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Home Publications Blogs Beat the Press Privatizing Fannie and Freddie Shifts Profits to Wall Street, not Risk From the Government

Privatizing Fannie and Freddie Shifts Profits to Wall Street, not Risk From the Government

Friday, 09 May 2014 06:55

A front page Washington Post article fundamentally misrepresented the main impact of the Johnson-Crapo bill that would privatize Fannie Mae and Freddie Mac. The article told readers that the bill:

"would dismantle the companies in a bid to shift the risks of mortgage lending from the taxpayers to the private sector."

Actually, the government would still be on the hook for 90 percent of the value of privately issued mortgage backed securities (MBS). As a result of the perverse incentives created by the system envisioned under the bill, this would likely mean more risk to the taxpayers rather than less. Private investment banks would stand to profit from securitizing bad mortgages. Unlike the years of the housing bubble, when investors stood to lose 100 percent of what they paid for a MBS, investment banks could tell their customers that in a worst case scenario they would only lose 10 percent of their investment with the government picking up the rest of the tab.

For this reason it is hard to see Johnson-Crapo as a "bid to shift the risks of mortgage lending" to the private sector. The most obvious way to accomplish such a shift would be to simply get the government out of the business.

The most obvious effect of Johnson-Crapo is to shift the profits that Fannie and Freddie are now earning to the financial industry. Presumably the bill's proponents recognize this fact.

Comments (9)Add Comment
written by Ryan, May 09, 2014 7:32
Ever get the feeling that the media less resembles a set of journalism outfits and more a gossip circle, where reporters only repeat what they've heard and what people have said?
written by djb, May 09, 2014 7:47

are these reporters "blissfully ignorant" or purposefully deceiving
When Government Competes, America Loses: Privatize Gains and Socialize Losses Now!
written by Last Mover, May 09, 2014 8:26

Exactly. Government must never be allowed to compete with the private sector. Such "competition" is inherently unfair given the bottomless pit of available subsidized taxable funding used by government predators to drive private vendors out of the market with artificially low prices.

Just ask any sock puppet paid by economic predators who has this meme memorized to the letter. Competition from government is more evil than the total combined tragedy imposed on mankind by Mao, Stalin and Hitler

Two examples are the internet and health care. Municipalities across America were systematically barred from voting freely to provide internet service at far lower cost and prices than what extortionist fascists monopolists now charge who took it over. Medicare Part D required heavy subsidies so private providers could "compete" with government on a "level playing field" and drive prices through the roof in the process.

Likewise the Johnson-Crapo bill would bring the same economic efficiency to the housing sector that produced the world class internet and health care service America so proudly holds out as as the global economic leader in these critical industries.

It's your decision America. Stop the socialized gains of government efficiency achieved by Fannie and Freddie when it competes with the private sector. Cripple them so the private sector can accomplish the same thing far more inefficiently.

Let the housing sector rise to level of the internet and health care sector so America can be strong once again with higher prices free of government subsidies but loaded to the top with anti-competitive monopoly economic rent.

Ask not what your government can do for the private sector.
Ask what your private sector can do for the governmment.
Then mandate it as a free market solution.
written by skeptonomist, May 09, 2014 12:27
Well, in practice MBS's are fully backed by the Fed already. In QE1, the Fed bought up about a trillion in MBS's, no questions asked (and more since then to a total of over $1.6T). If you have an MBS that looks bad, hang on to it until the next crash and then the Fed will buy it.
written by Downpuppy, May 09, 2014 2:21
The actual topic - Whether pre-bailout shareholders still have any claim on F & F - is interesting.
written by Viewer II, May 09, 2014 6:39
It was written by a real Johnson and the bill is a load of Crapo.
bank failure
written by Ethan, May 09, 2014 6:43
The small local bank where I have been a customer for 15 years or so, failed and was acquired 2 or 3 years ago by a nation wide bank. I was told that the reason it failed was that it had purchased a lot of preferred shares in Fanny or Freddy or both and that the shares became worthless when F & F failed. I was told that one of our senators tried to intervene, but apparently rules are rules. No exceptions. Put your money in a government sponsored institution, and you risk it all.
since when?
written by trish, May 10, 2014 6:01
since when has privatization shifted the risks from the taxpayers to the private sector?
I can't think of a recent example. And the push for privatization of any and everything public is spreading like a virus through this country.

I do wonder if journalists like Dina ElBoghdady are cognizant of the truth or mere unwitting hacks for the bills proponents.
written by Phred, May 15, 2014 8:55
Ethan, your bank failed because of losses incurred by stock in a comoany or companies that were taken into conservatorship. It was a bad investment and it doesn't matter if it was Fannie, Freddie or any other financial institution that failed in 2008. If you lost your money in your failed bank, then YOU failed to understand the rules and requirements of FDIC deposit insurance.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.