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Fannie and Freddie: Yet More Looting Branded as “Reform”

• NakedCapitalism.com/
 
The problem is that any government sector guarantee for a private sector entity is a terrible idea absent very tough constraints on operations, which is the still-unlearned lesson of the financial crisis. And the idea that any higher capital standards will hold over time is dubious. Fannie and Freddie were enormously powerful lobbying forces, a de facto mainly Democrat slush fund; any new GSEs will have similar collective clout and will press for their agenda on a unified basis, which is certain to include waivers that will amount to lower equity requirements. Increasing leverage is one of the easiest ways to improve performance in a financial firm. Now the Administration is also allegedly presenting some elements of securitization reform on Friday. We’d be glad to be proven wrong, but we anticipate any proposals will be cosmetic and/or insufficient in scope. The real problem is that the coming staged fight over GSE reform will serve as a useful distraction for what is really needed, which is much broader mortgage market reform. Pursing the GSE question largely in isolation is sure to produce bad outcomes. For instance, one of the excuses for continuing to have a large role for the GSEs 2.0 is that the private securitization market is dead. But that is because the banks have been blocking reform and investors have gone on strike. But the lack of private market demand is then used as an excuse as to why we still need something GSE like to play a big role. That’s tantamount to killing your parents and asking for charity because you are now an orphan.

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