Fannie, Freddie still pose threat to U.S. finances
Jun. 1, 2010 12:00 AM
The Arizona Republic

The financial reforms about to be enacted in the wake of the epic systemic meltdown of autumn 2008 look to us like collateralized debt obligations, those dubious instruments that played such a destructive role in the subprime mortgage crisis.

Few people understand them. They have the potential to spread even more economic chaos if they fail. And everyone presumes they're rigged to benefit Goldman Sachs.

Whether the reforms will have their intended effect - which is to encourage a return of the famous "animal spirits" of Wall Street - is yet to be seen, of course. Particularly since a "commission of wise men" also has been put in place to cool the street's enthusiasm at just the right moment in time.

But one thing we do know is that one of the most important reforms, the breakup and sell-off of Fannie Mae and Freddie Mac into completely private hands, did not happen. And that unfortunate oversight alone suggests the Democrat-sponsored financial reforms are not likely helpful.

Fannie and Freddie are the two "government-sponsored enterprises," or GSEs, whose accumulation of subprime mortgages has required (and is requiring) the infusion of tens of billions of taxpayer dollars to keep the organizations solvent. Thanks to the federal government's implied assurance that Fannie and Freddie were too big and important to fail, they ended up among the biggest beneficiaries of the Bailout Era.

Amazingly, reform still hasn't touched them. They remain GSEs. They remain the primary repository for subprime mortgages, which themselves seem to have escaped reform. And they remain threats to the stability of the country's financial future.

Just last Wednesday, the acting director of the Federal Housing Finance Agency told Congress that the two GSEs would be "unable to serve the mortgage market in the absence of the ongoing financial support," the total of which now exceeds $145 billion since late summer 2008 and counting.

Whatever else congressional financial reforms were intended to fix, they were intended to assure that taxpayers would not get stuck again with bailing out financial houses that are too big to fail. Mortgage finance companies holding nearly three-quarters of all home loans in the United States - Fannie and Freddie - seem to qualify as "too big." The fact that both are in government-controlled conservatorship and, inexplicably, are conducting business almost exactly as before the crash, would indicate they retain their propensity to fail.

The call to reform Fannie and Freddie is hardly new. In 1997, a financial analyst writing for the Heritage Institute argued that the quasi-government enterprises "expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify." Make that hundreds of billions.

Fannie and Freddie escaped reform because they are handy tools for Congress to continue manipulating mortgage rules, thus ensuring the prospect of still more instability in the market.

This is crazy. By ignoring Fannie and Freddie, Congress is ignoring half the reason for the financial meltdown two years ago.

Financial reform won't be complete until GSEs no longer enjoy "implicit" access to the taxpayer's wallet.

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