Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) didn’t behave any worse than other banks, says Andrew Gordon in Investor’s Daily Edge. But they didn’t behave any better either. They succumbed to the same greed and grab for big money that the private-sector gave into, while ignoring the risks. They don’t deserve to be saved, says Andrew…

Since the beginning Fannie and Freddie have carried the implicit backing of the U.S. government. It has always been understood that the U.S. government wouldn’t allow Freddie or Fannie to fail…

Or at least wouldn’t allow their debt to go bad.

This implicit backing by the U.S. government makes their debt safer than banks in the private sector – in fact much safer since banks do go under (eight have gone bankrupt this year so far). And when they do, it immediately puts debt holders and especially shareholders (since they are subordinated to debt holders) at risk.  

I don’t blame Freddie and Fannie for being a little conflicted. Are they here to help Americans buy more homes? Or are they here to maximize profits for their shareholders?

But maybe the conflict is more in my mind than theirs. They seem to have been grappling with quite another conflict: going for big profits or going after really big profits.

It’s one thing if they are helping low-income people on the verge of qualifying for a house loan but just missing. These are the kind of borrowers Freddie and Fannie are supposed to help.

But a big chunk of Fannie’s and Freddie’s credit losses comes from $574 billion of Alt-A mortgages that these agencies bought or guaranteed in recent years.

And these loans are typically much bigger than those given to subprime borrowers.

So who got these loans? The speculators playing the expensive and once-booming suburbs of Miami, Los Angeles and Las Vegas who were not getting quite the scrutiny by lenders and underwriters that they should have (bad for business, after all).

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That stinks. If the flim-flam F&F twins aren’t taking their mission seriously, why should we care if they survive? The fact is, we shouldn’t.

• F&F have outlived their usefulness. Around 70 percent of American families own homes. What the current deluge of defaults is showing, is that this percentage is too high. It’s clear that tens of  thousands of the families that make up this 70 percent can’t afford to own homes.
  
• Private-sector banks and thrifts weren’t free enough or willing enough to give out loans to “marginal” borrowers? They clearly were – if anything – too free.

And part of the reason was they had F&F buying and guaranteeing their suspect loans. F&F were participants and enablers of bad behavior – two good reasons to wave them good-bye.

• Why pay Richard Syron (CEO of Freddie) and Daniel Mudd (CEO of Fannie) and their management teams huge salaries for taking the good name of the U.S. government and running it into the ground? Their leadership has been unexceptional at best, and reckless at times.

Case in point: As far back as 2004, Syron was being told by colleagues inside Freddie that the agency was buying dangerous loans.

But we’ve all heard the government’s excuse for being willing to bail out F&F: they’re too big to fail.

The $5.2 trillion worth of mortgage loans (almost half the value of the $12 trillion mortgage market) F&F covers is just too big to let go under.

Bush won’t do it. But how about the next administration?

Barack Obama says that Fannie and Freddie both should go into government receivership to protect the U.S. taxpayer.

John McCain says a government bailout would be a package deal. In return for spending taxpayer money on these agencies, “the managements and the boards should immediately be replaced, multimillion-dollar salaries should be cut, and bonuses and other compensation should be eliminated.”

Neither candidate goes far enough. Save the loans. Get rid of F&F. But do it in an orderly way so our whole financial system doesn’t go down the tubes in the process.

In the short term, mortgage rates would be sure to go higher. Bank stocks would suffer. Shareholders in F&F would undoubtedly be wiped out.

That’s a lot of downside to absorb. I don’t think the government will do it.

But if it did, in the longer term we’d be rid of these sorry mutts. As a percentage of the population, home ownership may have peaked. But is that a terrible thing? Consider all the homeowners either going through foreclosure or whose mortgages are underwater (higher than the value of their homes). In comparison, renting is a walk in the park.

Source: Fannie and Freddie Don’t Deserve to be Saved