In September 2008 (“Think Enron Was Bad? ‘Fredron’ and ‘Fanron’ May Be Worse”), reacting to the implosions at Fannie Mae and Freddie Mac, the two “government-sponsored enterprises” that had just become “government-controlled enterprises,” I quoted a Wall Street Journal editorial telling readers that “taxpayers are now on the hook for as much as $200 billion.”
We should be so lucky. On New Year’s Eve, a Bloomberg story headline told us that the losses will be $400 billion. The story’s first sentence actually says that “taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion” (italics mine). The only question appears to be: “By how much?” We’re already at eight Enrons (losses there were roughly $50 billion) and counting.
The government has given up even trying to guess how deep the hole is. On Christmas Eve, the Treasury Department, which had previously “limited” its financial commitment to $400 billion ($200 billion for each entity), issued a cleverly worded press release. Blandly titled “Update on Status of Support for Housing Programs,” it tells us that Treasury’s financial commitment to keep the two entities afloat will “increase as necessary to accommodate any cumulative reduction in net worth over the next three years.” In other words, Fan and Fred will receive relief without limits.
Many readers will be less than pleased to know that Massachusetts Congressman Barney Frank now considers Fan and Fred to be a “public policy instrument” of the government, and that they “have become a kind of public utility.” In her story about the unlimited relief with a Pollyanna title (“New Aid for Fannie and Freddie”), Louise Story at the New York Times writes that “the Obama administration has effectively transformed them into arms of the government, using them to help carry out its mortgage modification programs.” Great.
How have these new “arms of the government” been performing? Last week, Peter S. Goodman at the Times brought forth evidence that the modification programs have “done more harm than good.” That harm is escalating. Desperate for success stories, Treasury reacted to the fact that many of those who are trying to get relief are fudging their applications by significantly understating their income in hopes of getting undeservedly low monthly payments by issuing a mid-December directive ordering participating lenders not to penalize applicants for having done so. Associated Press columnist Rachel Beck describes this move as “reward[ing] liars.” Expect more liars to apply for “rewards.”
This is all happening way too easily. It’s enough to make you wonder if designing Fan and Fred for failure while making them “too big to shrink” in the eyes of many hasn’t been the plan all along.