Private Profit, Socialized Risk

I won't claim to be prescient about Fannie Mae and Freddie Mac. But I've been writing critically about them for a long time, even back in the 1990s when they were riding high. The combination of private profit and socialized risk always got under my skin and I think I had a resentment of the place the way I didn't like the cool kids in high school.

Fannie Mae, more than Freddie, was the cool place in Washington for pols and hacks to hang their hats and gets rich all under the guise of doing good. I've always had a sinking feeling about the place. As recently as a few months ago, after Fannie's stock has collapsed by 50 percent, I suggested that after we got through this mess, the place be privatized. I had no idea that it would come to this--government receivership of the kind announced this weekend.

It's an incredible moment and I hope that this dramatic move stops the hemorrhaging and the taxpayer bill doesn't climb from the estimated $25 billion estimate of a few months ago into something more cataclysmic. But I think any estimates you hear about the size of the bailout are really pretty worthless. We just don't know.

A few other thoughts:

It was the right thing. Paulson did the right thing this weekend and I'm starting to regret having been so hard on him in a column earlier this year. He seems to have done the right thing here. What was the alternative? Letting Frannie--as they are jointly called---fail? Not putting them under government control could only have led to the companies taking more risky maneuvers and questionable accounting.
Hats off to Morgan Stanley's John Mack. When Treasury asked the investment giant to do an audit of Frannie, it would have been easier to punt. Why get in the middle of this? But Morgan Stanley did the right thing and seemed to have come up with more than Frannie's government regulator.

An investigation. It's time for a full-scale investigation about how we got into this mess. It's not just the fault of the housing deflation. Frannie was built into a Frankenstein through years of lobbying and political cronyism. Time to have all of the major players in from Jim Johnson to Jamie Gorelick to Arne Christensen and others explain how we got in this mess. They didn't break the law but they helped foster a culture that got us into this. Message to McCain: This is a gold mine for a self styled reformer with more Democratic skeletons than Republican ones.

Poor Beth Wilkinson. Can the much-respected and admired attorney from Latham Watkins who prosecuted Oklahoma City Bomber Tim McVeigh be long for Fannie Mae? She must have regretted taking this gig a couple of years ago when she could have written her ticket anywhere. Hope she lands someplace good.

The firings are right. There's no way to keep the current leadership at Frannie. Dan Mudd did some good things like helping to make Fannie a less pugnacious player but it's time for him to go.

Dismantling the lobbying arm. Yessssssss! It was bad enough having companies built on private profit and socialized risk. Having huge lobbying arms to keep it that way was unseemly. Good riddance.
The Wall Street Journal was right. Hey, even a broken clock is right twice a day, as the old saying goes. The Journal editorial page, which I find to be reflexively right wing, was wisely raising questions about Frannie over the past decade. Would that the Times and Post had been as vigilant. It doesn't excuse the page's obsession with marginal tax rates and the likes of Ken Starr but it is to their credit that they led the way on this. Pulitzer to Team Gigot?

Public or Private, Pick a side. Let it be a warning to other public-private endeavors. You can't have private profit and socialized risk. We've now seen the consequences.