Of course Fannie and Freddie are government entities

OpenMarket.org has a response to the laughable assertion that Fannie Mae and Freddie Mac are purely private companies. The post entitled Are Reporters Financially Illiterate? Fannie and Freddie Are Called “Government-Sponsored Enterprises” for a Reason, by Hans Bader kindly links to my post on the subject from this morning:

Right now, the federal government, at a huge cost to taxpayers of perhaps $100 billion, is bailing out the two government-backed mortgage giants, Fannie Mae and Freddie Mac — the so-called GSEs. “GSE” stands for Government-Sponsored Enterprise. But some reporters are financially-illiterate, because if you point out the obvious — that the GSEs are going to cost taxpayers billions — reporters will condescendingly “correct” what you said, by insisting that they are completely “private sector” entities (false) that have yet to cost taxpayers a dime (false). (Back in July, the predicted cost to taxpayers of a bailout was already over $25 billion, according to the Congressional Budget Office. The cost could be up to $300 billion. Moreover, the GSEs already “receive an estimated $10 billion a year in hidden taxpayer subsidies”).

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As John Berlau earlier noted, “Fannie and Freddie . . . were never really private in the first place. Fannie was created as the government agency the Federal National Mortgage Association in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later. But even though they had private shareholders, they always retained government privileges. The President still appointed some of their board members, they were exempt from state and local taxes, and, importantly, they each had lines of credit with the Treasury. Though these lines were ‘only’ $2 billion, CEI President Fred Smith presciently warned at a Congressional hearing back in 2000 that ‘as long as the pipeline is there, it is like it is very expandable. … It could be $200 billion tomorrow.’ (The transcript is here. Fred’s statement, in response to questioning by Rep. Carolyn Maloney, appears on page 193.) Fred also testified about the inherent dangers of the privatization of profit and socialization of loss in the Fannie-Freddie model. He described the GSEs as ‘strange organizations, neither private sector fish nor political sector fowl’ and said that ‘as a result, no one is quite sure how these entities should be evaluated or held accountable.’”

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Many reporters are so ideologically invested in depicting the mortgage crisis as the result of a lack of government involvement that they simply cannot accept the reality that Government-Sponsored Enterprises were at the root of the problem. Government meddling, along with federal regulatory pressure on lenders to promote “affordable housing” and “diversity,” helped erode traditional lending standards, resulting in more risky mortgage loans to irresponsible people with bad credit (as some longtime supporters of federal meddling now admit).

It cannot be said too often or too loudly that this problem is one of government's own creation. It is not any kind of failure of the regulatory process and it is not proof that more government involvement in the mortgage market is necessary or desirable.

What it actually represents is proof positive that whenever the dead hand of government sees to interfere with the efficient operation of the free market that the distortions which are introduced into the market will, without fail, create unwanted, unpleasant and unforeseen (at least by the government do-gooders) consequences.

Creating a business which has government backing to cover losses while allowing private investors and company officers to pocket any profits has all the wisdom of giving teenage boys whiskey and car keys.