Fannie and Freddie Should Compete On a Level Playing Field
April 28, 2015
Fannie Mae and Freddie Mac's collapse into government conservatorship was a long six and a half years ago. In spite of endless discussions of reform, they remain in conservatorship limbo, where they are run by their regulator as wards of the state, with de minimis capital. Nobody wants the old Fannie and Freddie back; nobody wants them to stay on indefinitely in conservatorship.
Here are several ways to improve Fannie Mae and Freddie Mac:
- Take away Fannie and Freddie's capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size.
- End all their securities law exemptions. Subject them to the 1933 and 1934 Securities Act requirements like all other companies with public securities.
- End all their preferences in banking law and regulation. Banks are not allowed to hold corporate equity, but as a mistaken exception were allowed to make large equity investments in Fannie and Freddie, on a highly leveraged basis.
- End their exemption from state and local income taxes.
- Open up their charters to competition just like banking charters. End their exclusive duopoly privileges.
Implementing these steps would go a long way toward making Fannie and Freddie less distortive and far less dangerous, rendering them a Fannie and Freddie we could live with as two competitors among others. Such a de-fanged, de-privileged Fannie and Freddie could safely be brought out of eternal conservatorship. If they again get themselves into insolvency, they could be placed into receivership.
Source: Mark Balabira and Alex J. Pollock, "Making a Fannie and Freddie We Could Live With," The Hill, April 27, 2015.
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