Fannie Mae and Freddie Mac: Too Big To Fail?
June 19, 2003
Freddie Mac, the government-backed home mortgage loan corporation, has recently come under investigation by the U.S. Securities and Exchange Commission for possible accounting irregularities, but experts doubt that the charges will lead to a large-scale financial crisis within the massive firm.
However, the current scandal sheds light on a broader problem, the danger inherent in letting so much home mortgage risk concentrate in just two large institutions, Fannie Mae and Freddie Mac. Special privileges from the government allow these two corporations to avoid the pitfalls and risks that private-sector mortgage companies face.
- Both entities are allowed to borrow money on extremely favorable terms that no private competitor can match.
- Investors who purchase Fannie and Freddie's bonds (including foreign governments) assume that the U.S. government will always be there to bail them out in the event of a financial crisis.
- Both companies lobby and contribute soft money to campaigns in order to avoid regulation which would limit their privileges and their ability to get bigger.
When all else fails, they threaten havoc in the home-financing market if someone threatens their privileges. More regulation of the sort that failed to prevent Enron, WorldCom, and the like won't work to control Fannie Mae and Freddie Mac, and simply removing their federal charter will still leave them too big to fail. The answer is to break them up and privatize them before they can monopolize the home mortgage market any further.
Source: Holman W. Jenkins Jr., "Freddie's Problem--And Ours," Wall Street Journal, June 18, 2003.
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