Fannie and Freddie: You’ve Got Their Back

Secretary of the Treasury Hank Paulson issued a statement yesterday declaring the the Treasury Deparment stands ready to expand their line of credit to the two troubled Government Sponsored Enterprises (GSEs) that backstop or own half of all U.S. mortgages, Freddie Mac and Fannie Mae. In addition, his proposed plan calls for the Treasury Department to purchase an equity stake (buy stock) in the companies if necessary. The Federal Reserve has also made substantial credit available to the two companies.

Lest you think this doesn’t involve you, I urge you to remember that the Treasury Department mean you. Your tax dollars, or much more likely, your good name on an I.O.U., because, frankly, the Treasury Department doesn’t have the money. This plan will need to be approved by Congress (it will) and is not, at this point, even necessary. Both Fannie and Freddie claim to have enough cash on hand to meet all their debt obligations. We’ll see. In any case, and despite the prospect of another bailout, this was a good move by Paulson et al. in advance of today’s market opening. As you may have heard elsewhere, Fannie and Freddie really are too big to fail.

Along with these remarks there is the expressed promise by Paulson and Bernanke to reform and regulate our remarkably deteriorated financial system. This is essential. Deregulation (and downright greed) has been largely responsible for this mess. The regulations that were put in place – many of them after the Great Depression – must be reenacted. Yesterday, Paulson referenced protecting the taxpayer (instead of dollars he’s going to use magic beans) and the legislation currently make it’s way through Congress to reform the GSEs.

Don’t trust the government to protect you. Make sure that Congress handles this legislation (and lots more too after all is said and done) the right way. I know it’s easy to have your eyes glaze over when you read about GSEs, financial regulations, etc. But, trust me, this is of vital interest to anyone reading this. Don’t wait until you lose your home or your job or simply can’t afford to buy milk to get involved. Get angry and get active. Start by contacting Congress.

P.S. Here’s a great piece by the always brilliant Gretchen Morgenson about Fannie and Freddie’s bloated books, greedy executives, and the ultimate lesson of all this: when it comes to big business, it’s privatized profits and socialized losses.

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