Because Non-Government Guaranteed Private Companies Like Bear Stearns Were Managed So Much Better than Fannie and Freddie

Freddie

It seems Paulson is repeating the excuse Freddie and Fannie’s CEOs made for their dismal performance, except, being Paulson, more intelligently:

Treasury Secretary Henry M. Paulson Jr. said Sunday that managers of the companies were not responsible for the main causes of the government’s action, which he identified as conditions in the housing market and an inherent conflict in the companies’ business model. As federally chartered but shareholder-owned firms, they were required to balance a profit motive and a public-service mission.

Arthur, likewise, opined that Freddie and Fannie are

“neither fish nor fowl.” He said the country had long put off discussions about the implicit government backing of the companies, which Congress made explicit last month by empowering the Treasury to infuse billions of dollars into them.

“The fabric of those companies was so intertwined with its political patrimony that ordinary considerations were put aside for what was or wasn’t politically acceptable,” Mr. Levitt said in a telephone interview. “As a result of that, the way one would operate a business according to business standards gave way to operating a business in a way that was palatable to a political system.”

Wait a second. Wasn’t… Countrywide a private company operating in a way that was palatable in private markets? Didn’t Countrywide go belly up? Didn’t Bernanke have to rush hundreds of billions of dollars worth of credit to private companies?

The problem wasn’t that Fannie and Freddie weren’t run as private companies, the problem is they weren’t run as government controlled companies with rigid risk rules and rigid underwriting requirements. Since in private companies such rules limit share price run ups, completely private Fannie’s and Freddie’s would have done the same thing, just with a higher borrowing cost and even less controls.

It’s not the balancing act, the "public service component" did nothing to cause Freddie and Fannie to go under.

The lesson is not that Fannie and Freddie got into problems because they had a public component. It is that they had a private component, on the public’s dime. It’s known as "head I win, tails the public loses" (or, more formally, as moral hazard.)

Demonstrated once more by the fact that severance packages will be worth as much as 14.9 for Freddie’s ex-CEO Syron, and 9.8 million for Fannie’s ex-CEO, Mudd. Good work if you can get it. Drive the company into bankruptcy, be rewarded by becoming filthy rich.

Once more: Privatize the Profits. Socialize the Losses.

Rinse. Repeat.

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