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GAO Report on Fannie Mae and Freddie Mac:

I've blogged several times about the currently unclear and undecided plans of the Obama administration and Congress for Fannie Mae and Freddie Mac. So I was interested to see this new report by the GAO outlining the issues and laying out what it sees as the general options. The report runs some 60 pages, and I've only had a chance to read it rapidly. It does not seek to do more than provide background and options, rather than arguing for a particular recommendation for how to resolve their GSE status. However, on my quick read, it is pretty well done, cogent and written in plain language. For that matter, the news summary of the report that first drew me to it, by Jody Shenn in today's Washington Post (September 11, 2009, "GAO Analysis Skeptical About Privatizing Fannie, Freddie") is a pretty good, clear summary.

At analytical bottom, however, and as I said here before, the choices come down to some version of fully privatize, fully government agentize, or continue as some form of mixed GSE. As the GAO notes, each of them has problems. The worst option is to return them to active GSE status as profit-seeking, shareholder-owned entities but with a government guarantee (both for the debt they issue via securitization as well as for the portfolios they invest in) and hence a subsidized and distorted capital cost, and great susceptibility to politicization (both to be corrupted by Congress and to corrupt it). The second worst option is to do nothing and continue to watch the portfolios slide in government hands while contributing little to getting the securitization markets up to speed with better risk and capital management.

(The Treasury White Paper on financial reform, out a few months ago, does not offer a prescription for what to do with Fannie and Freddie. The administration has said it will have a plan to offer by early next year. If you follow the articles in the WSJ and Washington Post, there is not much clarity, to the public anyway, of where the administration might decide to go.)

(As I've also noted before, but as this recent Wall Street Journal news article by Nick Timiraos lays out in what might turn out to be chillingly prescient detail, there is another mortgage finance situation rapidly evolving - the FHA - and its adventures into subprime, little money down, etc., etc., home mortgages.)

Constantin:
Step One should be to keep Jamie Gorelick away from whatever option is chosen. That's an automatic savings of a few billion dollars right there. She's the Bizarro King Midas.
9.12.2009 3:42am
Mark N. (www):
Is there a canonical (or semi-canonical) position paper by a proponent of the privatize-them option? I'm curious whether the pros/cons in this GAO report would be seen as a fair assessment of that option by its proponents. Presumably the American Enterprise Institute's 2004 privatization proposal would have to be updated in light of recent events, but is anything like it still seen (by AEI, at least) as plausible? I've been looking around but haven't managed to find a concrete recent proposal.
9.12.2009 4:31am
Bart (mail):
No consideration of the option of dissolving Freddie and Fannie in bankruptcy and calling an end to this experiment in house ownership socialization?
9.12.2009 8:56am
geokstr (mail):

Bart:
No consideration of the option of dissolving Freddie and Fannie in bankruptcy and calling an end to this experiment in house ownership socialization?

Of course not. The rachet only turns one way - toward the Collective.
9.12.2009 9:06am
SuperSkeptic:
Bart:
No consideration of the option of dissolving Freddie and Fannie in bankruptcy and calling an end to this experiment in house ownership socialization?


Of course not. The rachet only turns one way - toward the Collective.


Then why do we waste our time going the Fabian route, let's just get it over with already and let everyone see the results?
9.12.2009 12:56pm
Doc merlin (mail):
@SuperSkeptic: "Then why do we waste our time going the Fabian route, let's just get it over with already and let everyone see the results?"

They do, every generation regardless tries it again. Its an impulse in the human condition as far as I can tell.

Certain people seek power or benefit from collectivist behaviors, others are drawn to it because of the emotional good sounding language that surrounds it. Inevitably it ends horribly. A couple generations later its tried again, using the exact same arguments and everything.
9.13.2009 2:30pm

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