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Fannie and Freddie Nationalization

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What do you think about the US governments role as a white knight spending billions of taxpayers money to help sustain a bubble.

According to experts this is what lead to Fannie and Freddie's default.

1) Foreign investors were selling off existing holdings of F&F paper and were increasingly reluctant to buy new paper, so failed F&F issues were highly probable.

2) F&F accounting remained opaque and possibly wrong. They both had much less capital than stated, possibly negative in the case of Freddie.

3) Washington cares little or nothing about the U.S. government's deficit or about inflation.

4) The Fed will be urged to ease monetary policy further to contribute to a rising stock market and improved confidence in the weeks to come.

Will this help the financial markets stabilize? Not entirely: For example, the conservatorship has triggered a determination by the credit default swap dealers that a "credit event" has occurred. That opens the process of arranging an auction (probably messy) for settling CDS [credit default swap] positions. Losers will probably sue, arguing that a credit event shouldn't have been declared.

I find the ductape fixing a broken heart ( US economy) governments approach quite worrysome.

What will happen next ? Will foreign governments own american soil ? Some Sheiks already own some skyscrapers and the central station in New York.

Would love to hear your opinion since F & F owns more than 6 trillion in mortgages.

Here is Sebastian Mallaby, Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics point of view.

The key question now is what the government's longer term plan is. Is it content to keep Fannie and Freddie in intensive care during the current mortgage downturn, then release them back onto the streets when the economy recovers? That would be a grave error.

The past year has shown that incentives matter in finance. Investment bankers were paid a lot to take enormous risks, but not penalized quite as much if the risks turned sour: These assymetric rewards go some way to explain the excessive leverage at Bear Stearns and other lenders. But the greatest and most scandalous assymetry existed at Fannie and Freddie. In these public-private partnerships, the privateers pocketed the profits in the good times but the public is now bailing out the institutions in the bad ones. Re-privatizing Fannie and Freddie with the same incentives would be inviting history to repeat itself.

The best solution would be to run down the institutions gradually, selling their assets to private companies over a number of years. There's no compelling case for the government to be involved in mortgage finance, so it should aim to exit the sector. It used to be said that government mortgage companies were needed to spread home ownership to low-income households. The subprime story has shown that low income households had plenty of access to home loans—and arguably too much access.

The second best solution would be to break Fannie and Freddie into several smaller institutions and then re-privatize them. If the Baby Fans and Baby Freds were small enough, the implicit guarantee of a government bail-out would be much reduced. It was the sheer size of Fannie and Freddie that compelled the Treasury to come to the rescue this weekend. Such behemonths must not be unleashed again.