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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.

James Lindgren (mail):
When I first saw this called a gaffe, I thought no one would be so silly as to believe it was.

But then the antiPalin commenters on another thread picked this one up as if there were something to it.

A suggestion to both sides: THINK FIRST.

There are plenty of real weaknesses about all 4 candidates that you don't have to make things up.


Jim Lindgren
9.9.2008 5:09am
DangerMouse:
But then the antiPalin commenters on another thread picked this one up as if there were something to it.

A suggestion to both sides: THINK FIRST.


To be perfectly blunt, the people attacking Palin aren't exactly the strongest when it comes to brains. They've been emoting for about a week now and they still haven't come to grips that all their attacks are reinforcing middle America's love of Palin, and that the more hysterical they are, the more favorable Palin becomes.

Palin will probably make a couple of gaffes in the campaign, but nothing, NOTHING, she says in the future will damage her in a way like the leftists are dreaming. That's because no matter what mistake she makes, they'll try to amplify it into a mountain and people will remember the big mountain of crap that the liberal MSM tried to initially push on Palin. So it really won't matter.
9.9.2008 5:24am
Dave3L (mail) (www):
All right, I get it: you're like a troll with his own blog! Or at least access to someone else's.

Here's the actual quote, from which it is pretty clear that she clearly was mistaken AND that you lack any ability whatsoever to be even-handed:

They've gotten too big and too expensive to taxpayers.... The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.

However you want to cut it, she clearly does not understand what the companies are, what their relationship is to the Federal government (much less to the executive branch), and what problems they face. She fits them into her preordained worldview: we must shrink the size of government... shrink, baby, shrink! Never mind these are private companies, not agencies, and certainly nothing a McCain-Palin administration would have any say about whatsoever, much less as to their potential size and functioning.

But whatever.
9.9.2008 5:57am
Dave3L (mail) (www):
Here, watch the video... it's pretty clear she is mistaken:
9.9.2008 6:03am
Nate in Alice:
Jim,

You've lost all credibility with this string of Palin posts today/tonight. I see you feverish, high on caffeine, typing furiously away to salvage the worst vice presidential pick this side of Ferraro. (Yes, Ferraro). It's sad.

Also, I just find it so ironic that all certain intellects around these parts are fawning over someone who clearly couldn't hold her own at their dinner table and probably wouldn't be invited back. But she likes guns, so whatever.
9.9.2008 6:12am
Nate in Alice:
Oh, and Jim, care to respond to the ENTIRE quote?

How will McCain and Palin make Fannie and Freddie "smaller" and "smarter" and "more effective" for all those homeowners who need help?
9.9.2008 6:17am
A. Zarkov (mail):
"Further, while governments can seldom run things better than private businesses, Fannie and Freddie were only quasi-private."

How are they "quasi" private? While Fannie and Freddie are government chartered, they are privately owned and run. Their shares trade on public stock exchanges, and their prospectuses explicitly state there is no government guarantee, meaning you invest at your own risk. What makes Freddie and Fannie less private than say Bear Stearns? Or Lockheed, Chrysler, and Penn Central? Is it simply the charter?
9.9.2008 7:08am
mls (www):
A more technically accurate statement would be something like this: Freddie and Fannie were able to get so big and so risky because they were operating with an implicit government guarantee, one which the taxpayers are now being called upon to back up.

But what Palin actually said is more straighforward and conveys the essential fact of the situation. To call this a gaffe is ridiculous.
9.9.2008 7:56am
Big E:
Oh, and Jim, care to respond to the ENTIRE quote?

How will McCain and Palin make Fannie and Freddie "smaller" and "smarter" and "more effective" for all those homeowners who need help?


Right if you listen to the entire quote it becomes clear she has no idea how Fannie/Freddie work. Face it Jim she's such a lightweight she makes Dan Quayle look like William F. Buckley.

I'm not saying she's unintelligent she just isn't well versed on many national/international issues.
9.9.2008 8:09am
Nate in Alice:
Jim,

I don't understand all the ins and outs of the financial system. It's incredibly complex. I don't think Palin does either, and this quote reveals that.

Can you make a credible claim to her understanding on any issue besides energy exploration in Alaska?
9.9.2008 8:23am
Al Maviva (mail):
I agree. You've become a total troll, Jim.

Anybody who questions the wisdom of having Fannie Mae and Freddie Mac underwrite loans to marginal borrowers ans speculators, which are likely to go into default and foreclosure is clearly in the tank for Pailcain and deserves no credibility. Etc. Some would say that fewer people should be getting mortgages, and that neither property speculation or marginal mortgagors should be features in the mortgage market landscape, but I'm not one of them. Keep lending to marginal homebuyers and speculators - otherwise, you'll prove Palin, and Larry Kudlow, and a lot of investment bankers right.
9.9.2008 8:37am
Ugh (mail):
Hack.
9.9.2008 8:37am
Richard Aubrey (mail):
There are gaffes where a politician inadvertently tells the truth.
There are gaffes where a politician tells an unpleasant truth intentionally.
You might call this, at worst, getting it right by accident.

And making F&F smaller and more efficient for homeowners wasn't the issue. The issue is what to do with them. They were backed up--implicitly--by the feds, which makes them "quasi" governmental, by the implication that all mistakes would be made good by the taxpayer, as happened. That's more than "quasi".

So let's acknowledge that she was marvelously lucky in her mistake. At the very worst. I'll take a few of those for myself this week.
9.9.2008 8:38am
Brian Mac:
Were the intertubes always this angry?
9.9.2008 8:52am
Federal Dog:
Here's an idea: If you do not want to read Jim Lindgren's posts, don't. There's nothing wrong with reasoned response to continuing Palin rumors.
9.9.2008 8:56am
Curt Fischer:
I also don't understand how even the full Palin quote provided by Nate in Alice is embarrassing to Palin. mls gets it right in my book.
9.9.2008 9:13am
Snaphappy Fishsuit Mokiligon:
If a disinterested observer like James Lindgren sees nothing wrong with it, then neither do I.
9.9.2008 9:29am
Clastrenster:
Regardless, the Gov.'s really odd statement seems to be providing a default "platform" piece for McCain (and as I think Jim Lindgreen's post points out, it can be salvaged with some work, though for the moment it still looks a bit like slathering some tasty frosting on a fart).
9.9.2008 9:32am
r.friedman (mail):
So Fannie Mae started as a government agency and was privatized because market discipline would be better than direct management. And Freddie Mac was started to give Fannie Mae a competitor because competition is always good. Have we learned anything?

When Fannie Mae was privatized and Freddy Mac created, was it not to align their interests with those of the larger securities industry? To let them employ lobbyists and give big salaries to support big political contributions?

So cui bono? Of course, many of the mortgage orignators and packagers who were there on the way up had made their pile and moved on before the bubble burst. The house flippers and spec contractors and cookie-cutter condominiumisers made piles, but probably are bankrupt now. Now there's a huge overhang of housing inventory, just like there was excess office building capacity after the S&L crisis, especially in the boom areas. Who loses is the non-investor homeowner, who's lived in an older house for 10+ years, paid taxes on artificially high property values, and now is left with most of their savings tied up in an illiquid asset.
9.9.2008 9:36am
Andy L.:
Not surprisingly, Palin was roundly attacked defended 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 to admit that Palin clearly misspoke and perhaps displayed a lack of depth of knowledge on the subject.

Wow.
9.9.2008 9:48am
TCO:
I think Palin is the only one of the 4 who is really disgusted with the financial shenanigan of Freddie and Fanny. Who have been no secret paying off congress for years and have had plenty of warnings. I still think a bankruptcy would hav been good. Purge the rottennes. Purge it all.
9.9.2008 9:55am
Dave Flores:
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.

Well, if this is evidence that Fannie &Freddie are only "Quasi-Private" then there isn't a private company in the whole of the country.

Seriously, you can see how absurd a defense of Palin this post if just by adding up all the times it echoes Palin's phrase "too big and too expensive" as if it were the most natural thing in the world and in no way meant to validate Miss Teen Alaska's feeble grasp of the U.S. Economy and its major players.
9.9.2008 10:10am
The Ace (mail):
What makes Freddie and Fannie less private than say Bear Stearns? Or Lockheed, Chrysler, and Penn Central? Is it simply the charter?

Surely you're joking:


Among them is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street firms, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie's sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.



What is absolutely hysterical about this is that a bunch of leftists, who have no idea how FM works, are criticizing someone for "not knowing how Fannie Mae works."

Again, you can no longer parody the left.
9.9.2008 10:16am
Clastrenster:
Maybe morphing this into an anti-obesity-as-education platform is the way to go. The American taxpayer has become too big and too expensive for itself and needs to be smarter and smaller.
9.9.2008 10:20am
The Ace (mail):
Jim,

I don't understand all the ins and outs of the financial system. It's incredibly complex. I don't think Palin does either, and this quote reveals that


Um, since you don't understand the financial system, how do you know she is wrong?

Again, you can no longer parody the left.
9.9.2008 10:21am
The Ace (mail):
Right if you listen to the entire quote it becomes clear she has no idea how Fannie/Freddie work

Instead of saying that, why don't you explain it to us?

Your answer(s) will be illuminating.

Otherwise,


Their unusual status was the key to their business. The fact that they are federally sponsored led the financial markets to believe the government would cover their debts if they were unable to do so themselves. The assumption that they were virtually as reliable as the U.S. Treasury enabled them to borrow at low rates and fund their investments with cheap money. It also helped them charge a premium for their mortgage guarantees.


Step up champ, please.
9.9.2008 10:23am
Jill Stewart (mail) (www):
Oh, common, elections are coming! You can't be suprised everybody is taking on shiny armor and sword to fight the economy-eating dragon. And no problem, if he will cut his own limb :)
As a Toronto realtor I know there is 1 of every 400 mortgages default in Canada. In the US it's 1 of every 11. This situation hasn't developed overnight - the mistake was done long time ago, again and again. And while government will be using tax payers to cover risky behavior of some gamblers, it will happen again. And it's not only about the USA of course...
Jill
9.9.2008 10:25am
The Ace (mail):
By the way, I'd love for any, just one, liberal commenter attacking Palin on this to explain what the following are: MBS, MRB, DMBS and what Fannie does with each.

Without google.
9.9.2008 10:28am
David Mader (mail):
Much as I hate to detract from this partisan bickering, I wonder if one of you fine folks can answer a question I have about the federal takeover: by what legal authority was it effected? Was it written into the companies' charters? Was it legislated - presumably under the Commerce Clause - in the housing bill that Congress passed earlier this year?
9.9.2008 10:29am
DerHahn (mail):
David M - based on a short report I heard on Sunday, the answer to your question is that it was recently legislated. The government agency recently created (IIRC Federal Home Mortgage Authority, but I'm not sure) to regulate Freddie and Fannie became something like a receiver.
9.9.2008 10:38am
ejo:
per the la times comment, we are about the take a bath in the 100's of millions, yet Palin is somehow wrong to suggest that FM/FM is costing us money?
9.9.2008 10:40am
Calderon:
If you want to know how Fannie Mae and Freddie Mac differ from private enterprises, the CBO released a report back in 2001 listing the subsidies the two receive, which can be found here: http://www.cbo.gov/doc.cfm?index=2841&type=0&sequence=3. One key line of that CBO report for purposes of some of these comments is "The law treats the GSEs as instrumentalities of the federal government, rather than as fully private entities. They are chartered by federal statute, exempt from state and local income taxes, exempt from the Securities and Exchange Commission's (SEC's) registration requirements and fees, and may use the Federal Reserve as their fiscal agent." That sounds like a good reason for calling them quasi-private.

Also, the CBO "has estimated the costs of those subsidies in two parts: First, there is the direct cost from the fees and taxes that otherwise would be collected by federal, state, and local governments. Second, there is the opportunity cost of providing free credit enhancement to the GSEs, because competing financial institutions would be willing to pay to receive similar treatment." Those are costs borne by taxpayers.

But of course the major cost now, in 2008, is the cost of bailing them out. I just don't see what's wrong or controversial, given the cost of bailing them out now, in saying they've gotten too expensive for taxpayers.

As far as the next part of the quote, I took it as one of those detail-less statements politicians make all the time, like saying they're going to make government work for you or make it responsive to your needs. That said, Fannie Mae was created first and Freddie Mac was created later to provide Fannie Mae with a competitor. Palin could have decided that a duopoly isn't much better than a monopoly and that instead there needs to be 8 to 10 of those institutions to provide real competition to each other (and hopefully not all take actions that later turn out to be mistakes), which would necessitate making Fannie Mae and Freddie Mac as they existed on Sept. 6, 2008 smaller.
9.9.2008 10:40am
PaulD (mail):
I find it amazing that anyone would think: 1) this is a serious gaffe; 2) that any typical voter would care about.
9.9.2008 10:45am
Big E:
By the way, I'd love for any, just one, liberal commenter attacking Palin on this to explain what the following are: MBS, MRB, DMBS and what Fannie does with each.

Easy peasy MBS's are mortgage backed securities which I think most readers of the VC are already familiar with, DMBS's are discounted MBS's and MRB's are mortgage revenue bonds this stuff isn't rocket science.
9.9.2008 10:48am
David Warner:
"per the la times comment, we are about the take a bath in the 100's of millions, yet Palin is somehow wrong to suggest that FM/FM is costing us money?"

Try billions. I still remember all the right-wing idiots trying to take down the young Clinton over all sorts of trivia and self-reinforcing ridiculousness. To all those grasping at any possible straw to take down this woman, a warning: It is not only her reputation at stake.
9.9.2008 10:48am
David Mader:
Thanks DerHahn - that sounds right, and a little poking around brought me to the text of the housing bill - http://www.govtrack.us/congress/billtext.xpd?bill=h110-3221. Looks like Congress gave its new agency the authority to place a regulated entity (such as Fanny or Freddie) in either receivership or conservatorship, at which point the agency itself - in its guise as receiver or conservator - would succeed to the charter of the entity.

Curiously, the bill text contains no reference (at least that I see) to the Constitutional authority under which it was passed.
9.9.2008 10:50am
The Ace (mail):
Easy peasy MBS's are mortgage backed securities which I think most readers of the VC are already familiar with, DMBS's are discounted MBS's and MRB's are mortgage revenue bonds this stuff isn't rocket science.

and what Fannie does with each?
9.9.2008 10:50am
The Ace (mail):
which I think most readers of the VC are already familiar with,

I'd bet a lot of money that "Nate in Alice" has not the foggiest clue as to what an MBS is.
9.9.2008 10:52am
Clastrenster:
Is the McCain platform on Fannie an endorsement or a criticism of the bail out plan?
9.9.2008 11:01am
Big E:
and what Fannie does with each?

As I said I think most VC readers are financially literate enough to recognize these terms in their non-acronym from but if you insist.

MBS- are instruments that are used by Fannie to provide liquidity to lenders.

DMBS- if memory serves correctly the key difference between MBS and DMBS's are that the discounted securities are shorter term and usually muti-property

MRB's these are issued in conjunction with local governments to finance home buying programs.

Satisfied?
9.9.2008 11:05am
Eric Muller (www):
Hey there Jim --
I hope you weren't planning on getting other work done today, because there's a new Palin story that must be debunked! she billed the state for 312 nights when she was living at home, and billed the state for her children's travel both within and out of the state. That's what the Washington Post says.
9.9.2008 11:08am
wfjag:
You're absolutely right Big E. We need a woman who really understands. Bring back Jamie S. Gorelick:


Federal National Mortgage Association

Even though she had no previous training nor experience in finance, Gorelick was appointed Vice Chairman of FNMA from 1997 to 2003. She served alongside former Clinton Administration official Franklin Raines, and earned over 26 million during her six years there. During that period, FNMA developed a $10 billion accounting scandal. [10] One example of falsified financial transactions that helped the company meet earnings targets for 1998, a "manipulation" that triggered multimillion-dollar bonuses for top executives. [11] Gorelick received $779,625. On March 25, 2002, Business Week interviewed Gorelick about the health of "Fanny Mae". [12] Gorelick is quoted as saying, "We believe we are managed safely. We are very pleased that Moody's gave us an A-minus in the area of bank financial strength -- without a reference to the government in any way. Fannie Mae is among the handful of top-quality institutions." [12] One year later, Government Regulators "accused Fannie Mae of improper accounting to the tune of $9 billion in unrecorded losses". [13]


From Wikipedia article "Jamie Gorelick".

(return sarcasm to mute mode).

FM squared have been mismanaged for a long time. Congress created them, last summer Congress gave them a blank check guarantee (with taxpayer money), and Congress can change or eliminate them.
9.9.2008 11:17am
JRL:
It appears that this "gaffe" (ahem) shows that Palin is much more intelligent and informed than even her supporters realized.
9.9.2008 11:18am
Snaphappy Fishsuit Mokiligon:
MBS, MRB, DMBS

Mortgage backed securities and Mortgage revenue bonds. Essentially, Fannie and Freddie (and other banks), make a bunch of mortgages into a security and then sell shares of it. I'm not familiar with DMBS, though I note that it has all the consonants describing a person who makes unfounded assumptions about people on the other side of a debate, DuMBaSs!
9.9.2008 11:22am
Clastrenster:
It's a bit like re-reading Kosinsky's "Being There," over and over and over. (except for the Ace, who pointed out long ago, re: James Madison, the pending organized armed conflict in the US, and is evidently preparing as I write with pop quizzes in a post-google imaginary).
9.9.2008 11:24am
js5 (mail):
As a conservative, I strongly believe Palin is a horrific pick for McCain, but I'm beginning to understand why he did so. The Republicans have anti-intellectualism. It's been a long time coming but it was bound for a person like her to be picked for one of the most important and esteemed offices on this planet. I understand why Jim is so vehement to defend her on these terms, because if he ever actually addressed the real issue conservatives like me have against Palin, then he wouldn't be posting what amounts to blind-admiration of a person on grounds that she puts an (R) next to her name.
9.9.2008 11:25am
The Ace (mail):
Keep going leftists, its working:


John McCain's 6 percentage-point bounce in voter support spanning the Republican National Convention is largely explained by political independents shifting to him in fairly big numbers, from 40% pre-convention to 52% post-convention in Gallup Poll Daily tracking.


McCain is +15 now with the Indys.
And the "progressive" left is busy attacking Palin for not staying home with her kids.
9.9.2008 11:29am
The Ace (mail):
I'm not familiar with DMBS,

Of course not.

a person who makes unfounded assumptions about people on the other side of a debate

Considering I'm correct, how "unfounded" is my assumption?

Again, you people are simply hysterical in the non stop comedy.
9.9.2008 11:34am
MnZ:
The government assumed a rather large liability by underwriting Fannie and Freddie's liabilities. I am not an accountant, so I don't recall when the expenses of that liability are realized.

Maybe it was a gaffe. However, I don't think that voters care all that much about the finer points of expense recognition.
9.9.2008 11:36am
Suzy (mail):
If this makes you feel better, on that not-so-unlikely day when Palin is in charge of our seriously troubled economy, more power to you. Call me a dour naysayer, but I need a little more convincing that this person, who has a history of mismanaging public funds and is not exactly known for her brilliance, is a good choice for that job. Rather than debating whether it was a gaffe, maybe someone could just ask her to elaborate on what she would do to address the fallout from the mortgage crisis. Is that such a crazy idea?
9.9.2008 11:41am
Clastrenster:
What's really curious about how this discussion is framed (outside the ace-like who's-your-daddy-pop-quiz rhetoric), is how the statements in question are seen as somehow Gov. Palin's. It's quite clear from the video-tape that this is McCain's issue, and she didn't mis-speak in any way. It really seems like the entire discussion resulted from lackluster speech-writing. McCain was standing right behind her the whole time, somehow resembling a Soviet General Secretary, looking a bit awkward in response to the inarticulate phrase about how he's long been a reformer of "things." Then it goes into the so-called "gaffe," at which point there's some applause, in which McCain joins in. It seems crazy for Obama supporters to pin this on Gov. Palin in any way, who was simply reading a not-great-portion of a speech. David Warner's advice above seems apt, indeed.
9.9.2008 11:42am
PLR:
What is the cost to taxpayers of the government's undertaking to the holders of FNMA and FHLMC paper (I'm talking out-of-pocket costs, not those theoretical opportunity costs the think tankers toss around)?

Oh, we don't know? I guess that's why we call it a blank check, the amount hasn't been filled in. What have we spent so far? Oh, we're just starting to run a tab? Are there corresponding benefits provided to taxpayers by the GSEs that should be accounted for?

So many questions. How much easier it is just to give the pre-ordained answer.
9.9.2008 11:58am
Calderon:
Also, probably worth noting that McCain and Palin ('s speechwriters) have an editorial about Fannie Mae and Freddie Mac in the WSJ
9.9.2008 12:08pm
JK:
THat was a good post, but did the second half really need to be about Sarah Palin again? I'm really getting sick of hearing about her.
9.9.2008 12:25pm
Hans Bader (mail):
Ironically, Palin's comment was accurate, not a gaffe.

Fannie and Freddie are called GSE's -- Government Subsidized Enterprises -- for a reason.

They have long received direct and indirect taxpayer subsidies, and when the mortgage bailout law was passed last month, the GAO estimated its cost to taxpayers at $25 billion.

They've long received subsidized lines of credit from the treasury, and also been able to borrow hundreds of billions of dollars at lower interest rates based on the (accurate) presumption by investors that the government would bail them out if they ever went broke.

And everybody agrees that the bailout will indeed cost taxpayers tens of billions of dollars, to bail out these mismanaged GSEs that went broke by gambling on taxpayers' money.
9.9.2008 12:45pm
PLR:
Fannie and Freddie are called GSE's -- Government Subsidized Sponsored Enterprises -- for a reason.

Repair completed.
9.9.2008 12:53pm
CFG in IL (mail):
I've got an idea: why don't we just have a member of the press ask her about it in a press conference?
9.9.2008 12:55pm
Andy Freeman (mail):
> Who loses is the non-investor homeowner, who's lived in an older house for 10+ years, paid taxes on artificially high property values, and now is left with most of their savings tied up in an illiquid asset.

Said person is basically in the same situation that she'd have been without FM promoting a housing bubble, except for the high property tax thing. (Which is why CA's prop 13 is a good thing.) The property tax will go down with the next assessment and the local jurisdiction will scream about losing revenue.

10 years ago housing was an illiquid asset - we're back to that. Said house's value has lost its bubble boost, so it just has 10 years of normal appreciation.
9.9.2008 12:56pm
SG:
What is the cost to taxpayers of the government's undertaking to the holders of FNMA and FHLMC paper (I'm talking out-of-pocket costs, not those theoretical opportunity costs the think tankers toss around)?

No link, but I heard someone on CNN yesterday estimate the taxpayer cost at $80-$200 Billion. They also said it was potentially the most costly bailout ever, even surpassing the S&L bailout in the '80s.
9.9.2008 1:05pm
Anderson (mail):
resembling a Soviet General Secretary

Not in life expectancy, let's hope.
9.9.2008 1:09pm
Perry:
Whew. That was a pretty intricate setup just to be able to defend Palin.

Yes - its true that Fannie and Freddie are too big, but why are they too big? Years and years of bipartisan efforts to expand their reach and expand marketshare while taking on ever riskier portfolios. Can't say that I didn't see this coming.

Certainly there are PLENTY of other things to question Palin on but this isn't one.
9.9.2008 1:11pm
Bill in Melbourne (mail):
The left is frantic about Palin's rocketing popularity among women and independents. They have to take any possible awkwarness, no matter how petty or contrived, and turn it into an international incident.

How small minded, and desperate. Keep it up, leftits. You are making Palin's case for her.
9.9.2008 1:20pm
The Ace (mail):
loki 13 if you're reading:


According to the latest ABC/Washington Post poll, McCain now has a 12-point lead among white women.
...
Some of McCain's biggest gains in this ABC News/Washington Post poll are among white women, a group to which "hockey mom" Sarah Palin has notable appeal: Sixty-seven percent view her favorably and 58 percent say her selection makes them more confident in McCain's decision-making. Among those with children, Palin does better yet. And enthusiasm for McCain among his female supporters has soared.

White women have moved from 50-42 percent in Obama's favor before the conventions to 53-41 percent for McCain now, a 20-point shift in the margin that's one of the single biggest post-convention changes in voter preferences.


Cue the Imperial theme music...
9.9.2008 1:25pm
PaulD (mail):
Is it too obvious to say that no one's vote is going to be swayed by how well a candidate can describe the ins and outs of Fannie Mae and Freddi Mac?
But if the left wants to spend its time trying to show that Palin is not a policy wonk, I say go for it.
9.9.2008 1:26pm
Shahid Alam:
Just to add on to what their GSE status actually meant, for all those claiming that they were fully private entities. On the upside:

1. Their GSE status has always been used as an implicit guarantee of USGOV backing, resulting in what's generally assumed to be a 50 basis point advantage over actually private banks on borrowing. This meant that no bank could fairly compete in the markets they were allowed to enter.

2. Their regulation regime, through the OFHEO, was far more lenient than normal banks in terms of reserve capital they were required to have to back their loans. There were two reasons for this: congressional lobbying and regulatory capture.

The implicit guarantee meant that the USTREAS was always going to be on the hook for the failure. (Yes, in theory, the USGOV could say no, but now at least that would argue a counter-factual.)

Those who are taking issue with Palin for asserting that their administration would make the FMs smaller apparently also did not read the details for the conservatorship agreement. According to it, the FMs will be allowed to grow in terms of loans carried through next year, but their portfolio will shrink by 10% a year until they reach a stable point of $250 billion.

As Paulson suggested in his announcement, he believes that the next president and Congress should make one of two decisions:

1. Make the FMs fully private, not GSEs, with no implicit backing and with the same regulatory standards that all banks in the space must follow.

2. Fully nationalize, but keep them small, so their incentives can be kept focused.

In either case, the FMs have been since their inceptions as GSEs, one of our greatest examples of crony capitalism, privatizing profit and socializing cost. That needs to end.
9.9.2008 1:33pm
Hans Bader (mail):
I meant to write above that "Fannie and Freddie are called GSE's -- Government SPONSORED Enterprises -- for a reason." (Instead, I referred above to GSEs being government subsidized enterprises).

Thanks to PLR for correcting my error before I did.

Given their governmental-creation, decades of governmental subsidies (through subsidized lines of credit and special immunities), government appointment of some of their officials, etc., it is not accurate to depict them as wholly "private sector" enterprises.

And even if they were private sector enterprises, it's undeniable that they will indeed cost taxpayers a bundle, because of their "too-big-to-fail" size.
9.9.2008 1:46pm
MG:
It's a little tough to tell with all the shouting whether there is an issue here. It seems like most people are in agreement that it was not a gaffe to say that FM and FM have gotten too big and too expensive.

However the second part of the quote has been contested, that is that the McCain-Palin administration would make these institutions smaller, smarter and more efficient.

What I don't understand is if that is something that is within the power of the president and vice president. It seems like Congress has taken them over under a receivership, but perhaps the executive branch has some input as well. Can someone explain how the receivership will work and whether the president and VP will have power to reform?
9.9.2008 1:55pm
ed (mail) (www):
Hmmmm.


"Yes - its true that Fannie and Freddie are too big, but why are they too big? Years and years of bipartisan efforts to expand their reach and expand marketshare while taking on ever riskier portfolios. Can't say that I didn't see this coming. "


In New Jersey we called that the "Insurance Pool". Basically a dumping ground where bad or unprofitable deals go so taxpayers can bear the bill.
9.9.2008 1:56pm
ed (mail) (www):
Hmmmm.

@ CFG in IL


"I've got an idea: why don't we just have a member of the press ask her about it in a press conference?"


Good idea!

And that right after the questions over her uterus, the sexuality of her daughter, flying while pregnant, being her youngest child's grandmother and how could she possibly consider having a professional career and be a responsible mother all at the same time.
9.9.2008 1:59pm
Andrew J. Lazarus (mail):
I'm trying to understand the conservative argument here. One part is that Palin is (allegedly) doing great with white women. The other is that the plain reading of her full quote on Fannie Mae and Freddie Mac, which suggests she has no clue what she is talking about, is not the correct reading, that it was really some very subtle point about opportunity costs and what-not. I don't see any connection between these arguments. I think Ace's idea is to annoy liberals so much we say something over the top.

But why listen to the Ace, since I doubt if without Google he can explain a Scissors Coup, the Najdorf Variation, and the Riemann Hypothesis.
9.9.2008 2:03pm
ed (mail) (www):
Hmmmm.

@ Js5


"As a conservative, I strongly believe Palin is a horrific pick for McCain, but I'm beginning to understand why he did so. The Republicans have anti-intellectualism."


ROFLMAO!

A *conservative* talking about "anti-intellectualism" in the Republican party??

Oh yeah I'm buying that one for a dollar.

Amazing how many solid conservatives show up to denigrate a VP pick who believes in fiscal responsibility.

Let's face it. The traditional role of a VP in American politics?

Zzzzzzzzzzzzzzz. Senate needs a tie-breaker vote? Zzzzzzzzzzzzzzz.
9.9.2008 2:04pm
ed (mail) (www):
Hmmmm.

Regardless how this turns out. This has been, by far, the most entertaining election cycle of my entire life.

Originally I viewed the prospect of a 2+ year election process with great trepidation and angst. But as time has passed the sheer intensity, and insanity, that has come up again and again is like an unscripted Monty Python sketch played by mad people. All it requires is a man slapping someone in the face with a fish or perhaps a renegade blancmange winning the US Open.

Pray continue dear liberal fellows. You amuse me.
9.9.2008 2:08pm
The Ace (mail):
This is just too precious:


Top recipients of Fannie/Freddie donations:

#1 Chris Dodd
#2 John Kerry
#3 Barack Obama
#4 HIllary Clinton


Nary a word on this from the leftists...
9.9.2008 2:20pm
ejo:
it's not subtle, nuanced or based on opportunity costs-it's a simple fact that the fm/fm were, when the statement was being made, about to cost us a lot of money due to the Bush/Paulsen blank check. when brought to our attention by not too smart lefties, that had metastasized to hundreds of billions of dollars. now, explain to me again why they aren't costing me money?
9.9.2008 2:27pm
marcystrauss (mail):
The Ace--what does it matter if nate in alice can answer your questions--he's not running for vice president (and essentially president, since the odds are decent that she'll serve).
9.9.2008 2:29pm
marcystrauss (mail):
The Ace--what does it matter if nate in alice can answer your questions--he's not running for vice president (and essentially president, since the odds are decent that she'll serve).
9.9.2008 2:29pm
subpatre (mail):
MG said "What I don't understand is if that is something that is within the power of the president and vice president. It seems like Congress has taken them over under a receivership, but perhaps the executive branch has some input as well. Can someone explain how the receivership will work and whether the president and VP will have power to reform?"

Perhaps the Left --or all of us, since the abuses encompass both sides-- should look at the reverse.

Fannie Mae/ Freddie Mac receivership was made possible some time ago. The act was consumated when it became realistically possible that executive power could shift to alter these corporations or shield taxpayers from mistakes.

When the electoral bounce became apparent, Congress/ the establishment/ 'Da Man' moved their money to a safer place.
9.9.2008 2:41pm
Clastrenster:
Ejo, are you saying that McCain/Palin are criticizing the Bush/Paulson plan? I thought the (way-too-reactionary) criticisms of Palin's speech with McCain had to do with tense-- it sounded to McPalin critics like the billions upon billions had already been spent, and therefore this needed to be stopped via restructuring. What's most ridiculous about both the "right" and "left" reactions here is this: Palin's comments had virtually no content to them, except for _possibly_ implying a basic confusion about what was going on.

A tremendous waste of time, but completely unrelated to the elections, it has provided a nice opportunity to learn more about what's going on. As for the candidates, none of them are going to come out looking like they're against homeowners, as any serious and responsible engagement with the issue risks doing.
9.9.2008 2:50pm
ejo:
wow, someone who actually understands it was a talking point/line, not a policy paper. I think you are correct-it virtually had no content. As to a basic confusion, I think you are wrong-they are costing us billions of dollars and were even at the time of the statement. It has since risen even more.

waste of time-it has been put forth as a serious issue showing Palin's ignorance. these critiques, of course, lack any substance given that they don't refute that fm/fm were given a blank check before and now even more.
9.9.2008 2:55pm
Clastrenster:
I do think I understand what you're saying, but as a talking point, it was sloppy at best and did open itself to questions of coherence about McCain's vision (this has zero reflection on Palin's cognitive virtues, only a bit on the speech's writer). Of course many on the so-called "left" commentators can't seem to get enough lemming-like pleasure plunging compulsively into the rhetorical abyss. Not that the "right" doesn't have its own suicidal tendencies.
9.9.2008 3:04pm
vanyali:
The GSE's weren't costing the taxpayers a dime until the Government decided to swoop in and take them over. And it's costing the shareholders, including all of their employees, everything.
9.9.2008 3:07pm
Toby:
It is clear that several on this thread need a refressher course in how mortgages and mortgage-based securities are moved around in the market.

I recommend this brief and amusing video
9.9.2008 3:08pm
Toby:
Sorry, that location has been taken down, although it can now be found here
9.9.2008 3:10pm
The Ace (mail):
The Ace--what does it matter if nate in alice can answer your questions--he's not running for vice president

Because since the poster since does not understand the issue at all, how would they know know Palin is wrong? Which was stated.
9.9.2008 3:27pm
EIDE_Interface (mail):
I don't want to be a cold-water thrower, but the Palin scandals do seem to be piling up. Now that "per diem allowance" thing seems pretty corrupt. How can she claim to be a reformer when she engages in unethical behavior? Palin is a sham.
9.9.2008 3:37pm
Hans Bader (mail):
Taxpayers will pay, and have long paid, for the bigness and "too-big-to-fail" status of the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac.

Even before the current federal bailout, which the Congressional Budget Office estimated back in July would cost $25 billion, Fannie Mae and Freddie Mac were already costing taxpayers a bundle.

Economists estimated the cost to taxpayers of the subsidies to Fannie and Freddie at $10 billion per year. That amount has risen as they have gotten progressively bigger as a result of all the special privileges and advantages they enjoy under federal law.

Moreover, they get special exemptions from many kinds of income taxes (state income taxes, etc.), many kinds of regulation (securities regulation, capitalization/reserve requirements)

Thus, the term commonly applied to them -- Government-Sponsored Enterprises -- is apt.
9.9.2008 3:45pm
ejo:
hans, hans, hans, don't you get it baby, government guarantees are cost free. how can you put forth such lies-fm/fm aren't costing us a dime. all those hundreds of billions mentioned, we haven't actually paid them yet, so they don't count. that's why the collapse of the S&L's cost us nothing.
9.9.2008 4:06pm
Bad English:
"I don't want to be a cold-water thrower, but the Palin scandals do seem to be piling up."


Actually, media rumors are piling up. Scores of them that have been debunked. The machine is in overdrive. That doesn't say anything about anyone except the media types who are peddling lame deception.
9.9.2008 4:14pm
Harry Eagar (mail):
'Further, while governments can seldom run things better than private businesses.'

This is a joke, right?

Otherwise, r.friedman's is the most cogent (and brief) assessment I've seen anywhere.

The arguments about FMx2's status as wards of the state is beside the point. I am old enough to remember that the Cheaspeake Bay Bridge-Tunnel bonds were explicitly not wards of the state, but Virginia bailed them out anyway.

If I'd had $800K then, I'd have made $20M with no risk.
9.9.2008 4:22pm
TruthInAdvertising:
Just spotted on Yahoo's home page:

"Obama tries to steal Nebraska electoral vote from McCain"

If this was reversed and was about McCain/Palin, I'm sure we would have Lindgren and Co. screaming about how it was a lie and a gross example of media bias since it's impossible for someone to literally "steal" an electoral vote.
9.9.2008 5:46pm
wfjag:

"I don't want to be a cold-water thrower, but the Palin scandals do seem to be piling up."

Actually, media rumors are piling up. Scores of them that have been debunked. The machine is in overdrive. That doesn't say anything about anyone except the media types who are peddling lame deception.


As of Sunday, Sept. 7th, there were 71 rumors, mostly debunked, and those not debunked are of the "why are you wasting my time" variety (e.g., her husband did get a DUI -- 22 years ago, or some 2 years before they married). See Palin Rumors (backup) at http://sarahpalinrumors.blogspot.com/

Some of the rumors are quite entertaining.

The "per diem scandal" hasn't made it to the site yet. Perhaps the blogger is getting writer's cramp noting all the "NY Times v Sullivan protects us unless you can prove actual malice" level of reporting. Meanwhile, even WaPo didn't actually allege that Palin's per diem payments violated any legal or ethical standard under applicable Alaska law. Reading the article carefully, it appears to be a report on a non-scandal scandal.
9.9.2008 6:06pm
ejo:
I would love it if someone would debunk the rumor that the Fannie Mae/Freddie Mac takeover will cost the taxpayers hundreds of billions of dollars? please?

Perhaps if there hadn't been so many lies parroted in the media, an actual scandal might attract some attention-at this point, I doubt anyone will believe what the media prints about Palin unless there are actual, non-photoshopped, pictures. (aside from jbg, of course, international expert on obstetrics and child rearing).
9.9.2008 6:13pm
Federal Dog:
"(aside from jbg, of course, international expert on obstetrics and child rearing)."

My favorite jbg claim is that so far in his life, he has been admitted to six ivy league universities.
9.9.2008 6:25pm
Buck McHugh (mail) (www):
These government bailouts are nothing more than a quick fix of fundamental problems with our economy. Uncle Sam can just print the money and we have to deal with hyper-inflation as the result. posted by Buck McHugh
Comment by Howard Buckley McHugh
9.9.2008 7:37pm
Harry Eagar (mail):
I dunno if it will be recognized as a scandal, but Palin's lies about the bridge to nowhere ought to raise some eyebrows.
9.9.2008 9:02pm
jukeboxgrad (mail):
"he has been admitted to six ivy league universities."

See if you can guess which two I didn't bother applying to.
9.10.2008 12:47am