Fannie and Freddie: Action This Week

Brendan Murray and Dawn Kopecki:

Bloomberg.com: Treasury Secretary Henry Paulson... speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the [GSEs].... The Federal Reserve separately authorized the firms to borrow directly from the central bank.... Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.... Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity ``if needed'' in the firms, and to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months....

Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow.... Preferred securities tumbled in Asian trading as investors questioned if Freddie and Fannie will be able to continue to pay dividends.... Senator Charles Schumer, a Democrat from New York who chairs the Joint Economic Committee of Congress, praised Paulson's plan, saying it "is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers."...

Senior debt of both companies trades as if they were rated A3 instead of Aaa by Moody's Investors Service, according to data from the rankings firm's credit strategy group...

Comments

[Robert Waldmann]

In the Washington Post story on how no one could have everyone predicted the Fannie Mae Freddie Mac troubles example number 1 is a former colleague of yours

"The political battle lines were drawn by 2000, when a senior Clinton administration official called on Congress to take steps that might have diminished the companies' special status. Treasury Undersecretary Gary Gensler also urged that regulators be given more power to set capital requirements for Fannie Mae and Freddie Mac."

So tell us about this Gary Gensler who tried to prevent the horror of you having to debate Grover Norquist.

[Aaron]

So what is the end game? Is it all about putting working class people into public housing. Times change and certain jobs disappear because they no longer make sense. What ever happened to the milk man? Is it that this form of product deliver no longer makes any economic sense. Same thing with the real life versions of the Bailey Building & Loan Association from it’s a Wonderful Life. It seems that full service small banks have gone the way of the milkman.

Without loans to those seeking the American dream Martini and his family would never become home owners. The breakdown in the system is largely because the Bailey Savings and Loan has been replaced by mortgage brokers with no ties to the community but only wanting to earn their commission and then sell their loans to a faceless syndicate the pools it with other loans and repackages it for institutional investors.

I think the milkman was a charming part of American life. But if truth be known I don’t want to pay higher prices for orange juice, yogurt, and milk delivered by a milkman. Also, I don’t want to subsidize inefficient Savings & Loan companies.

This is a difficult problem with competing priorities. Government housing is like forcing the working middle class into a life in Potter’s field. More regulation means fewer loans which mean less mortgage brokers, more families in public housing or as renters, a few less bright young analysts and investment bankers on Wall Street, and the fat cats on Wall Street will earn smaller bonuses. 20 percent down payment is music in Potter's ears. The American dream is a search for the wonderful life. We can't let those with ulterior motives take this away from us.