Privatizing Fannie: Déjà vu all over again

Article Highlights

  • Hedge-fund lobby seeks repeat of disastrous 1968 Fannie Privatization plan.

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  • Former Treasury Secretary Geithner was right to warn Congress that it would be dangerous to allow Fannie and Freddie to return to their status as private companies.

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  • To do as the hedge-fund lobby suggests would merely privatize gains, socialize the losses and promote crony capitalism.

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The Bloomberg headline trumpets “Paulson Leads Hedge-Fund Lobby Push to Privatize Fannie.”

It should have read: “Hedge-Fund Lobby Seeks Repeat of Disastrous 1968 Fannie Privatization Plan”.

The hedge-fund lobby proposes to “privatize” Fannie and Freddie by converting the US Treasury’s 79.99% preferred stock interest to common stock and eventually float the sale of the common with an initial public offering. The lure is a big budget payoff.

But the devil is in the details. This is privatization in name only, since the Treasury would need to give up the $20+ billion in dividends the taxpayers now receive annually, maintain the GSEs’ virtual monopoly of the conventional mortgage market for the foreseeable future, and continue the government’s guarantee of these “privatized” companies. For without those perks, any IPO would be a non-starter.

This proposal uses the same playbook used to “privatize” Fannie in 1968. Back then, Fannie was also largely owned by the US Treasury through its holdings of preferred stock. Treasury gave up its dividends and converted the preferred stock to common.  Fannie got to retain its monopoly and had an implicit government guarantee in the bargain. The motivation was the lure of a big budget payoff — back then Fannie was on the US budget.

Papers from the Lyndon B. Johnson Library reveal the so-called “privatization” was recognized as a sham from its inception: “The elimination of Treasury-held preferred stock… would leave the SMO (Secondary Market Operation was the name for Fannie’s business back then) ‘privately owned’ (emphasis in the original) although the Treasury would continue to be authorized to purchase preferred stock and to lend up to $2-1/4 billion to FNMA (the name for Fannie back then).” There then ensued a discussion about the controlling requirements for placing an entity like Fannie off budget. The LBJ-era document continues: “HUD does not believe these frills to be necessary.” The concerns of the housing lobby were also considered: “Homebuilders will need to be convinced their interests will be adequately protected by the new…structure. Realtors already, on the other hand, favor a FNMA independent of HUD and its muddle-headed bias in favor of new construction; they would go for a weak regulatory role.” The papers go on to observe: “It can be sold to homebuilders when packaged with a large, long-term program of subsidized housing that provides builders with guaranteed markets and profits.”

Former Treasury Secretary Geithner was right to warn Congress that it would be dangerous to allow Fannie and Freddie to return to their status as private companies.  They must be brought to an end through winding them up. To do as the hedge-fund lobby suggests would merely once again privatize the gains, socialize the losses, and promote the crony capitalism that goes along with it.

The privatization of Fannie in 1968 was recognized as a sham back then. This proposal is no different.

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Edward J.
Pinto

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