FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac

We present a link to and an excerpt from a report by the Federal Housing Finance Agency, Office of the Inspector General. We believe it is important and suspect it will receive limited coverage because it is counter to the currently fashionable narratives. The short story is one we already knew: Fannie & Freddie are big time bust. And don't you know Dodd-Frank is silent on the topic. Well, why not? Both those Senators were essentially parties at interest in Fannie & Freddie.

As to the matter of large scale capital flows & macroeconomic outcomes, our country is slowly awakening to the quaint, old fashioned notion that results & outcomes matter.  They matter very much. 

White Paper: FHA-OIG's Current Assessment of FHFA's Conservatorships of Fannie Mae and Freddie Mac

"As a practical matter, however, the Enterprises’ future solvency – and, thus, emergence from the conservatorships – is unlikely without legislative action. FHFA officials have stated that the PSPAs have made it virtually impossible for the Enterprises to emerge from the conservatorships. For example, the Enterprises currently owe Treasury $183 billion, and are required to pay 10% dividends on Treasury’s outstanding investment. Merely paying the 10% annual dividend (i.e., $18.3 billion, presently) would not reduce Treasury’s outstanding investment. Moreover, the Enterprises have had to borrow from Treasury at least part of their dividend payments to Treasury, thus increasing the value of their outstanding debt. As a result, it would appear highly unlikely – if not mathematically impossible – for the Enterprises to buy themselves out of the conservatorships. FHFA’s Acting Director has stated that:

[T]he Enterprises will not be able to earn their way back to a condition that allows them to emerge from conservatorship. In any event, the model on which they were built is broken beyond repair... "

The magnitude of these losses are huge, the loss of national wealth permanant, and the burden on the US economy and younger generations of American huge... all driven by defective policy and corruption. For insight into the nature of corrupted governance & markets we recommend Reckless Endangerment by Gretchen Morgenson.

Private markets provide mechanics for change of governance in face of failure. That mechanic seems to be lacking in the political arena. The same political class continues to regulate increasing sectors of our economy by the same defective methods. The agency costs of failed political goverance are too high to sustain. Remember the wisdom that brought us here: we see it repeatedly in the regulation of financial markets, health care, and Fed policy.

 "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero" Implications of the new Fannie Mae and Freddie Mac Risk-Based Capital Standard by Robert & Peter Orszag and Joseph Stiglitz, 2002