Fannie, Freddie Plan Signals Open Raid on Federal Treasury

The U.S. Treasury said in an emergency announcement yesterday that it is taking temporary control of floundering mortgage lenders Fannie Mae and Freddie Mac. The move is the latest chapter in a sorry story of regulatory failure, accounting fraud, and political cronyism.

Treasury Sec. Henry Paulson stated Sunday, “I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure,“ yet he still offers no plan to fundamentally reform this flawed structure and inherent conflict. In fact, Sec. Paulson’s latest plan actually expands Fannie and Freddie’s risky mortgage guarantee activity and delays the decision to even begin to reduce their size to 2010.

FreedomWorks President Matt Kibbe commented:

“Secretary Paulson has decided to kick the tough decisions to 2010, when he is no longer in office, while making sure that American taxpayers make Freddie and Fannie bondholders whole immediately.”

“The Democrat majority in the U.S. Congress, led by Sen. Dodd and Rep. Barney Frank, has completely failed in their oversight responsibilities and in their responsibilities to the American taxpayer. They blocked GSE reform for years, and it’s clear now that the most recent Dodd-Frank housing bill simply made matters worse.”

“In the Administration, Director James Lockhart repeatedly claimed that Fannie and Freddie were ‘adequately capitalized’ and even reduced their capital requirements earlier this year. It’s a strange world indeed when the regulator who failed in his mission is now given expanded duties.”

“With this plan, the U.S. government is borrowing more money from foreign creditors, in order to buy equity and mortgage-backed securities in a convoluted way in an attempt to guarantee Fannie and Freddie bonds. This is not a sustainable or rational economic policy.”

“With this plan, U.S. taxpayers are making an equity investment in two public companies so that those companies can continue to pay subordinated debt dividends to insider banks and Wall Street investors, and to prop up the mortgage-backed securities market.”

“The U.S. government needs to break up Fannie and Freddie, not throw good money after bad attempting to preserve them in their current form. The only good news is that Freddie and Fannie will halt all political activities. Hopefully this will create breathing room for the next administration to actually deliver real reform.”