Bill, that is smartest thing I have heard in a long time!
Bill Seidman, former chairman of the Federal Deposit Insurance Corpoation (FDIC), made some real sense today by calling for the break up and privatization of Fannie Mae and Freddie Mac. The government should put in new management and run the companies for the sole benefit of borrowers, while balancing obligations to the housing market with financial costs, he said. I agree with taking this a step further and making sure that no government agency has direct control of these agencies as well has the right to bail them out with tax payer dollars.
The banking expert said the government should buy 95% of the GSEs, leaving shareholders with “a token amount,” a move he acknowledged would lead to “huge losses” for investors. After the companies and the housing market get back on their feet, Fannie and Freddie should be broken up and sold to private investors. “This process needs to be done in an overt, rather than covert, fashion so that market participants know what the rules are,” Seidman said.
Meanwhile, he said any plan would require making Fannie and Freddie creditors whole. Because the debt is held in such large amounts by governments and banks around the world, “it would endanger the global financial system.” With the relatively recent advent of securitization markets in which mortgage loans are packaged up and sold to large investors, the private sector is more equipped to deal with a market without the GSEs, Seidman argued. The costs of borrowing to purchase a home would likely rise, but the current system is broken, he said. (This would only be temporary as market forces create an equillibrium in home prices, folks!)
“If the government wants to provide a subsidy, why not just give it directly to borrowers and get dollar-for-dollar on its money?” Seidman said. “Of course, the problem is that this would be a government program, but it’s more efficient than the system we have now.”
Privatizing the GSEs “can’t be done overnight” and could take years due to the problems already shaking the mortgage and housing markets, and there would be losses borne by the government.
This takes some real “out of the box” thinking and action in order to pull this off.
