The Scourge of Fannie/Freddie

This past week, both Fannie Mae and Freddie Mac reared their ugly heads with two stories. First, here's the most important one.

The Obama administration's decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday.

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

Beyond that, we found out that the two mortgage giants will be paying their top execs handsomely over the next few years.

The chief executives of Fannie Mae and Freddie Mac each could earn as much as $6 million this year and next, despite huge continued losses at the seized mortgage giants and a government bailout tab of more than $100 billion that the Obama administration said could rise even higher.

Fannie Mae Chief Executive Michael Williams will earn a base salary of $900,000 in 2009 and 2010, with a deferred base salary of $3.1 million each year to be paid "only if the enterprise meets performance metrics" set by its board and subject to government review, according to filings Thursday with the Securities and Exchange Commission. An additional $2 million is possible annually, identified as "target incentive opportunity." Freddie Mac Chief Executive Charles E. Haldeman Jr. will get the same compensation package.

Four additional Fannie Mae executives will earn base salaries above $500,000 and have compensation packages for 2009 and 2010 that could pay each of them at least $2.7 million annually. One other Freddie Mac executive will receive a base salary over $500,000 and could earn as much as $1.15 million a year.

Stories about executive pays and bonuses aren't necessarily all that important in the larger scheme of things. After all, whether or not the CEO of Fannie Mae makes $6 million next year or $6 isn't going to make or break our economy. Those stories are fueled mostly by class warfare, envy, AND the sense that incompetence at the top is being rewarded and HANDSOMELY.

In the first story, the government announced that they would raise the debt they will cover for Fannie/Freddie to an unlimited amount. It was $200 billion each. Here's how a Treasury spokesperson characterized the decision.

(the move was) necessary for preserving the continued strength and stability of the mortgage market,

That's all nonsense. The government wouldn't be making the debt ceiling unlimited unless their number crunchers thought that was necessary to cover the necessary losses. A year and a half ago, when this crisis first hit with Fannie/Freddie, I pointed out their two problems. First, there's only two of them and so they are essentially monopolies, or technically duopolies. Second, they are extensions of the government making them quasi socialistic. I said the solution would be to break them up and privatize them.

Since then, the government has gone backwards. They're no longer merely extensions of the government but wholly owned subsidiaries of the government. This leads to all sorts of moral hazards. That's why we're here in the first place.

The problem is that mortgage securitization is necessary to the entire mortgage world. Since they're the only securitization game in town, we have to prop them up. So, if they're about to collapse without a significant lifeline, we have to bail them out.

Long ago, I said that we must use this as an opportunity to reform both. Instead, the government has made the situation worse. Now, these two giants hold the real estate market, the economy, and with it everything else at the barrel of their financial gun. They can't fail, and so we must continue to bail them out. Instead of fixing the problem, we've made it worse.