Is it time to kill off Fannie and Fred?

Here’s a list, in reverse order, of WSJ articles on the poorly run Fannie Mae--back to February 2002, early in the Bush administration, the earliest one in Feb. 2002 comparing the risk to Enron. Was anyone listening?

"As for interest-rate risk, Fan and Fred hedge with a giant and complex program using all manner of derivatives. At the end of 2000, their combined derivative position was valued at $780 billion. Even scarier, these hedges are only as good as the counterparties' ability to pay up. But Fan and Fred don't disclose the identity of their parties, so investors have no idea how much risk comes from possible counterparty failure. (By the way, last year Fan's derivative strategy went, um, somewhat amiss and she had to write down shareholder equity by $7.4 billion.)

Fan and Fred also pool mortgages and then sell those securities -- that is, they retain the credit risk since they guarantee the soundness of the mortgages and buyers assume the interest-rate risk. But Fan and Fred have recently been buying back their own securities; each now holds 30% of all mortgage-backed securities outstanding. Simply put, they are re-assuming interest-rate risk. Not necessarily a terminal practice when interest rates are stable, but dangerous if rates turn volatile."

We know Fan and Fred and their federal co-conspirators in Congress (called committee "oversite", or fox guarding the hen house) are in part to blame for the current meltdown and housing crisis. The like to blame a corporate "greed", but it's bad loans chasing even worse risks. Then there is today’s alarming editorial in WSJ that points out that in addition to our $6.6 trillion debt held by the public (up from $5.3 trillion a year ago), you and I are guaranteeing $5.3 trillion in Fannie and Fred liabilities!

So I ask you, what if there had never been a Fannie Mae or Freddie Mac?

“In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration-insured mortgages, thereby replenishing the supply of money to lend to future homeowners.

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders to ensure that there was funding available for future homeowners. Freddie Mac purchases single-family and multifamily residential mortgages. They help homeowners and renter get lower housing costs and better access to home financing.” from Singing Blog

So Fannie is a holdover from the Depression era and Fred from the 70s. Maybe they should have been killed off when WWII and not FDR's socialist programs restored the economy? In theory, the interest rate is supposed to be 1/4 percent lower, but considering how mortgage loans have fluctuated from 4.5% (about 5 years ago) to 10.5% (about 22 years ago) during my own mortgage commitment years (we've owned 5 homes since 1961), how really has that 1/4 percent made a difference to home owners, who seem to find the means no matter what the rate, other than to encourage bad behavior and poor credit? Plus, it's one more playground of regulation for the likes of the Barney Franks of Congress. In truth, I can't blame all this on the old Barn--he hasn't been in charge long enough to have created all the mess, but I'd like to see every chair of that committee still alive and not in a nursing home testify before the American people about why we the people need Fannie and Fred and to hear a few mea culpas.