K Marx The Spot

The Joys of the Ownership Society

Now it seems that the 40-year American experiment of having government-sponsored enterprises swim in the waters of the stock markets is over, at least for now. (Fannie Mae was an arm of the federal government from 1938 until 1968, when the Johnson administration privatized it to get its debt off the government's books; Freddie Mac was formed in 1970 in essentially its current form.)

The impetus for an administration so proud of the free market and so enamored of small government to effectively privatize the two mortgage giants? It had little choice.

The government's planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies' debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.

The details of the deal have not fully emerged, but it appears that investors who own the companies' common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also wind up with little. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.

But what were company officials saying about the situation at Freddie and Fannie? Barron's has an answer: in its issue out on newsstands today, a letter in the Mailbag section from Anthony Piszel, the Executive Vice President and Chief Financial Officer of Freddie Mac, tells a very different story:

To the Editor: The arguments made in "The Endgame Nears for Fannie and Freddie" (Cover Story, Aug. 18) miss the mark.

All financial institutions in the mortgage business are taking losses. Freddie Mac is no exception. But Freddie Mac is weathering the storm better than many. The default and credit charge-off rates on mortgages we own are a fraction of industry averages. We hold capital well in excess of regulatory requirements. Our liquidity position remains strong, and we have reported strong revenue growth in our mortgage-investment and guarantee businesses.

I hate to be a spoilsport, but Barron's was right to mention the word endgame. And if you were an investor who took Freddie Mac or Fannie Mae officials at their word that the companies were well and truly strong, welcome to the real world of finance, where it is hard to tell the difference between an outright lie and rampant self-delusion.

Labels: Fannie Mae, Freddie Mac, stock market, stupid mailbag tricks

Fanning the Flames

Conservatives generally hate Freddie Mac and Fannie Mae, the huge quasi-governmental agencies in the United States that backstop a good chunk of the residential mortgage market. After all, markets never prove wrong about anything as simple as mortgages, so the government should just butt out.

Markets, of course, fail often enough that even Americans believe that the government should step in—hence, the lack of outrage when the recent housing bill essentially backstopped Fannie and Freddie's debt.

What is a good conservative to do now? Make something up. Take this letter to Barron's:

One thing that really bugs me about Fannie and Freddie (Editorial Commentary, July 21), is that they do not pay federal or state income taxes, so the taxpayer is already subsidizing them. Who knows what they would have paid in taxes if taxed as an ordinary company?

Alas for the readers of Barron's, whoever edits the Mailbag column could not be bothered to check the assertions in the letter. While Fannie Mae and Freddie Mac are exempt from state and local income taxes, they are indeed subject to federal income taxes. While both have low effective tax rates, they have used federal tax credits for affordable housing and historic rehabilitation—the same tax credits that other companies can and do use—to get that way.

(What a pleasant world it would be if letter writers were equally up in arms when companies avoid state income taxes by paying royalties for intellectual property use to shell companies in Delaware or Montana.)

Labels: Barron's, Fannie Mae, Freddie Mac, stupid mailbag tricks