What to do with Fannie and Freddie

Compared to other countries, Fannie Mae and Freddie Mac were and are unique features of U.S. housing finance. They once made U.S. housing finance, according to their own pre-crisis publicity, “the envy of the world.” In those days, Fannie and Freddie were accustomed to being the stars and darlings of both Washington and Wall Street — or more precisely, being a darling of Washington made them a star of Wall Street. Fannie in particular was also a greatly feared bullyboy both in Washington and on Wall Street, and most politicians and bankers were afraid to cross or offend it.

Perhaps drunk with power, hubris, the free use of the U.S. Treasury’s credit, and nearly unlimited command of other people’s money — domestic and international — Fannie and Freddie became major perpetrators of the housing bubble, running up the leverage of the housing finance sector, inflating house prices, escalating systemic risk, and making boodles of bad loans and investments.

As in a Greek tragedy, their hubris led to humiliation. Both went utterly broke, greatly embarrassing their political cheerleaders and allies, including Senator Chris Dodd and Congressman Barney Frank (the chairmen of the respective congressional banking committees), but their taste for using other people’s money did not abate. They lost all the profits they had made for the previous 35 years, plus another $150 billion. These enormous losses were foisted on the innocent public, while the government made sure that their creditors, domestic and foreign, were paid every penny on time. Large additional losses to the public are the deadweight bureaucratic costs of the Dodd-Frank Act, sponsored by the aforementioned former political cheerleaders.

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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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