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Freddie and Fannie’s Excellent Adventure

The New York Times reports this morning in a front page story that, “Despite assurances that the takeover of Fannie Mae and Freddie Mac would be temporary, the giant mortgage companies will most likely never fully return to private hands…”

It is an interesting story how they got to be in private hands in the first place. The Federal National Mortgage Association was created by the federal government in 1938 as a government agency to add liquidity to the mortgage market. By buying mortgages from banks, packaging them as securities, and selling them to investors, Fannie Mae, as it was soon nicknamed, greatly increased the number of mortgages the banks could initiate. It was one of the New Deal’s better ideas, and it started the revolution in homeownership that contributed so greatly to the post-war prosperity, and that prosperity’s spread across the socio-economic spectrum.

Then, in 1968, Fannie Mae was rechartered as a “government sponsored enterprise,” an independent company, its stock traded on the NYSE, although it had several tax advantages over typical financial companies. In 1970, the federal government chartered the Federal Home Loan Mortgage Corporation (“Freddie Mac”) theoretically to give Fannie Mae some competition.

But why was Fannie Mae spun off in the first place? Simple: to make the federal books look better. By offloading Fannie Mae and its considerable debts and assets, the statistic called “the national debt” was reduced by a stroke of Lyndon Johnson’s pen. That same year, Social Security was taken “on budget” in order to reduce the apparent size of the federal deficit.

The payroll taxes paid to the Social Security Administration became “income” but the surplus that went into the Social Security trust fund and was instantly borrowed by the treasury in exchange for bonds was now just a “transfer between government accounts” and didn’t count in determining the annual deficit.  That’s why the federal government ran “surpluses” in 1998-2001 that totaled $559 billion while the national debt increased by $394 billion in the same period.

If a corporation treated employee contributions to its pension fund as “income,” the managers of that corporation would soon be playing volley ball at Club Fed.

Wall Street in the post-Civil War era figured out that corporate managers could not be trusted to keep honest books. They began insisting on corporate books being certified by independent accountants and kept according to Generally Accepted Accounting Principles” (GAAP). Until the federal government (not to mention most state governments) has a comparable mechanism in place, the government’s managers–the president and members of Congress–will continue to cook the books for political reasons and the country’s financial health will continue to be severely adversely impacted.



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