A look at the Fannie and Freddie bailout

The logos for Freddie Mac and Fannie Mae


Scott Jagow: Well, it's happened again. The government has stepped in and announced another bailout. This time of the mortgage companies Fannie Mae and Freddie Mac. A lot of people see this as a sign of just how much the financial system stinks right now, but the markets are rejoicing. We'll get to that in a minute. First, let's take a look at this plan. Here's John Dimsdale.

John Dimsdale: Secretary Paulson said he needed to save Americans' access to home loans, auto loans and other consumer credit.

Tape of Henry Paulson: Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in the financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth from family budgets to home values to savings for college and retirement.

Treasury will inject government capital and credit as needed over the next 16 months so the mortgage underwriters don't run out of money. Douglas Elmendorf at the Brookings Institution agrees with Paulson's claim that incremental payments are better for taxpayers than one big bailout.

Douglas Elmendorf: The crucial step is that if Fannie Mae and Freddie Mac were covered financially after the government has put in money, that the returns for that would go to the taxpayers not to the current shareholders.

Secretary Paulson says when mortgage rates go too high, the government will buy Fannie and Freddie's mortgage-backed securities to ease those rates, but that worries Elmendorf.

Elmendorf: That is a greater government involvement in the housing finance business than we should be aiming for.

The government's authority to back up Fannie and Freddie expires at the end of next year. Secretary Paulson called on Congress to use that time to restructure Fannie and Freddie to be either fully public or fully private organizations.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.
Log in to post2 Comments

I agree that the government is doing the righ thing. The power that the two GSEs held over congress was non partisan -- both sides caved constantly to the lobbying. Now I am wondering if there is a case for merging the two and benefitting by shrinking the headquartes staff. Freddie was created in the late 70s (right around the time of the S&L debacle) mainly to provide another source of liquidity to the market. Over the years, they acted as duopoly, even to the extent of "fixing" market share.

Why have two problems rather than one?

Why do you not explain to your listeners that everything the government will be doing will be paid for by the next 3 or 4 generations. There is no way the public should be paying for the CEO's mismanagement of Freddie & Fannie; their personal wealth and the payouts they received should be used to, at least, make a dent in the disorder. They carelessly extended credit in order to make their profits large, their rich friends richer and never gave one thought to the consumers who would be obliged by the government to be taxed into oblivion. if there are consumers in 3 or 4 generations.

With Generous Support From...