Before George Delano Bush unveils yet another vast, socialist scheme in response to today’s financial turmoil, his administration should try something as simple as ABC. While the following may not solve the problems of all the institutions in distress, it may be the best bet to minimize the damage from the implosion of two of the largest failed enterprises: Fannie Mae and Freddie Mac.
Now that these two entities have been fully nationalized, they should be divided into much smaller parts and sold off. This can be accomplished in six steps.
First, declare that Fannie and Freddie are dead. Make this painfully clear to everyone by using crowbars to pry the brass nameplates off of their respective headquarters buildings.
Second, pour their assets into a new, temporary agency whose legal authority expires within 90 days. The Asset Breakup Corporation will supervise Fannie and Freddie’s orderly dismemberment and sale in much smaller pieces.
Third, use Fannie’s and Freddie’s databases to create a list of their customers ranked alphabetically according to the individual homeowners’ surnames.
The first set will contain people whose surnames begin with the letter “A.” Americans named Aaronson, Adams, Alvarado, and Antonucci. The second will consist of those whose surnames begin with “B.” People named Baca, Benson, Berkowitz, and Brooks will compose this category. Next, people surnamed Caruso, Charles, Chavez, and Chung will populate the “C” group.
This simple method soon would divide Fannie’s and Freddie’s assets easily, fairly, and transparently into 26 distinct slices.
This method automatically would minimize risk. Rich people and poor folks, hard workers and slackers, cheapskates and spendthrifts, city slickers and country bumpkins, Southerners and Northerners, Pacific surfers and Atlantic lobstermen, blacks and whites, the young and the old, and everyone in between are scattered evenly and randomly across the alphabet. The “A” group, “D” group, or “W” group all will include many diligently paid mortgages and some turkeys. Some mortgage owners will live in thriving communities while others will reside in sleepy little towns. Some will bask in the Sunbelt while others endure endless rain.
By evenly spreading risk this way, any business that purchases these blocks of former Fannie and Freddie assets will be confident that there will be enough performing mortgages to compensate for those that have gone sour.
The alternative — selling these assets by geographic region, according to their current status, or by homeowners’ incomes — would yield a predictable and understandable result: Investors would line up to purchase mortgages belonging to creditworthy, high-income homeowners in affluent parts of the country. Taxpayers would get stuck with non-performing mortgages from, say, downtown Detroit or New Orleans’ embattled Lower Ninth Ward.
Fourth, each “lettered” company will contain hundreds of thousands of units across which to average risk. Similarly, each “lettered” company’s mortgages, on average, should approximate the balance due on a typical Fannie/Freddie loan. As of last June 30, according to slide 33 of its Investor’s Summary, the average Unpaid Principle Balance on a typical, single-family, Fannie Mae loan was $146,503. So, if the letter M group has 1 million such mortgages, it should be worth $146.5 billion. While the winning bidder will end up paying “too much” for mortgages with balances due of say, $125,000, those homeowners who owe $175,000 will have their debts purchased at a discount.
Auctioning off these 26 units will determine what proportion of this price the market is willing to bear. This price-discovery process would be far preferable to having the government cheat taxpayers out of potential cash by charging prices that are too low, or attenuating the current mess by charging prices that potential buyers will not pay, thus marooning these assets even longer.