Famous Last Words: “They Are Adequately Capitalized”

On Sunday September 7, 2008 the U.S. government took control of the mortgage giants, Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs), which have steadfastly denied any government guarantee in their unending lobbying activities, control more than half of the nation’s mortgages. Yet the bailout is now official: they are now in conservatorship under the Federal Housing Finance Agency, leaving U.S. taxpayers exposed to potentially hundreds of billions of dollars in new government debt.

During the contentious debate over the housing bill and the need to reform the ailing mortgage giants, Sen. Chris Dodd (D-Conn.) assured Americans that no bailout was in the making: “Today, as people watched the economic news of the country, we know that Fannie Mae and Freddie Mac, these great mortgage lenders that are responsible for more than 50 percent of the mortgages in the country, have had a tough day. The good news is they stabilized at the end of the day, and rightfully so because these institutions, despite what some have said, are on a sound footing. They are adequately capitalized. In fact, they have more capital than Federal law requires and they have access to it. I am glad to report that things seem to be stabilizing when it comes to the government-sponsored enterprises.”[1]

Senator Richard Shelby (R-Ala.) also noted: “It is not a Government bailout. It is not taxpayers’ money.” Shelby also pledged that, “… there is no specific bailout for any specific mortgage company or banks, as somebody alluded to last week–none of that,” and that, “We would not vote our support for anything like this.” [2]

In truth, however, these companies were not as stable as many in Congress would have us believe and were in fact on the verge of financial meltdown. Now taxpayers must face that reality. Even worse, the Treasury’s open checkbook may generate little in the way of fundamental reform of these two GSEs. In fact, their bailout looks to keep them afloat through the hard times, with the threat of rising again as markets gain strength. Representative Barney Frank (D-Mass.) has a vested interest in this outcome, as his pet housing projects are funded by a levy against Fannie and Freddie.

Regardless of why they were created, it is clear that Fannie and Freddie have become a burden on the economy and should not be resuscitated. Whoever wins the election in November should focus on paring back their activities and eventually moving them into truly private hands. At that point, they may actually be “adequately capitalized.”


[1] July 11, 2008. American Housing Rescue and Foreclosure Prevention Act 2008. Library of Congress.

[2] July 10, 2008. American Housing Rescue and Foreclosure Prevention Act 2008. Library of Congress