The government’s bailout of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), along with the collapse of Bear Stearns, has profoundly changed Wall Street.

One of the many problems with the government’s multi-billion-dollar welfare for Wall Street program, says Chris Mayer, is it has given Fannie and Freddie distinct advantages over purely private sector companies.

Chris says that, apart from the government’s backing of the obligations carried by Fannie and Freddie, these newly nationalized GSE enjoy a number of other less well known advantages…

This from Agora Financial’s Rude Awakening:

Whether stock and bond prospectuses carry the disclaimer that its obligations are not backed by the US government, the market believes something else. GSE obligations yield only slightly more than treasury securities, but below that of America’s top-rated corporate obligations. And the rating agencies treat GSE obligations as if the US government backs them.

As Bert Ely stated in an American Enterprise Institute research briefing, “Anybody who has any doubts about these institutions has to realize that they are not only ‘too big to fail’ institutions, just by their sheer size, but again, if they got into trouble as the Farm Credit System did back in 1987, they would get bailed out. . . . Long-Term Capital Management was small potatoes in size compared to where Fannie and Freddie are today and where they’re going.”

More recently, if the government can’t sit by and watch the airlines perish or watch domestic steel producers fail, then it can hardly be expected to let these much larger giants fall.

The lower yields mean that the GSEs have a significant funding advantage over their competition. The GSEs also receive other benefits, as detailed in a research paper written for the Mercatus Center titled “Neither Fish nor Fowl: An Overview of the Big-Three Government-Sponsored Enterprises in the U.S. Housing Finance Markets” by Mises Institute adjunct scholar John Cochran and Catherine England. Among these benefits:

1) Lines of credit with the US Treasury. Fannie and Freddie may borrow up to $2.25 billion each from the US Treasury, and the FHLB system enjoys a $4.0 billion line of credit. They have never used these lines, but have fought vigorously to maintain them. The lines surely add to the belief that the US government backs the GSEs.

2) SEC exemption. The debts issued by the GSEs are exempt from SEC registration and disclosure requirements, which saved them collectively an estimated $236 billion in 2000.

3) Privileged treatment. While banks face strict limits on the amount they can lend to any one borrower, this regulatory requirement does not apply to GSE debt. Therefore, banks can hold unlimited amounts of GSE debt, and this debt is given favorable treatment in computing compliance with regulatory capital requirements. In addition, the Federal Reserve acts as a transfer agent for all of the GSE debt, just as it does for the US Treasury and for government agencies. These privileges expand the market for GSE debt beyond what it might otherwise be.

4) Tax exemption. GSEs are exempt from state and local income taxes. Fannie and Freddie also don’t pay federal income taxes on their earnings, nor property taxes on any of their offices. Cochran and England maintain that the GSEs saved $1.3 billion in tax exemptions in 2000.

There are other benefits more technical in nature but every bit as real. For all practical purposes, the GSEs are government agencies. In addition to the benefits the GSEs receive, the GSEs have imposed a cost on the market as well. We do not know how the mortgage market might have developed if the GSEs had never been created, nor can we guess what alternative uses the capital invested in the mortgage market might have found and what would have been created instead.

Source: Mortgage Market Socialism