Has Fannie and Freddie already been reformed? Is Fannie and Freddie broken?
Parrott et. al.'s proposal believes in the surreal occurrence of "A large number and broad range of financial institutions would compete to take credit risk. (Like the national highway system, in which a wider range of commerce is able to move freely across the country because of the government’s stewardship of the infrastructure, here institutions of all sizes and forms will be better able to compete because they have the same access to the basic functions of the conforming mortgage market on which they rely.")
Parrott et. al. propose fashioning Fannie and Freddie into a single, highly regulated, monopolistic but financially neutered feeding trough with its MBS guaranteed by the full faith and credit of the US Government for financial institutions to freely take their fill of profits without taking on catastrophic credit risk and without holding additional capital to remain going concerns in a crisis. This explicit guarantee for MBS, that does not exist currently, is same guarantee proposed in Johnson-Crapo. This proposal amounts to a further tweaking of that failed bill.
This is a wolf in sheep's clothing approach where the largest financial institutions will be allowed to feed freely and greatly using their ability to leverage without catastrophic credit risk while developing new mortgage products, servicing loans and gettin the most and best of the primary and secondary mortgage market. The smaller financial institutions will get monetary scraps they can afford and leverage but the lion's share of the bounty will go to traditional Wall Street capital giants who will naturally outcompete all smaller financial institutions. There will not be a large number and broad range of financial institutions competing to take credit risk. Wall Street will rule the housing market again and this time with a support of a government corporation as backstop.
This proposal, couched in specialized, undefined words, will persuade those who cannot decipher the meaning and difference between catastrophic and non-catastrophic credit risk (see Note 5) or cannot fathom the financial impact of MBS having a explicit guarantee of the full faith and credit of the US. It is designed to be "reform starter" for the Senate and House to begin again reform talks to propose yet another bill for a bumbling government handling of Fannie and Freddie.
Finally, current Fannie and Freddie shareholders are not mentioned or dealt with in this reform proposal. This is simply an avoidance by the few who attempt to propose a lording over the many through this proposed reform to open the door for Wall Street to walk back into a government protected secondary mortgage market now dominated by Fannie and Freddie.
Carney piece is not worth making the effort to make a comment.
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