Congress Should Oppose Second Wall Street Bailout | Commentary
Preferred shareholders of Fannie Mae and Freddie Mac continue to pressure Congress and the media to support their attempted heist of $35 billion of taxpayer money to recoup their losses in the aftermath of the government takeover of the failed housing giants. Congress should dismiss the fraud these shareholders are attempting to perpetrate and move forward with legislation to liquidate Fannie and Freddie and protect taxpayers from investors who made a risky bet and lost.
The hired guns scurrying through the corridors of Capitol Hill on behalf of the shareholders are engaged in an exercise of historical revisionism of Orwellian proportions. One of the more egregious falsehoods the shareholders claim is that Fannie and Freddie have paid back the American taxpayers the $187 billion needed to bail them out. Rarely is there a metric available to determine precisely how big a lie is, but fortunately in this case there is one. There remains $80 billion in unrealized payments to taxpayers, and even these investors are sophisticated enough to understand that is not yet a debt paid in full.
The shareholders are also trying to convince Congress and the American taxpayer that Fannie and Freddie must be preserved. They argue that private capital will shy away from any new system that does not embody the safety and soundness of Fannie and Freddie. This scare tactic fails on two fronts. First, Fannie and Freddie failed and nearly sank the economy, so that housing finance structure is a known loser. Second, there is simply no comparison to be made between the structure of Fannie and Freddie and the new proposed housing finance proposals currently under consideration. In other words, these shareholders are attempting to project their own failures onto new and promising housing reform ideas.
The preferred shareholders are also arguing that the return to profitability of Fannie and Freddie points to the rebirth of the institutions, and an orderly bankruptcy under which shareholders get repaid is the only lawful and fair way to proceed. Interestingly, they did not make this “rule of law” argument back in 2008 when the entities failed. They criticize the conservatorship as a faulty mechanism for handling the failed housing giants, yet it was through the conservatorship that Fannie and Freddie became profitable again. The shareholders ignore the fact that Fannie and Freddie were never typical companies and this is no ordinary restructuring. They are now remnants of a failed experiment, and the American taxpayer cannot absorb the risk of returning to the past housing financing system.
When the government needed to intervene and provide Fannie and Freddie with $187 billion in taxpayer relief to avoid a real disaster, the institutions entered conservatorship and thus ceased to be independent corporations. The Congressionally-mandated role of the conservator is to protect taxpayers from additional losses, recoup as much money as possible for taxpayers, and reduce the portfolio and scope of the housing giants.
The conservatorship has largely worked. Fannie and Freddie unwound much of their nonperforming assets through a variety of programs created by their conservator, the Federal Housing Finance Agency. The failed institutions are turning a profit and paying back the money provided by taxpayers to keep Fannie and Freddie from going under in 2008. As important, Congress has begun the serious work of replacing the flawed model that nearly brought down the entire U.S. economy.
While the House, Senate and Obama administration may differ on some elements of housing reform, all three seem to be consistent in two areas. First, more private capital must be injected into the housing market to reduce the government role. Second, Fannie and Freddie must go, and the housing financing system must be reformed. The strategy Fannie and Freddie’s shareholders intend to employ to effectuate their heist of taxpayer dollars is to blow up housing reform in Congress and preserve Fannie and Freddie. This would allow them to recoup their investment and leave taxpayers and homeowners in peril.
At least the position of the preferred shareholders is consistent with the prevalent attitude surrounding the housing crisis since the bubble burst: only taxpayers and homeowners should lose money. Apparently the ideals of free market capitalism, under which money is gained and lost, are suitable for everyone except for these specific shareholders. When their money is lost, free market capitalism is replaced with a series of unfounded and hysterical claims that the world will end if they are not made whole courtesy of the American taxpayer.
Congress should not allow the shareholders to hijack housing reform and send a reform package that liquidates Fannie and Freddie to the president’s desk in 2014.
Scott Whaley is the 2014 president of the National Real Estate Investors Association.