Franklin Delano Raines, who ran Fannie Mae before being forced to resign amid an accounting scandal in 2004, and still owns stock in the company, has a very strange op-ed today in the Washington Post.
Raines starts out by arguing that the loan losses so far at Fannie Mae and Freddie Mac are actually pretty manageable. He may be right about that, he may be wrong. I’m really not the one to judge, although Bert Ely told me pretty much the same thing and Bert’s no friend of the Fanniefreddieplex. But then Raines writes something that seems patently wrong:
The Treasury proposals, curiously, substitute government capital for private capital. Fannie and Freddie have served their housing mission for decades by marshalling private equity from around the world. Federal capital funds are inherently limited, while private capital is essentially unlimited.
Fannie was created as the Federal National Mortgage Association in 1938 because some other guy named Franklin Delano and his allies in Congress concluded that private capital needed government help to find its way into the mortgage market. The reason that Fannie and Freddie have subsequently been able to marshal private funds from around the world so successfully is in large part because investors assume that, if things go really wrong, U.S. taxpayers will take care of them. That is what has enabled the Fanniefreddieplex to outbid purely private rivals over the decades and build such a dominant role in the mortgage business. And perhaps more important, it is what has enabled them to keep funding loans even after private investors soured on non-Fannie-Freddie (and let’s not forget Ginnie) mortgage securities last summer. (More after the break.)
In fact, it is the performance of what are called the government-sponsored enterprises over the past year–and during the credit crunches of the early 1980s and early 1990s, and the mini-crunch of the late 1990s–that offers the single best justification for their existence. They make loans when others are too bearish to dare. Don’t believe me? Take a look at this chart, which I’m rerunning from a post a couple of days ago:
Graphic by Feilding Cage/Time.com
Raines argues that private capital is “essentially unlimited.” But one of the defining aspects of private capital markets is that they go through big swings between fearing risk and embracing it. Right now they’re fearing it big-time, unless told that taxpayers stand ready to help out if things go bad. At this moment, in the mortgage market, the promise of what Raines calls “federal capital funds” appears essential to accessing the private capital needed to keep the housing market from completely freezing up (as it did in the early 1930s, before government got into the mortgage business in a big way).
The main point of Raines’s piece seems to be that the Fanniefreddiebashers in the White House are to blame for all the companies’ troubles. I would agree that critics of the two companies seem remarkably blind to the essential service they’re providing during the current financial crisis. But Raines’s depiction of them as successful private companies that aren’t really reliant on taxpayer backing sounds a lot like somebody who was born on third base hitting a triple. Not that Raines was born on third base; he’s a remarkable self-made success story. Fannie Mae is not.