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Thursday, July 24, 2008

John McCain Almost Nails it on Fannie/Freddie

This John McCain editorial on Fannie/Freddie is pretty spot on. Here are the most important portions.

Americans should be outraged at the latest sweetheart deal in Washington. Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It's a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.


Fannie and Freddie buy home loans from lending institutions and reissue them as marketable securities — creating a liquid market for mortgage debt that lowers borrowing costs for prospective homeowners. The two institutions have easy access to borrow at low interest rates because they were originally government agencies and continue to be viewed as being backed by the government. The irony is that by bailing them out, Congress is about to make that perception a reality, even though government backing is no longer needed for their original mission. There are lots of banks, savings and loans, and other financial institutions that can do this job.


What should be done? We are stuck with the reality that they have grown so large that we must support Fannie Mae and Freddie Mac through the current rough spell. But if a dime of taxpayer money ends up being directly invested, the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists. And taxpayers should be first in line for any repayments.


It's time to get America on the right track by creating the jobs that will build a strong foundation under our housing markets. We need to address the high cost of gasoline and other energy sources, and transform health care to be cheaper, higher quality and built around the needs of patients. But most of all, we need to reform Washington and wrest control from the special interests that have created this problem.

Now, McCain is right on just about everything. There is no doubt that these two bought themselves influence that created corruption. They absolutely received special favors as a result. Furthermore, he is right that it is downright shameful the cronyism that is set at those two. He is right that is long past time for them to stop being Government Sponsored Entities and start being private companies like other private companies. Where I believe he is wrong is in assuming that banks can do their role.

In fact, if banks were to hold these loans themselves, the market would lack liquidity. I do believe that the private market could absolutely be able to securitize loans in prime. I know this because Lew Ranieri did exactly that for sub prime. I believe that with enough study of the issue McCain will come to a place close to me and suggest that they be broken up as well as privatized (which he is already suggesting).

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