Fannie and Freddie, as Predicted

A reprise of what I wrote August 25: Any day now — perhaps any hour — the plug will be pulled on Fannie Mae and Freddie Mac, and a massive government bailout will ensue. Together, they’ll become the largest government-owned entities in American history, and, once again, taxpayers will pay the bill, which could come to $25 billion or more.One question is how did we ever get to this? The Savings and Loan Bailout of the late 1980s should have taught us that when government guarantees the downside of risks and private investors reap the upside gains, there’s hell to pay. The risks Fannie and Freddie took on weren’t officially guaranteed by the government — that is, by you and me — but investors assumed they were. And so did Fannie’s and Freddie’s executives, who reaped a bonanza with bonuses in the tens of millions each year.

Apologists will say that Fannie and Freddie exist to make housing loans to low-income Americans, so it was inevitable that the two giants would get caught in the quagmire of the housing burst. But the fact is, Fannie and Freddie — and the executives who ran them and still run them — have been out to maximize profits. Period. Just the same as every other mortgage and investment bank. High-risk sub-prime loans offered a higher rate of return, so Fannie and Freddie went into them big time. And because of the implicit government guarantee, Fannie and Freddie could take on even more risks and make even more money. Until now.

It’s another case of socialized capitalism, folks. The largest, yet. Along with making lots of money for investors and their executives, Fannie and Freddie corrupted our political process. They blocked any attempt to reign in the risks. Their lobbyists were and are the most sophisticated and among the most ubiquitous in Washington.

What to do now? Hope that, like the S&L fiasco, taxpayers can get back a fair portion of our dollars. But unlike the S&L fiasco, this time we should make sure we bury socialized capitalism for good.

Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

2 Responses to "Fannie and Freddie, as Predicted"

  1. Guest   September 8, 2008 at 10:47 am

    In the immortal and slightly revised words of Professor Phil Kurland of the University of Chicago Law School (circa 1961) — guru to Senator Biden — there is nothing wrong with socialized capitalism as long as I get the profits and you take the losses.

  2. Arthur   September 9, 2008 at 10:43 am

    I agree with what you have written.If the deregulation and “free markets” really work then I don’t seee why I have to bail out these things. Now the Govt will be taking money ie collection duties and then giving the money to investors including NON-US investors. Maybe they will invest in “Blackwater” the privite company that makes so much money (from our pockets)everytime we invest in a police action, war or invasion. Or Sears were the Red 1 will be for sale.My point, if the markets work then don’t prop it up with socialized public money and turn it into privite profit, and stop picking up the corporate debt and pining it on tax-payers. secondly selling off public and government funtions, services, and tresures is more costly, more wasteful, less acountable and gives us the horrors of “big government” without and of the so-called ‘protections for the public, all the protections are for the corporate profit.