After Fannie and Freddie, what next?

The logos for Freddie Mac and Fannie Mae

TEXT OF INTERVIEW

KAI RYSSDAL: For years the big question about Fannie Mae and Freddie Mac was this: Does government-sponsored really mean government-backed? Fannie and Freddie are what're known as government-sponsored entities. They get a special line of credit from the Treasury Department and some other perks. And the assumption has always been that the government would be there for them if times got tough. Yesterday's announcement from Mr. Paulson is the exception that proves the rule about what happens when you assume.

Secretary Paulson made it clear that, yes, the government will be there now that things are tough. Fannie and Freddie will get another line of credit from the Treasury, access to special loans from the Federal Reserve, and the possibility that Uncle Sam will buy company stock to shore it up if need be. Karen Shaw Petrou's with the consulting firm Federal Financial Analytics in Washington, D.C. Ms. Petrou welcome to the program.

Karen Shaw PETROU: Thanks so much.

RYSSDAL: Is this crisis with Fannie Mae and Freddie Mac -- and I use that term advisedly -- is it a stock crisis or is it an actual liquidity crisis? Do these companies have enough money to do what they do?

PETROU: The companies do have enough money to do what they do. It is a stock-price crisis caused by investor fear.

RYSSDAL: If that's the case then, how reassured are you, and are investors, by the news over the weekend that the Treasury Department and the Fed are going to help out?

PETROU: One would ordinarily be pretty darn reassured by a blank check to the U.S. Treasury, but the markets still remain tumultuous.

RYSSDAL: Well, let me ask you about that, that blank check. We now have the authority -- we the people of the United States -- in the person of Henry Paulson, the Treasury secretary, have the authority to go out and buy shares in a company that we are lending money to in the form of a line of credit. Does that make much sense to you?

PETROU: No. I don't think any of this makes sense and I don't think anybody wants to do this. It's because we did not plan in advance, we did not regular these firms well, the mortgage markets were poorly regulated. Everybody thought house prices could only go up. Banks haven't failed since the early 1990s, and everybody forgot they could. They had private making the money when times were good, and all of us picking up the pieces when they turned bad.

RYSSDAL: Why not just drop the facade of having these things be government-sponsored and just nationalize them and be done with it?

PETROU: We'd have to figure out, I think, first what to do with the shareholders who are there. In this country we don't take private property and that's again part of the contradictions in private shareholders supposedly doing a public mission. I do think we're going to have Round 2. Once we get through this, as I hope we will, and stabilize Fannie and Freddie, we're going to need a really good, hard look at the concept of government-sponsored enterprises, and cut through those contradictions and protect the taxpayers much better than we ever have before.

RYSSDAL: Is there a little taste of the Savings & Loan crisis of the '80s and '90s in here?

PETROU: There's a lot of taste of that because then the taxpayers also picked up the bill for a lot of poor decisions. One of the identical factors between the S&Ls in the '80s and Fannie and Freddie today is lack of capital. Shareholders had nothing to risk in the S&L's because they didn't have much capital at stake. So there was a heads-I-win, tales-you-lose bet. And that was similar because of the poor regulation of the GSEs.

RYSSDAL: Do you have fears about the rest of the financial sector -- some of the banks?

PETROU: No. I do think we will see some more bank failures. I think we've, again, been through a period of poor regulation and complacent investors and to solve that problem's going to hurt.

RYSSDAL: Karen Shaw Petrou is the managing partner of Federal Financial Analytics in Washington, D.C. Ms. Petrou thanks so much for your time.

PETROU: Thank you, very much.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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