Fannie and Freddie: Guess Who’s Going to Pay?

September 9, 2008

Hold your nose. The stench of the S&L crisis of the 80’s fills the air once again. It all came rushing back over the weekend when the Treasury Department announced that the federal government was going to bail out the mortgage giants Fannie Mae and Freddie Mac and take them over. Remember the S&L crisis?


Based on government deregulation and loose standards of conduct, S&L’s all over the country began failing, resulting in the federal government taking over the operations of 747 private institutions in 1989.

When the dust settled on that government bailout, taxpayers (you and I) had to pay $132 billion in costs and another $285 billion in interest expenses on borrowed money, for a total cost to taxpayers of $417 billion. Ever wonder what caused the economic downturn of the early 90’s?

How will this bailout compare? It’s too early to tell, but the Treasury (again, you and I) pledged up to $200 billion to Fannie and Freddie to deal with losses on mortgage defaults. Unfortunately, that’s only an initial guesstimate. With future interest expenses incurred as a result of the borrowing, it is safe to assume this crisis will far exceed the S&L taxpayer bailout.

Any hope that the crooks who got us into this mess will have to pay up, however, is farfetched indeed. Compared to the $417 billion in taxpayer losses in the S&L fiasco, restitutions paid by the responsible criminals amounted to a whopping $26 million. Let’s put that in terms you and I can understand. For every $1,000 taxpayers had to pay to clean up the S&L industry, the insiders who got rich off of their shady dealings had to pay 6 cents in restitution. Whoever said crime doesn’t pay never met a banker or a mortgage broker.

The government fired the current CEOs running Fannie and Freddie, but lest they be simply tossed out on the street, agreed to hire them as consultants at a cost not yet revealed. Whether outgoing CEOs Daniel Mudd (Fannie) and Richard Syron (Freddie) will get their respective $14 million severance packages is still being debated.

Neither political party can avoid blame for this entire mess. Much of the deregulation that led to the mortgage meltdown was the handiwork of former Senator Phil Gramm, a close economic advisor to candidate John McCain. McCain himself is no stranger to these costly government bailouts. When the failure of Ken Keating’s Lincoln Federal Savings and Loan in 1984 helped lead to the S&L crisis of the 80’s, Senator McCain was one of the “Keating Five” who had lobbied to help his troubled friend, activities for which Senator McCain was rebuked by the Senate.

Democrats, however, have also been strong backers of the mortgage giants, and have received 56% of the $1.6 million in political contributions made by Fannie and Freddie. Senator Obama has himself received over $100,000 from donors associated with the two companies.

After all the finger pointing is over, however, it is once again the American taxpayer who will foot the bill. Taxes will increase, Republicans and Democrats will once again toss accusations back and forth, and retired mortgage brokers and lenders will be looking for new ways to invest their wealth. Life goes on.

UPDATE:  Fannie Freddie Execs Lose Golden Parachute.

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