Show MUM i I A A l 1 v r rt a s k- k N A new new F Fannie nnie an a and d Fr Freddie Steven Special to The Washington Post The superbly crafted rescue pl plan n that the represents not an end to the perils of Fannie Mae and Freddie Mac but merely the beginning of a new chapter of the sponsored government-sponsored enterprises does not resolve the term long-term questions and the hardest part of the job lies ahead While the Treasury plan left open the possibility of continued private ownership of the similar to how bankrupt companies are reorganized that's not a viable option As Treasury Secretary Henry Paulson said Fannie and Freddie's unique status as in effect partnerships between th the e federal government an anthe and d the private sector simply y doesn't work Fannie Mae was create created d in 1938 to provide capital to the strained Depression d mortgage market But in m i 1968 eager to keep th the e Vietnam War from inflating g the federal deficit President t Lyndon Johnson privatized privatize d I Fannie with a vague but bu t implicit government t 1 guarantee of its debt That left Fannie an and d I Freddie when it was create created d 1 two years later later free free to us use e government credit to profit profi t t private shareholders With Wit h i management d I by bonuses and dollops o of f stock options it was only onla y a matter of time before this thi s i privilege was abused If the had stuck k to to their original missions trouble or at least leas t I disaster might have been averted But in recent years as private mortgage providers dangled in front of home buyers more attractive than what the were offering Fannie and Freddie responded not by stepping back and allowing their role in the market to contract but by competing in the pit of and Alt-A Alt loans So what should we do Notables such as Alan Greenspan have suggested that if the are too big to be allowed to fail as indeed they are they should be broken up made smaller and fully privatized without even a whiff of government support But this appealing concept ignores the fact that the reason for FannieMae's Fannie FannieMae's Maes Mae's creation providing creation providing liquidity to the mortgage market in difficult times remains compelling and no nomore nomore nomore more so than present With private providers vaporized or sidelined Fannie and Freddie account for around 70 percent of the mortgage market Ironically the best solution may well be beto to go back to the original structure of the federally owned with a limited carefully defined and closely supervised role of underpinning the private providers of mortgage credit rather than competing with them To achieve that in a way that is fair to existing debt holders and shareholders we should consider setting up a new government entity We could even call it the Federal National Mortgage Association the original name of Fannie Mae As quickly as possible responsibility for providing liquidity to the mortgage market would be transferred to this new entity Once freed of buying more mortgages Fannie and Freddie could begin an orderly liquidation selling off their portfolios as market conditions permitted and allowing their guarantees of debt to roll off as the underlying mortgages were paid off or refinanced The Treasury appeared to set the stage for this possibility by including within its package a requirement that a sell-off sell begin As with any corporate liquidation cash coming in would go first to pay payoff off outstanding debt and then to shareholders initially to the federal government to the extent that it ends up infusing capital pursuant to Sundays Sunday's plan If anything remains holders of preferred stock and then common stock would be the recipients That would be a fair result for all parties Some will argue that even in a shrunken state returned to the original mission but run by government bureaucrats rather than sector private finance experts this new entity would pose unacceptable risks risks' for taxpayers But Fannie Mae existed successfully for three decades in this fashion and the Federal Reserve has has M served in a similar capacity as provider of liquidity to financial institutions for far longer without even t a meaningful misstep Others will maintain that we need the too much to start mucking about with new structures beyond the just announced Indeed to ease fears about the continuing meltdown in housing values the new package included an increase inthe in inthe inthe the authority to buy mortgages While understandable this will complicate a wind-down wind of the and underscores the need to move quickly on a more fundamental restructuring In addition to new structures we will need to address an even tougher question how much support the federal government should provide for housing Whether or not the program announced Sunday causes actual cash losses for the Treasury no one should be confused about the mammoth implicit cost of this rescue particularly the extension of an ironclad ironclad ironclad iron iron- clad guarantee to 5 trillion worth of obligations roughly as much as all publicly held Treasuries That's on top of decades of in effect subsidized borrowing costs for the as well as other expensive programs such as the mortgage interest deduction all to the enormous benefit of the American people But with witha a large budget deficit and mounting obligations we should think harder about the tradeoffs between housing and other urgent needs t |