Author Topic: Fannie and Freddie  (Read 617 times)

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Offline Allentownjake

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Fannie and Freddie
« on: September 24, 2010, 08:39:09 PM »
Not a big fan of GSEs.  Never really have been.

Basically what you have with Fannie and Freddie are two private institutions that were chartered by the Federal Government and given some exemptions from banking laws and preferential treatment in exchange for conducting lending into areas traditional banking would not touch. 

That is the exchange for Fannie and Freddie is the different rules and preferential tax treatment.  The government gets to appoint some people onto their board as well for oversight (hence how Rahmbo got there). 

There is no Federal or State or Municipal guarantee on Fannie or Freddie debt.   The only guarantee on the debt is Fannie and Freddie's ability to pay like any other firm you might invest in.  They had shareholders, traded on the NYSE, issued normal bonds, issued Mortgage Backed Securities etc.

The US taxpayer owes investors in any of their capital structure nothing.  They owe them nothing for their stocks, nothing for their bonds, nothing for their Mortgage Backed Securities.  There was never a guarantee on any of their capital structure.  When you purchases any of the above assets, you got a prospectus that said, there is no Federal government guarantee on this asset.

Any investor who got burned, got burned with the full knowledge of what type of security they were buying.  It would be like me trying to recoup money from IBM defaulting on their bonds.  Pretty much sorry sucker.

Did the federal government determine the rules for Freddie and Fannie, yes.  Was this disclosed to investors, yes. Was the fact these were not obligations of the Federal Government disclosed, yes.  Were Fannie and Freddie given a competitive advantage in exchange for those rules, yes.  Did investors profit off of those rules by collecting dividends and interest, yes.  Was their capital ever guaranteed.  No.

So as far as the banks holding these assets, the government giving them one cent over what the asset is valued at market is a gift at the expense of the US taxpayer.

I hope we shall... crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country." --Thomas Jefferson to George Logan, 1816.