The GSEs Are Dead. Long Live the GSEs!
Fannie and Freddie cost us $150 billion plus, but next time the government will get it right . . .


Stephen Spruiell

‘I feel like Marc Antony presiding over Caesar’s funeral,” said Lewis Ranieri. The financier, a legend on Wall Street for practically inventing mortgage securitization, was made even more famous in Michael Lewis’s Liar’s Poker. Now he was addressing a room full of housing-industry officials at the Treasury Department. The subject of the conference? The future of housing finance, broadly speaking, in a post€’Fannie Mae and Freddie Mac world.

Antony came to bury Caesar, not to praise him, but the GSEs (government-sponsored enterprises), as Fannie and Freddie are known, aren’t dead yet. They are on taxpayer-financed life support, with an unlimited line of credit at the Treasury. The conference had the feel of “an elegant funeral for Fannie and Freddie,” a phrase that Rep. Barney Frank (D., Mass.) originated and Treasury Secretary Timothy Geithner employed (so are they all honorable men). What is important, Geithner said, is that reform be about more than just designing a funeral: “It requires a broader reassessment of how much support the government should provide for housing finance.”

The consensus at the conference? The government should provide quite a lot of support for housing finance. The panels were stacked with people who shared a broad conception of the government’s role in the housing market, from industry players who enjoy making profits backed by government guarantees to “affordable housing” advocates who fear that government subsidies for high-risk lending might disappear in the wake of the crisis.

At the same time, all the panelists were mindful not to sound too supportive of the GSEs, which have cost taxpayers $150 billion and counting. Even Ranieri — who analogized himself to the man who stealthily turned the crowd against the fallen tyrant’s assassins — made sure to stress that Fannie and Freddie “permitted what they were meant to prevent.”

Geithner took an even tougher-sounding line: “We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.” And yet: “I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing stability in access to mortgages, even in future downturns.”

This phrase “carefully designed” popped up again and again throughout the conference, as one speaker after another denounced Fannie and Freddie in the strongest terms, only to follow this condemnation with a solemn warning that the government must not let the GSEs’ irresponsible behavior give a bad name to the service they were designed to provide, namely, a subsidy for moderate-to-low-income homebuyers made possible by the implicit government backing the GSEs enjoyed. Speaker after speaker stressed that some more “carefully designed” government program must take the place of the GSEs in providing this subsidy — as if the government planners behind Fannie and Freddie had set out to create a sloppily designed mortgage subsidy.