How to Shut Down Fannie and Freddie

November 15, 2010

Although Fannie Mae and Freddie Mac played a central role in causing the recent economic crisis, they are absent from the reform plans of Congress and the Obama administration, says Emil W. Henry, the CEO of Henry, Tiger, LLC, and an assistant secretary of the Treasury from 2005 to 2007.

The Treasury doesn't need Congress or an academic assessment in order to tackle the most important reform goal: eliminating the government sponsored enterprises (GSEs) and moving their activities to the private sector.  Secretary Geithner himself can immediately reshape the mortgage markets -- by withholding his approval of new debt issuances by the GSEs.  That's the best way to begin curtailing the GSEs, and it can be done unilaterally.

  • If the Obama administration is serious about addressing the GSEs, it should re-establish a rigorous process to review all GSE debt issuance.
  • That process should require the GSEs to provide Treasury with full financial data and justification for issuances, including statistics that show the creditworthiness of the agencies after each offering.
  • In addition, the Treasury secretary should have to approve all new debt issuances personally.

The administration should also announce that in 2012 the Treasury will begin to deny a portion of GSE debt issuances with the goal of reducing their debt 50 percent by 2015 and 100 percent by 2018.  This eight-year period of adjustment would allow the private markets ample time to provide secondary market liquidity, says Henry.

Large banks may be wary of this solution because the federalization of the GSEs has offered them a stable vehicle for off-loading their mortgages.  Policymakers, meanwhile, will worry about impairing the recovery if a private market is slow to materialize.  But the alternative is keeping the flawed system whereby liquidity depends upon distorted price discovery, permanent subsidization and the economic judgments of bureaucrats.

Source: Emil W. Henry Jr., "How to Shut Down Fannie and Freddie," November 11, 2010.

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