Freddie and Fannie - Has Everyone Gone Postal? - Page 2 of 2

Fannie Mae and Freddie Mac started out as government agencies. Even after their status changed in the late ’60s, their stated purpose was to fulfill the long-established policy of the United States to promote individual homeownership by making mortgage money freely available. Essentially, the basis of the suits against the banks is that the registration statements by which the mortgages were sold to Fannie and Freddie did not fully and adequately disclose material facts. In fact, the allegations would indicate that the government believes not merely that the disclosure was inadequate, but also that it was deliberately false and misleading.

The banks’ defense is likely to be that Fannie and Freddie were intimately involved in the creation of these securities, their policy was to make as much mortgage money available as possible, and since they are perhaps the largest and most experienced institutions involved in the United States mortgage business, they knew, or should have known, the risks as well as any investor.

[Article: $2 a Gallon Gas, Michele Bachmann? Aim Higher.]

The U.S. government is not alone in seeking redress from the banks over those ridiculously overpriced mortgages. There has been a barrage of suits against most, if not all, of the 17 defendants named by the U.S. government, including one filed by AIG, the insurer of many of the mortgages originated and/or packaged by the banks. It can be argued that AIG, at least by dint of ownership, is also quasi-governmental ever since the Fed engineered its massive bailout in 2008. It’s sure getting harder to distinguish among the players without a scorecard these days.

The government has been negotiating with these banks for a while and, in fact, filed a suit very similar to those announced last week against UBS some months ago. As a practical matter, this dance has been going on for so long the statute of limitations for the type of securities violations alleged in these suits would have expired in just a few days. The government was out of time—it had to sue now or forever hold its peace.

[Free Tool: Obtain your Identity Risk Score from Credit.com]

Get matched with a personal loan that’s right for you today.

Learn more

Unfortunately, these suits have the effect of slowing down and further compromising the pace of bank lending, which was precisely what the bailout was supposed to fix. And besides that, what is the logic of saving banks and then suing them?

The answer is that slowly, and probably unintentionally, as the government got ever larger, it also became schizophrenic. It has lost sight of the role of government in a capitalistic democracy. It can’t figure out if it’s a friend or foe to big business. The plethora of quasi-governmental agencies that became in vogue in the ’60s and ’70s are a good example of this phenomenon—they are neither fish nor fowl. They just don’t work. Hence it was a bad week for Freddie and Fannie, as well as the USPS, because the suits portray them as hapless victims… one can perhaps argue the victim part, but not the hapless part.

I don’t know if Saturday deliveries should be stopped, or who defrauded whom as between the banks and Fannie and Freddie. But I do know that what is called for in the 21st-century is a very bright line between the public sector and the private sector, with most of life being on the private side of that line.

[Featured Product: Looking for your credit report?]