This article originally appeared in Forbes. Click here to read the full article.
By Ike Brannon
Nothing exemplifies the cost of crony capitalism like Fannie Mae and Freddie Mac. For years these fiefdoms were run as little more than as piggy banks for connected politicians, who could count on substantial financial support for re-election, and retiring members and staffers from their committees of jurisdiction could expect a lucrative lobbying contract. Even their relatives got in on the act.
A major shareholder recently offered a reform plan that would replace them with two fully-capitalized private entities, which Treasury officials dismissed out of hand. Before anyone puts a knife in the heart of privatization efforts, it’s worth reviewing how they got into their current plight.
For a long time Fannie and Freddie had been managed by political entities rather than mere businessmen, and they had two masters–the politicians who wanted campaign contributions and increasing home ownership rates, and shareholders. Eventually, regulatory oversight went by the wayside and they chased their twin, conflicting goals with impunity.
Their collapse revealed the stark cost of this corruption for all to see-a debt of hundreds of billions of dollars on their books. Treasury placed Fannie and Freddie into a conservatorship, assuming ownership of almost 80 percent of each.
Taking them over via a conservatorship rather than receivership–whereupon it would have assumed complete ownership–allowed the government to keep the combined debt of Fannie and Freddie off the government’s books. Since this totaled well over $1 trillion at the time, this maneuver helped the government avoid any potential fiscal or political ramifications from reporting an annual deficit the over $2 trillion.