No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.
— Matthew 6:24
Now the new managers of Fannie and Freddie will have to decide how they want to run enterprises controlled by the government. Lowering fees and buying large numbers of mortgages would serve as an economic stimulus, but could increase the ultimate cost to the government if the housing market gets worse. Raising fees, and being cautious in lending, could prolong the housing slump. Being generous in restructuring loans could help borrowers, but cost the enterprises money.
Henry M. Paulson Jr., the Treasury secretary and former chief executive of Goldman Sachs, tried to assure the public that the enterprises would follow both courses, an indication that the need to serve multiple masters remains. On one side, he promised that “the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”
On the other side, he said Fannie and Freddie “will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking.”
It may not be easy to take less risk while lending more and charging lower fees.
I saw a Buffett interview, conducted in the safety of Canada, in which he said he thought banks should have to reap what they sowed and that the public wasn't his choice for funding bank bailouts. I did not hear him specifically address Fannie/Freddie, which I don't think were on the table yet.
Do we know Fan/Fred need the bailout, and that they don't just need the confidence-building environment of federal backing?
My question is who cares about these entities? If Congress wants someone to stand behind mortgages, Congress can tell the Treasury department to start a mortgage-backing agency. Oh, wait. The federal government already has a mortgage-backing agency, Government National Mortgage Association ("Ginnie Mae"). Who exactly is screwed if Fannie and Freddie die? Investors who hoped to capitalize on management's risks, I'd hope. The homeowners can't be foreclosed if they're current on payments (that's old property law), and isn't everyone else responsible for what they did trying to make money?
Public bailout of investors' speculative efforts to achieve a return isn't something I expect in any of my own investments, and it's frankly offensive to see it -- even if it's limited to preferred shareholders or debt investors -- in these two entities that could have pulled the handle and stopped the assembly line any time they liked if they really cared about the quality of the business they were doing.
This is, I assume, the idea behind Buffett's disinclination to give the nod to a bank bailout, and I see no reason Fannie and Freddie should get different treatment.
This doesn't mean I don't expect Congress to pretend to be looking out for homeowners while in fact bailing out institutions holding Fannie/Freddie debt instruments. And it may be that Fan/Fred debt is so widely dispersed that failures would cause big, rippling problems. Anyone got specific thoughts on it? I'm not a Fan/Fred investor so I never DD'd it.
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