Fannie Mae and Freddie Mac: Too Big and Too Expensive.

As I noted over the weekend, Fannie Mae and Freddie Mac were taken over by the federal government. Previously, the federal government had agreed to prop them up and in effect to make good on many of their losses. So as things deteriorated, that existing guarantee and the exposure it reflected was becoming too expensive for taxpayers to bear.

Further, while governments can seldom run things better than private businesses, Fannie and Freddie were only quasi-private. Their business model proved to be an expensive one, in part because they wasted huge sums on lobbying and executive compensation that was unwarranted given the firms’ poor performance. Also, it seemed to the Treasury Department that if the firms were taken over, the rates to place their mortgage debt would drop, in essence that the interest that they had to pay out to place their paper was too high.

So Fannie Mae and Freddie Mac had become too big and too expensive to taxpayers to let the firms continue on as they were. Allowing them to continue to operate was wasting too much taxpayer’s money, since we were on the hook for their expensive and wasteful business model.

In part to reduce the expense to taxpayers of the guarantees given in July, on Sunday the federal government put Fannie and Freddie in receivership, removed their board, put in new management, and eliminated their lobbying costs. Fannie Mae and Freddie Mac had become too big and, given the pre-existing promises to make good or offset much of Fannie and Freddie’s losses, too expensive to let them become yet more expensive for taxpayers. Better to takeover and potentially take losses sooner than to let the expense of a rescue explode in the future.

As I understand it, Sarah Palin made this point in passing, saying that they had "gotten too big and too expensive to the taxpayers." She was right; their growing expense to taxpayers was one of the main reasons for the takeover (among other worries were secondary effects on some investors of further Fannie and Freddie troubles).

Not surprisingly, Palin was roundly attacked by people either too partisan to be honest about things or too ignorant that Congress had already written a blank check to Fannie and Freddie that was getting more expensive to taxpayers by the day.

Here is Peter Viles’ take on things at the LA Times blog:

My take: The Palin comment is well within the margin of error on the campaign trail. There is no "gaffe" here. Congress earlier this summer — in the housing bill that both John McCain and Barack Obama supported but didn't bother to vote on — gave Treasury Secretary Henry M. Paulson Jr. a blank check* to invest in Fannie or Freddie. It OKd a big bailout. Perhaps in your book a blank check freshly signed by Congress is not "too expensive." Perhaps you trust the government not to spend a blank check. Perhaps pigs have wings. Palin was right: The very existence of a blank check means that Fannie and Freddie are too expensive to taxpayers.

*In a comforting bedtime story that several members of Congress actually believed, Paulson said the blank check was so big and powerful (a bazooka of cash!) he would never have to use it. By the time Palin spoke, it was clear that Paulson's attempt at "verbal intervention" had failed and that real taxpayer money will be spent to prop up Fannie and Freddie. No one knows how much, but the Treasury has signed contracts to invest up to $100 billion in each company. Oh, and loan them money too. Oh, and buy their mortgage-backed securities. Do you really want to argue that she made a mistake by saying the two companies are "too big and too expensive to the taxpayers"?

Give her time, and a few one-on-one interviews. I'm certain she's as capable of the other three of a real screwup. This is not it.