TEXT OF INTERVIEW
Kai Ryssdal: The past couple of days we have been looking at all the bailouts from last fall, and how to get out of them. The ones from the Treasury Department, the Federal Reserve. And today, the first big one from a year ago — Fannie Mae and Freddie Mac.
They hold about half the nation’s home loans, trillions of dollars worth. But they are tricky to talk about. Because before they were rescued they were, in theory anyway, private companies. But they were also government-sponsored. They had the implicit, if not the outright, backing of Washington. Now, of course, they are owned by the federal government.
Lawrence White is a professor of economics at NYU’s Stern School of Business. Professor, good to have you with us.
LAWRENCE WHITE: Well, thank you. It’s good to be here.
Ryssdal: Little known fact of the bailout timeline is that Fannie Mae and Freddie Mac got their bailouts before Lehman Brothers actually ever went under. The week before they did. Remind us why we had to bailout them out.
WHITE: Fannie and Freddie were having difficulties in financing themselves. They had invested in mortgages, like lots of other people, that had turned out to be worth less than Fannie and Freddie paid for them. Also on the mortgage-backed securities that Fannie and Freddie had issued to investors, over $4 trillion worth of mortgage-backed securities, there had been an explicit guarantee that if the mortgage borrowers failed to repay the mortgage, Fannie and Freddie would step up and make the investors whole. To not step in would have really meant chaos in the financial markets, generally, and in the mortgage markets especially. The Federal government couldn’t not do what they did.
Ryssdal: And so we basically wrote them a check for $200 billion. What did they do with that money? Did they plow that back into the housing market?
WHITE: Basically that money is being used to satisfy their obligations, but it has kept them going. And so they are able to continue to fund purchases of mortgages. And buy mortgages, wrap them up in safe packages, and send them out the door as mortgage-backed securities.
Ryssdal: And you’re OK with them being in the mortgage-backed security business still?
WHITE: This is basically a plain vanilla type of operation. This is not the subprime story. The subprime story is a very different story.
Ryssdal: How might we get that money back then without doing damage to a still fragile housing market?
WHITE: Well, I’m not so sure we’re going to see that money back. I think that both places are insolvent.
Ryssdal: They’re still insolvent. A year-and-a-half, two years into this credit crisis.
WHITE: That’s right. I mean, yes, the federal money has been used to fill in the hole, but it’s filled in the hole. And so they are absent the federal money, still insolvent.
Ryssdal: Can you see a way that we might be able to spin out those companies, and free the government of the debt, and make them — as many suggested for years and years — make them actual private companies without the explicit or implicit guarantee of the federal government.
WHITE: Well, I think it is possible. We can’t do it now. The mortgage markets, the financial markets more generally, are still too fragile. Over the longer run. What does that mean? Maybe two or three years from now. It is certainly possible. I hope the Obama administration will see this as the appropriate exit route. In so doing though, I think the federal government is simply going to have to eat essentially the money that it has put into those entities. It’s not coming back.
Ryssdal: Lawrence White. He’s a professor of finance at New York University’s Stern School of Business. Professor White, thanks so much for your time.
WHITE: Thank you.
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