Fannie And Freddie's Mess

I'm on the road, and not enjoying access to daily print versions of the Wall Street Journal. Reading it online is not as practical an option as I'd like it to be.

However, I had a chance to read the headline stories of the weekend edition of the paper. What I read about the developments in the mess involving US mortgage markets, Fannie and Freddie are scary.

I think my overall view of the situation is that it is a mistake to give more capital access to the same crew that got into this mess.

The implicit Federal Government guarantee clearly led to an imbalanced strategy over the last decade. Both institutions enriched employees, especially senior management, while failing to pay careful attention to the growing risks on their own balance sheets.

For this, we have Congress to thank, since it tends to view Fannie and Freddie as a large real estate finance cookie jar for their own pet agendas.

Of the choices which the Journal's article suggests, I think I would go with the Bush administration's desire to replace the current boards with members whose stated objective would be to clean up the balance sheets of the two firms and gradually shrink their role in the housing markets.

In this day and age, if a government-affiliated lender can't do a decent job securitizing housing loans, why allow it to exist?

We'll always get better performance from the private sector, assuming adequate regulation. Now, we have the worst of both worlds- shareholders losing value due to entrenched, incompetent management, and the Federal Government picking up the tab.

Shareholders chose to own the companies' stocks (I have owned equity in both firms in the past), so they deserve to lose their capital.

But to prevent a replay of this fiasco, I think it's time to remove the governmental connection to the two mortgage securitization firms as soon as it is possible.

Perhaps the most unfortunate aspect of this mess is its timing. Coming at the end of one US Presidential administration, it's unlikely that the clear, sensible and quick action required to begin cleaning up the problem will occur as it should. Instead, everyone except Secretary Paulson will look for reasons to delay until next calendar year.

That could be a fatal mistake for credit markets and the economy.