Replies to post #40388 on Freddie Mac-No Politics (FMCC)

[big-yank]

Your question is an interesting one, and I'll not get between obi's answer to you on that. But I would like to offer a secondary issue which is maybe less of a question and more of a simple observation. SOOO much of the dialog about Fanniegate is focused on TBTF and the "never again" adamant's push back on any future bailouts. The debate on the morality and legality of those "anti" views could go on forever with little resolution or plurality. So let's skip that part and move on to the core question in all of this. Does reform of Fannie and Freddie take place to remove them from the TBTF risk pool, meaning they need to be shrunk in size and market dominance, or does it mean shrinking government's role in what has traditionally been a private enterprise driven lending environment?

To make that maybe easier to digest, is it really GSE REFORM that is needed, or is it GSE REGULATION REFORM that is needed?

All comments appreciated.

[obiterdictum]

The economic and political environment that all publicly traded corporate entities are embedded is always changing. The usual path for corporations to successfully continue in a changing environment survive is to adequately adapt its structure and operations to handle the challenges faced. Reform is one type of adaptation that focuses on improving poor corporate operations versus, say, making adding divisions or making innovations in management or products.

Reform in the case of Fannie and Freddie, two publicly traded corporations, is complicated by the FHFA-run conservatorship and the onerous contractual arrangements with the US Treasury. Fannie Mae's and Freddie Mac's corporate structure and operations have been reformed, more or less, and continue to be profitable corporations.

The reform ideas being bandied about is not about reforming business operations. The reform sought is structural and political and is centered on power and control of these corporations by the US Government through Congressional law and the regulatory powers of the FHFA. This sort of reforming is a type of central planning of the primary and secondary mortgage markets in the US. This sort of reform is to be seen in contrast with a market economy and the transfer of the ownership of private property (houses, apartments) from private hands, be they banks, investors and home and building owners to government and semi-government corporations which receive interest and principal payments.

For example, one can readily evidence the immense transfer and change in the flow of cash (tens of billions) and property (MBS in the trillions) from the private sector to the US Treasury via the Federal Reserve, Fannie Mae, Freddie Mac and other GSEs from 2008 till present. The cash disappears into the US Treasury and is not returned to the US economy. This cash has been used to pay the deficit and/or other government expenditures and does not directly recirculate into the US economy.

Review the latest official data:
https://www.federalreserve.gov/newsevents/press/other/20160111a.htm - net income from Federal Reserve sent to the US Treasury in 2015.
https://www.federalreserve.gov/monetarypolicy/files/combinedfinstmt2015.pdf - Audited financial statements showing sources of net income sent to the US Treasury and ownership of private property by the Federal Reserve.
http://www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/Current-Market-Data-2016 -03-31.pdf - data on activities by the Department of the Treasury and the Federal Reserve System to support mortgage markets through purchases of securities issued by the housing government-sponsored enterprises (GSEs; Fannie Mae, Freddie Mac and the Federal Home Loan Banks) and by Ginnie Mae,