According to the Times, "It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history."
"The strong belief of investors in the implicit government backing of the GSEs
does not by itself create problems of safety and soundness for the GSEs but
it does create systemic risks for the U.S. financial system as the GSEs
become very large," he said.
there is reason to be seriously concerned about potential future social costs associated with the systemic risk emanating from Fannie Mae and Freddie Mac and that this risk largely arises from the institutions’ highly leveraged investment portfolios. We also find the social benefits of these portfolios to be minimal to non-existent. From these considerations, we conclude that a large reduction in the size of these portfolios would be socially desirable.
I continue to support the level of Fannie Mae’s portfolio of loans. I disagreed
one hundred percent with former Federal Reserve Chairman Alan Greenspan’s
recommended that Fannie Mae’s portfolio be reduced from its current level to one
hundred billion dollars worth of loans. Such a proposal would have negatively
impacted Fannie Mae’s ability to meet its mission and would have harmed my
I am also heartened that Fannie Mae, according to its regulator, is cooperating and working to address these issues in a responsible manner. I am also pleased that although serious, these problems do not appear to pose a systemic risk according to those most knowledgeable of the facts in these matters.
Congress should adopt a number of additional provisions that will reduce the impression among investors that Fannie and Freddie are backed by the government. Thus, Congress should repeal their exemption from state and local taxes, their so-called line of credit at the Treasury, the authority for national banks to make unlimited investments in their securities, and the fact that their securities may be used to collateralize Treasury's deposits in banks. In addition, as appropriate for organizations that receive a government subsidy, the GSEs should be prohibited from making political contributions and their lobbying activities should be limited.
These quasi private, private government entities, which allow people to real private sector like benefits while exercising government like power have been disasters. Why Fannie and Freddie failed, and why Members of Congress blocked reform legislation, should be thoroughly investigated. We could find a story that would make the whole Jack Abraham story appear to be trivial.