In class last night we discussed the falling of Fannie Mae and Freddie Mac. These banks failing during the housing bubble makes complete sense, but many of us were confused about what is being done with Fannie and Freddie now. Coincidentally, an article was posted in the New York Times yesterday about the current standing of Fannie and Freddie. (Link Here)
When I started reading this article, I thought it was going to answer many of the questions we had last night. Instead, it just brought up more questions. In 2012, the U.S. government decided to reroute all of Fannie and Freddie's mortgage earnings to the U.S. Treasury rather than letting them repay taxpayers under the original bailout agreement. Charles Grassley, chairman of the Senate Judiciary Committee, is both concerned and confused as to why the original bailout plan was changed and what the U.S. Treasury is doing with the earnings of Fannie and Freddie. The article stated,
"The F.H.F.A. [Federal Housing Finance Agency] “has regulatory authority over both Freddie and Fannie and the statutory duties include the requirement that the F.H.F.A. ensure that each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls,” Mr. Grassley wrote."
It is puzzling that profits of Fannie and Freddie are going to the U.S. Teasury, when the FHFA is supposed to have regulatory authority over both of these institutions. The article also states,
"The government’s decision to divert all of Fannie’s and Freddie’s earnings was unexpected when it was announced. As conservator, F.H.F.A. was supposed to oversee the companies with an eye to stabilizing them and conserving their assets. Redirecting their profits to the Treasury has prevented the companies from building up a larger capital cushion to absorb future losses, should they arise."
The U.S. government seems to be keeping its plan for Fannie and Freddie very secretive. The problem with this is that Fannie and Freddie are still both publicly traded companies, and many shareholders are claiming that sweeping the profits of these two companies into the treasury is improper taking of private property.
The Fannie and Freddie confusion seems like it could become and issue very quickly if the government does not come out and clearly state its plan for Fannie and Freddie. This could be because they aren't entirely sure what the best role is for Fannie and Freddie in our economy, like we discussed last night in class.
What do you think about the U.S. government's decision to change the original bailout plan of Fannie and Freddie to start sweeping profits into the U.S. Treasury?
How do you think Fannie and Freddie should be positioned in our current economy?
I think that it is problematic when a publicly traded company's profits are put into the treasury rather than distributed to the shareholders or put into R&D or retained earnings. If there are issues with Fannie and Freddie presently, as there appears to be, then both firms should be put under the supervision of the FHFA as was originally intended. It seems like a step was skipped by not allowing the FHFA to do the job it was created for.
ReplyDeleteI agree with what Taylor has stated above. I think that there are some confusion in terms of what roles Fannie Mae and Freddie Mae should play in the economy. This has lead to further confusion as to the exact role the FHFA has in supervising these companies. Also, I think that the lack of regulation, in terms of what kind of companies can play the roles that Fannie Mae and Freddie Mae were intended for in the housing market has lead to the financial crisis that we observed in 2008. These confusion about what roles Fannie and Freddie have in the housing market and, the specific actions or supervisions that the FHFA was intended to take, should be clarified by the government in order to avoid future housing bubbles.
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