Fannie Mae-No Politics (FNMA)

[chamillionaire]

Thanks for a thoughtful and intelligent response.

1) I would say that although it does reduce the US Treasury's exposure, it does not seem to do so to an extent that satisfies Congress. If you look at what has happened to banks in terms of increased regulation and capital requirements, I think you can see that Congress is very serious about preventing future financial disasters. Apply that to the GSE's case, and it is clear why reforming Fannie and Freddie in way that reduces the Treasury's exposure to an acceptable level is extremely difficult.

2) I do think that there is in fact a bias by those opposed to Fannie and Freddie that is a product of a judgement that the arrangement was a terrible deal for taxpayers. Of course just because privatizing the companies in the first place was a bad deal for taxpayers obviously does not mean that the Government can change the terms of the agreement.

I think GSE shareholders see this as what happened. However, as the note I C/Ped concluded, the original deal (law) was that in the event that private capital was not sufficient to absorb losses, the government would take over through conservatorship and its obligations to private investors would terminate. Thus, I feel like the Treasury did not take shareholder's property with the sweep, it merely enforced the original deal that the private sector invested in. If you have not, I highly recommend reading the Charter Acts and conservatorship legislation to better understand this very important point.

3) The key difference between Fannie and Freddie's bail out and that of other private sector firms is outlined above. None of the other firms had a deal with the Government from the outset of the enterprise period, and even further none that provided for a mechanism by which all of the interests in the company would revert to the Government. The reason of course for this special quirk to Fannie and Freddie is that so much (arguably all) of the value in the enterprise is due to an economic/business arrangement with the company.

Cheers.