Friday, March 27, 2009

A Cautionary Tale: Uncle Sam on Your Board

Here's an interesting little story about the dangers of government/business (or in this case, government/government sponsored entity) "cooperation". It seems that last year's intercession by the Feds in the operations of Freddie Mac (and the Feds pouring of billions into the mix to prop Freddie up) has resulted in a situation in which management of the company (Freddie) wanted to complain to the regulator (SEC) about the role that the federal government was having in potentially holding Freddie back from profitability.

You see, the instrument of Federal control of Freddie (the Federal Housing Finance Agency) and the Obama Administration have made Freddie an essential part of the "Homeowner Affordable and Stability Plan" (I know, weird name). By forcing Freddie to "re-do" mortgages, Freddie sees a loss of $30B that has to be reported in its books. Fannie's management sought to disclose this fully in its annual report; folks at FHFP wanted them to water down the language so that it didn't appear that the Obama Plan was contributing to further losses at Freddie. Freddie threatened to go to the SEC and report the whole shooting match. They all settled on sufficiently watered down language.

What's going on here? For one thing, the weirdly private/weirdly public status of Freddie Mac (and Fannie Mae for that matter)--even before the Bush Administration intervened--was always a thumb on the scale where risk was concerned for Wall Street. In the back of investors' minds was a sense that the government would never let these guys fail, so whatever they are doing must be legit and the risk must not be too high. We know that wasn't the case. Secondly, the relationship between the Feds and the big federally sponsored mortgage corporations is even FURTHER muddied now that the feds intervened. You can't run a corporation that seeks to maximize shareholder value (which after all, is the purpose of corporations) that is also being run as an instrument of public policy.

What's to be done? One of two things. End the charade of the GSE's being looked at in any way as "private". Completely nationalize them and make them solely responsible to the federal government for executing a national policy of increased homeownership. OR--set them free. Cut all government ties. Completely privatize them and let them go see if the market will support the kinds of products they sell. At this point, I would support nationalizing them completely. We've had our dance with the silliness of homeownership as a birthright, and the ridiculous ends to which government, Wall Street and the public went in that pursuit have become manifest. If increasing home-ownership remains a government pursuit, it ought to fund that in its annual plan in and among all the other competing national priorities.

No comments:

Newer Post Older Post Home