One of these men is (probably not) leaking to the Washington Post.
This may be the most open conflict in the White House economic policy team ev-ah, as the Post's Zach Goldfarb and David Cho follow-up their reporting yesterday on the potential to use a "bad bank" mechanism to clear toxic assets from government-owned housing lenders Fannie Mae and Freddie Mac. Various official spokespeople tried to walk back the story, saying it was part of a very preliminary, very informal, and very non-binding discussion, but today someone in the White House, presumably their original source, leaked the two reporters an e-mail revealing that it has been talked and written about within the Administration. Meetings on the project were scheduled to start this week. This is pure speculation, but I think the reason this internal debate has proven so controversial and led to leaks (besides, of course, the skills of Goldfarb and Cho) is related to the question I raised yesterday: If the administration thinks a bad bank is a good solution for the problems of Fannie and Freddie, why didn't they consider it for the troubled private banks they now have large stakes in? Why was the "bad bank" model criticized so much last winter? The politics surrounding the administration's response to the financial crisis have become acrimonious outside of the White House, so it's not too surprising that partisans of different approaches within the administration have taken this to heart. That said, it is true that this is simply internal debate within the administration, and it's nothing to get too excited about -- expect that the economic policy team will consider a variety of options for any problem before settling on the official approach. An administration official e-mails to stress that interpretation, noting that no meeting has been held yet (one scheduled for yesterday was cancelled due to "scheduling conflicts") and NEC principles are apparently not yet involved; this is just staff. The official also observed that in the regulatory reform proposal laid out earlier in the summer, the administration promised to reform Fannie, Freddie and other Government-Sponsored Entities (GSEs), figuring out exactly what kind of institutions they ought to be by early next year. In that White Paper, six options were laid out and apparently those proposals were recirculated this week. But weirdly, none of those options seems to be a "bad bank" type solution: There are a number of options for the reform of the GSEs, including: (i) returning them totheir previous status as GSEs with the paired interests of maximizing returns for private shareholders and pursuing public policy home ownership goals; (ii) gradual wind-down of their operations and liquidation of their assets; (iii) incorporating the GSEs’ functions into a federal agency; (iv) a public utility model where the government regulates the GSEs’ profit margin, sets guarantee fees, and provides explicit backing for GSE commitments; (v) a conversion to providing insurance for covered bonds; (vi) and the dissolution of Fannie Mae and Freddie Mac into many smaller companies.In fact, to my mind, the "bad bank" solution isn't really "GSE reform"; it's the medium-term solution to their financial problems and the stagnant housing market, not a long-term institutional reform like the options presented above (I like choices three and four). Curiouser and curiouser...
-- Tim Fernholz
