Alan Greenspan Tells WSJ Fannie, Freddie Deserved Breakup

2008 August 13

August 13 2008 - Former Federal Reserve Chairman Alan Greenspan disagreed with the government’s rescue of Fannie Mae and Freddie Mac, saying they should have been nationalized and split up into smaller companies, the Wall Street Journal reported.

“They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted,” Greenspan said in an interview this week, the newspaper said. He made similar comments last month.

Greenspan’s view reflects criticism from free-market proponents of the plan forged by Treasury Secretary Henry Paulson, who engineered a financial backstop for the companies in their current form. The two government-sponsored, shareholder- owned firms account for almost half of the $12 trillion U.S. mortgage market.

The crisis that engulfed Fannie Mae and Freddie Mac last month was “the ideal opportunity to come to grips with what is a fundamentally flawed model, which privatizes profits and socializes losses,” the Journal cited Greenspan as saying.

Paulson asked Congress on July 13 for emergency powers to inject “unspecified” amounts of government funds into Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac if necessary. He acted after the companies’ shares slid to their lowest levels in more than 17 years.

Implicit Guarantee

Republicans had for years sought to reduce the influence of Fannie and Freddie over the mortgage market, arguing that they benefited from the perception of an implicit government backing. That made it cheaper for the companies to finance their purchases of mortgages, in competition with private-sector banks.

The government should have provided taxpayer support to make the firms “financially viable” then split them into five to 10 companies and auctioned off, the Journal cited Greenspan, 82, as saying. He previously made the point in a CNBC television interview July 31.

Katie Byers, a spokesman for Greenspan in Washington, said he wasn’t immediately available for comment.

“I believe the firms should be nationalized,” former St. Louis Fed President William Poole said in an interview with Bloomberg Television this month, echoing Greenspan’s view.

Policy makers and legislators may reconsider the status of Fannie Mae and Freddie Mac once the current crisis, sparked by a surge in defaults on subprime mortgages, passes.

Next year “we’ll have to talk about whether it makes sense” to keep Fannie and Freddie as state-sponsored, shareholder owned companies, House Financial Services Chairman Barney Frank said yesterday in a Fox Business Network interview.

2009 Agenda

“Congress is going to have to address this issue on a longer-run basis next year,” Poole said this month. “I am anticipating they will have losses, that their position will be weaker.”

Yields on mortgage securities guaranteed by Fannie Mae rose this week to about their highest relative to Treasuries since March amid concern that defaults are spreading to prime and Alt-A mortgages from subprime loans.

Fannie’s current-coupon 30-year fixed-rate bonds currently yield 6.06 percent, 213 basis points more than 10-year Treasuries, according to data compiled by Bloomberg. That’s 25 basis points from the 22-year high of 238 reached March 6.

The Treasury says it has no plans to use its authority to aid Fannie Mae and Freddie Mac, which lasts through next year according to the law enacted last month.

“We have no plans to insert money into either of those two institutions,” Paulson said in an interview with NBC’s “Meet the Press” broadcast Aug. 10.

Greenspan also said an end to the house-price slump won’t come until next year, continuing to unsettle financial markets, the Journal reported. “Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009,” he said, according to the newspaper.

Greenspan Tells WSJ Fannie, Freddie Deserved Breakup
by Steve Matthews | Bloomberg

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