Why Fannie Mae and Freddie Mac Fear Privatization
February 19, 2003
As quasi-public institutions, mortgage-lending giants Fannie Mae and Freddie Mac enjoy the implicit assumption that if their operations fail, the federal government -- meaning the taxpayers -- will bail them out. And several recent government reports detail how they have built up a huge amount of risk.
- A recent report criticized the two for resisting disclosure about the trillions of dollars in mortgage-backed securities they issue.
- Another report reviewed the risks the two have assumed by repurchasing their own securities -- noting that they held $797 billion in such securities, or 62 percent of their combined portfolios.
Fannie Mae and Freddie Mac debt is held by U.S. banks, foreign banks, institutional investors like pension funds and individuals. Also, there is the implicit guarantee of a federal bailout that has allowed the two to leverage their debt to somewhere between 29-to-1 and 31-to-1, far higher than the 12.5-to-1 required by regulators for banks.
If the two were completely private financial institutions, they would have to nearly double their capital to more than $99 billion from $52 billion now.
If they were forced to do that, their return on equity would fall from 25 percent to 12 or 13 percent. So privatization -- with no government guarantees -- would force them to accept real-world returns. And they don't want to do that.
Source: Editorial, "Fan and Fred Get the Business," Wall Street Journal, February 19, 2003.
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