The Inspector General for the Federal Housing Finance Agency (FHFA) recently reported that Fannie Mae and Freddie Mac might need more government bailouts if housing markets decline. The problem: lack of capital reserves to serve as a buffer against future losses.

That lack of capital, says Fannie Mae boss, Tim Mayopoulos,

increases the likelihood that Fannie Mae will need additional capital from Treasury at some point.

William Isaac, FTI Consulting Senior Managing Director (and former FDIC Chairman), and author of the piece at the link, has a solution: Treasury should stop sweeping Fannie’s and Freddie’s profits into the Federal government’s piggy bank. He’s right that this is illegal, but it’s the wrong solution.

The correct answer to the problems with Fannie Mae and Freddie Mac is not to bail them out in any way shape or form. The correct answer is to disband them completely, erase them from government, and replace them with…nothing. Full stop.

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