In its current form Freddie Mac is a mercantilist company, and as such, it is not a good example of free enterprise, write Paul Cleveland and Michael Tucker. Freddie Mac should operate like any other publicly traded U.S. company. The remaining tie between it and the federal government should be severed once for all. When this happens, the truth about its situation will come to light and mortgage markets can operate more freely. Also, it is important that the U.S. taxpayer not be required to shoulder the burden for any of Freddie Mac’s poor financial decisions. [Full Article]
Source link: http://blog.mises.org/3312/freddie-mac-a-mercantilist-enterprise/
Freddie Mac: A Mercantilist Enterprise
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Wwll said. As a loan officer and concerned citizen the nonsensical proliferation of both Fannie’s and Freddie’s doing cause me some concern in no small measure.
IS ANYBODY WATCHING THESE PEOPLE?
Freddie and Fannie didn’t want to report higher earnings so that they could later use those earnings to offset losses. The problem isn’t earnings per se … it’s whether they have any capital and what would be a prudent leverage ratio for the companies.
The whole idea (for the investors, anyway) is that if they can effectively hedge away the interest rate risk plus add in the implicit guarantee of taxpayer bailout they can still function with razor thin (or non-existent, given the lousy GAAP rules) capital and distribute to excess profits to stockholders.
So it’s back to “crony capitalism” or more appropriately the old-style monopoly priviledge.
FNMA and FHLMC would absolutely be bailed out if they got into trouble because they underpin a good portion of the entire financial system. There is no question that the bond market has this right on the money – just as surely as any major bank would be bailed out should they grow to the size necessary.
Besides the FNMA / FHLMC issue – what about WHO HOLDS THE RISK? Really all that these companies have done is exchange on balance sheet risk for off balance sheet counterparty risk, making the risk “disappear” but it is STILL THERE. All the hedges won’t perform if a significant counterparty defaults and FNMA / FHLMC don’t have the capital to absorb any losses.
So we’ve an additional (and additional after that) problem. Gotta hand it to the financial wizards, they’ve got this “mutually assured financial destruction” thing down to a science.
Why would anyone within the jurisprudence-immunity of government workers ever try to make the best decision? Isn’t the “best decision” for a government worker always “the first decision that comes across my desk so I can get out of here by 4:30?”
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