Reforming Fannie and Freddie
Fannie Mae and its smaller cousin, Freddie Mac, were both formed by Congress to help low-income and minority Americans buy homes. They've done that task well. But in the process, they've become the largest home-mortgage companies in the world. Many of their investors reap rich rewards. And in this post-Enron world of more openness and strict accounting, these two enterprises need to change.Skip to next paragraph
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Their possible collapse due to a scandal or a downward spiral in property markets would be too costly for taxpayers to bear.
Fannie and Freddie achieved their lofty status, in part, thanks to overly generous conditions set by Uncle Sam. But earlier this month, the federal office that regulates them began a review of the companies' disclosure practices. And Fannie Mae also became a little more transparent recently it now posts the stock trades of its principal managers and board members on its website. And it released more information about how Fannie uses some of its more complicated financial instruments.
Good moves, but not enough.
A bill introduced earlier this month in the House by Congressman Chris Shays (R) of Connecticut, and Ed Markey (D) of Massachusetts would force Fannie and Freddie to abide by the same Securities and Exchange Commission disclosure and registration laws as other corporations. (As government-sponsored enterprises, or GSEs, Fannie and Freddie don't have to register their debt or securities with the SEC.) The bill went into a subcommittee last week. It should come up for a vote and pass.
Fannie and Freddie also don't have to pay state and local taxes. Their bonds carry AAA ratings, even though they are not actually guaranteed by the US Treasury. They take advantage of the perception of a government-backed credit, so they can borrow at lower rates. All of that has given them a supersized market advantage and made them too big to fail. Even Federal Reserve Chairman Alan Greenspan signaled last week that investors in Fannie and Freddie could possibly be underestimating their risk.
Both companies, indeed, carry systemic risk their financial health obviously affects others. According to reliable estimates, their debt could reach $8 trillion by 2010. If Fannie or Freddie ever need a federal bailout, what happened at Enron could look more like a small tremor.
The two financial giants, with five board members apiece appointed by the president, enjoy tremendous political clout in Congress. According to the Center for Responsive Politics, Fannie and Freddie gave more than $4 million in 2000 to both parties. Could all that money not possibly affect related legislation?
Forcing greater financial transparency and de-politicizing Fannie and Freddie would do wonders for the long-term stability of both entities and for the taxpaying public.