As I noted over the weekend, Fannie Mae and Freddie Mac were taken over by the federal government. Previously, the federal government had agreed to prop them up and in effect to make good on many of their losses. So as things deteriorated, that existing guarantee and the exposure it reflected was becoming too expensive for taxpayers to bear.
Further, while governments can seldom run things better than private businesses, Fannie and Freddie were only quasi-private. Their business model proved to be an expensive one, in part because they wasted huge sums on lobbying and executive compensation that was unwarranted given the firms’ poor performance. Also, it seemed to the Treasury Department that if the firms were taken over, the rates to place their mortgage debt would drop, in essence that the interest that they had to pay out to place their paper was too high.
So Fannie Mae and Freddie Mac had become too big and too expensive to taxpayers to let the firms continue on as they were. Allowing them to continue to operate was wasting too much taxpayer’s money, since we were on the hook for their expensive and wasteful business model.
In part to reduce the expense to taxpayers of the guarantees given in July, on Sunday the federal government put Fannie and Freddie in receivership, removed their board, put in new management, and eliminated their lobbying costs. Fannie Mae and Freddie Mac had become too big and, given the pre-existing promises to make good or offset much of Fannie and Freddie’s losses, too expensive to let them become yet more expensive for taxpayers. Better to takeover and potentially take losses sooner than to let the expense of a rescue explode in the future.
As I understand it, Sarah Palin made this point in passing, [...]