This Monday, Sept. 7, is Labor Day. A day to celebrate. Relax. Forget about the hustle and bustle.
One thing we won't be celebrating is what went down exactly one year prior: The collapse, and subsequent government takeover, of Fannie Mae
In the year since, Fannie and Freddie have received roughly $96 billion in taxpayer support, incrementally, to keep their net worths above zero. Originally, a backstop of $200 billion was allocated to keep the two afloat. That number was later bumped up to $400 billion.
While not solely, or even mostly, responsible for Wall Street's collapse, this was really the first shot fired in what turned out to be the fiercest financial panic in generations. Within days of the mortgage giants' fall, Lehman Brothers went bust, Merrill Lynch fell into Bank of America's
Danger from day 1
Markets, investors, politicians, and homeowners knew all along that Fannie and Freddie were backed by the full faith and credit of the government. This was not your average bailout. Unquestioned government support was expected long, long before markets began to unravel. However flawed this was, it was their purpose: To have semi-private, semi-government, organizations guaranteeing liquidity to the housing market, kept alive by taxpayers at any cost.
It was that arrangement, though, that ultimately turned them into nuclear bombs. Back in 2004, fellow Fool Bill Mann wrote a fantastic article on how Fannie Mae operates, summing it up nicely:
Want to know why Fannie Mae is in trouble? It's simple enough: This company, more than any other in America, is run by, in the interests of, and with the protection from politicians, not businesspeople.
Fannie and Freddie had two bosses to answer to: private shareholders, and Congress. One side, theoretically, wanted calculated, prudent risk. The other wanted to make people happy, put everyone in a home, and get reelected. The chasm between the two interests is so vast that, in hindsight, ever assuming the outcome would be anything but terrible was truly unrealistic.
What happened last year happened last year. The question now should be what to do with what's left of Fannie and Freddie.
In a press release last September, then-Treasury Secretary Hank Paulson said, "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
All well and true. But it raises the question: What's changed since then? Are the two now less prone to blowing things up?
With a bottomless backstop, I suppose they are. But what's really changed in the past year is that the two now only have to answer to one master: Uncle Sam. Consequently, risk restrictions on refinanceable loans have been relaxed twice, first from LTV ratios north of 80%, then recently to 125%. Fannie Mae admits it isn't in the business of making profit anymore. Both can keep capital levels at or near insolvency, knowing more capital will be provided as needed.
Who accepts Fannie and Freddie's risk has indeed changed, but the amount of risk at hand has not.
I don't doubt that putting the two into conservatorship was the right thing to do. As Berkshire Hathaway
What's questionable is the path the two are currently on, post-nationalization: They have been effectively stripped of their duties to shareholders, now only obligated to serve a group whose priorities may wander away from what's beneficial in the long term, to put it politely. If you've ever watched the House Financial Services Committee debate, you know what I'm talking about. This isn't a group even vaguely qualified to run what's essentially a blind, drunk, multitrillion-dollar hedge fund.
You take it from here
At any rate, I want to know what you think. What should happen to Fannie and Freddie? Break 'em up? Nurse 'em back to health? Kill the two once and for all? Hit the reset button and start again? Feel free to share your thoughts in the comment section below.