Include GSE Free Market Reform in any Bailout Bill

September 26, 2008

Dear Representative/Senator:

On behalf of FreedomWorks’ 500,000 grassroots activists across the country, many who oppose the Wall Street bailout, I urge you to include the GSE Free Market Reform Act introduced by Rep. Jeb Hensarling in any legislation addressing the current economic crisis.

It is important that Congress passes legislation that deals with the cause, not just the symptoms of the crisis. A credit crunch is a symptom; Fannie and Freddie are a cause.

Fannie and Freddie’s government-backed purchasing of risky mortgages from banks fueled the boom/bust by encouraging banks to give mortgages to people who did not qualify for them to buy houses they could not afford from builders who otherwise would not have built them. Fannie and Freddie then sold securities of these mortgages to financial institutions around the world, who bought them knowing Fannie and Freddie had the implicit backing of the US government. This made the risk associated with securities based on mortgages given to people who neither qualified nor could afford them of little concern, discouraging the prudence that would otherwise have been required.

This legislation accepts the fact that the special privileges bestowed by the government on Fannie Mae and Freddie Mac, and the incentives created by their government charters, drove the unsustainable housing boom the market is now trying to correct. This bill would ensure Fannie and Freddie do not drag us down this treacherous path again.

It does so by following the successful model used to transition Sallie Mae from a GSE to a private company, per P.L 104-208, through an orderly wind down of their business commitments over as many as 10 years. The legislation would first put a time limit of two years on the current conservatorship of both entities. After two years, their financial health will be assessed by FHFA, which will determine if they are fit to be released into the market or, if not, they will be put in receivership under the terms of HERA. After six more years of gradual reform, both Fannie and Freddie are required to begin the transition to being fully private sector companies.

This reform of Fannie and Freddie must occur, and no crisis-related legislation is complete without it. We have learned from this crisis that government sponsored enterprises like Fannie and Freddie are bound to fail because they socialize risk while privatizing profits. The GSE Free Market Reform Act allows Congress to gracefully accept this lesson from our history and protect the next generation from repeat it.

Please protect taxpayers from future bailouts by including the GSE Free Market Reform Act in any crisis-related legislation you support.

Sincerely,

Matt Kibbe
President
FreedomWorks