Fannie and Freddie in the Eye of the Storm Raging Around Foreclosures

Fannie and Freddie are in the eye of the storm raging around foreclosures. Questions are being posed as to why two companies created by the government are now being operated by private share holders. Taxpayers continue to be at risk and most probably would have to bail them out again. The question is being posed if the running of these two giants should not entirely be in the hands of the government.

In reply the then Treasury Secretary Paulson had replied, ‘Government support needs to be either explicit or non-existent.” The director of FHFA James Lockhart had also echoed these sentiments. At least for the time being, this would have been the best course of action.

Meanwhile the FHFA has taken control of the Fannie Mae and Freddie Mac as a Conservator. Contracts have been entered into with the Treasury in which promises have been made to keep the two giants solvent. On their part the duo allowed the Treasury the right to take over 79.9% of their common stock by paying a token fee. The Treasury also promised to purchase the mortgage backed securities of the firms for the forthcoming few years. This would enable the mortgage rates to be kept low. New CEO’s came to be appointed for the two companies. Dividend payments have been suspended although trading would continue in common and preferred stock.

Guessing the worth of the stock would be a game of interest for the investors over the forthcoming months. Fundamentally the more bailout dollars are used to shore up either of the two the less would be the worth of the stocks. Freddie seems to be more wobbly of the two. There are worries about the collapse in preferred share prices for it might erase many banks that own these.

Fannie made its debut in 1938 as a government agency with implicit backing from the federal government. It was privatized during the presidency of Johnson to get its debts off the books of the government. The Vietnam War forced this action. Following this Freddie was created by the Congress to prevent Fannie enjoying a monopoly. Thus fundamentally the idea behind the setting up these unique public-cum-private bodies was an accounting manipulation. Their debts were not loaded on to the government but the investors were made to think that these were guaranteed by the federal government!