Marketplace, November 18, 2003
Fannie Mae and Freddie Mac are the unofficial names of two huge publicly-traded, government chartered companies that buy mortgages and mortgage-backed securities to boost the flow of capital through the U.S. mortgage market. In plain English, they allow you and me and millions of other Americans to get mortgage loans relatively cheaply. Which is one reason why a record number of Americans -- two-thirds of all households -- now own the houses they live in.
But this cheery story has a darker side. Just like other major corporations, Fannie and Freddie have shareholders who want high returns on their investments. And they have executives who get multi-million dollar paychecks --even higher when the corporations show big profits. Earlier this year, Freddie got caught up in an accounting scandal that requires an estimated $4.5 billion earnings restatement. Last month, Fannie reported a $1.3 billion accounting mistake.
These problems might not be worrisome under normal circumstances. But we've hadtwo years of revelations about cooked books and shady dealings on Wall Street, so everyone's a bit nervous.
But Fannie and Freddie also present a larger worry here. Unlike most corporations, if Fannie or Freddie ever went belly up, American taxpayers wouldfoot the bill. These two giants are just too big to fail. Since 1995, the two have tripled their combined debt to more than $2 trillion. At this rate, they'll soon exceed the debt of the entire federal government. And because financial markets assume that the federal government guarantees their debts, Fannie and Freddie can borrow money at a discount and use the cash pretty much as they want.
You don't have to be a Wall Street wizard to know that when taxpayers bear the downside risks, and executives and shareholders get the upside gains, there maybe a temptation to take undue risks with money. Remember the savings and loan debacle?
Now, I'm not suggesting Fannie and Freddie are doing anything they shouldn't bedoing. I'm just saying there's cause for worry. We've been here before. Fannie and Freddie are fighting to avoid stricter oversight, and they have a lot of lobbying muscle in Congress. But they can't have it both ways. They can't have the advantages of being subsidized by the public, without being accountable to the public.
