[International Herald Tribune,
France]
Le Monde, France
How Freddie and
Fannie Paid the State to Keep Quiet
"Freddie and Fannie earned
about $70 million a year and the two institutions were the largest financial
backers of the Republican and Democratic parties … No one in Washington had any
interest in disrupting this political and financial collaboration that made so
many people happy … until the bubble burst."
By Pierre-Antoine Delhommais
Translated By Kate Davis
September 14, 2008
France
- Le Monde - Original Article (French)
There's a positive side to
financial crises: they allow the French to improve their English. Each time, they
learn a new phrase: during the stock market crash of 1987 it was program-trading,
with the failure of Long Term Capital Management in 1998 it was hedge fund,
and then there was rogue trader with Jerome Kerviel [In 2008, Kerviel
single-handedly lost €4.9 billion for French investment bank Société Générale 
].
Over the past year, the
French have become familiar with subprime mortgages, mentioned only six
times in the Francophone press in 2006, but 8,400 times in the second half of
2007. Finally, over the past two weeks they have learned about Freddie Mac and
Fannie Mae, who sound in such a joyous way almost like the names of comic strip
characters, but which now find themselves at the center of one of the biggest
financial bailouts in history.
On Sunday, September 7, the
American Treasury Department announced the bailout of the Federal National
Mortgage Association (Fannie) and Federal Home Loan Mortgage Corporation
(Freddie), the two pillars of financing for the American property market. As
this is the United States, there was no talk of nationalization, but that is,
indeed, what it is.
First
Man: 'What's the difference between the Zimbabwean
economy
and the world economy?'
Second
Man: 'There's some hope for the Zimbabwe economy.'
[The Irish Times,
Ireland]
Many in Europe have applauded
this return to power of the State, the savior of a financial system gone wild,
incapable of self-regulation, with its bankers who are irresponsible, blind or reckless,
and in all cases greedy. The taking over of Freddie and Fanny was seen as a
kind of financial revolution, putting an end to three decades of deregulation
and anything-goes liberalization.
This radical and very
reassuring vision has only one drawback - but it's a big one. It doesn't take
into account the fact that what Fannie Mac and Freddie Mac orbit around is that
very same State - and that the two institutions have been governed more by
political interests than by the law of profit.
By knowing their life
stories, it's easier to understand the fatal drift of Fannie and Freddie.
Fanny, the eldest, was at its conception entirely public, a child of the New
Deal, created by Roosevelt in 1938 to help the country emerge from the Great
Depression and to bolster the construction sector by helping Americans become
homeowners. Thanks to its label that read, “American State,” Fannie could
finance itself at rates much lower than private banks, making mortgages much
less costly for the citizens.
[O Dia, Brazil]
After it turned 30, the status
of Fannie changed, when President Johnson decided that its loans were unfair
competition for those of the Treasury, which was straining to finance the war
in Vietnam. Fannie was finally privatized - and herein lays the problem. It was
privatized in a very particular way. Like Freddie two years later, it was
endowed with the magical status of a government-sponsored enterprise, in other
words a state-held private enterprise. Held by private shareholders, of course,
but benefitting from a line of credit guaranteed by the Treasury - to reassure
investors - free from many of the obligations having to do with accounting and
caution. Yet still having the mission imposed by Washington, to ensure the
refinancing of real estate loans, notably for lower-income households. In a
word, to help every American realize his most cherished dream - that of owning
his own home.
Fannie and Freddie have done
their work with zeal and success, the amount of their loan portfolios going
from $740 billion in 1990 to $5.4 trillion today, a third of American GDP. With
great inventiveness, the two institutions have shown themselves to be pioneers
in field of securitization, a technique that consists of transforming bank
loans into bonds, and which helped contribute to spreading the subprime crisis
throughout the entire global financial system.
'Hurricane Lehman'
[Het Parool, The Netherlands]
This creativity also fostered
great opacity - Fannie Mae was found guilty on several occasions of accounting
manipulation - without the American political class ever growing concerned. How
could the White House and Congress be offended by practices that were certainly
clearly dubious, but by which they indirectly benefitted? How could they
denounce a system that in 10 years has permitted nine million Americans to
become homeowners, that is to say - produced nine million appreciative voters?
How could they attack a mechanism that seemed indefinitely capable of fueling
the rise of the real estate market, thus stimulating consumer spending and
growth?
If one adds to this the fact
that Freddie and Fannie earned about $70 million a year and, above all, that
the two institutions were the largest financial backers of the Republican and
Democratic parties, it all becomes clear. No one in Washington had any interest
in disrupting this political and financial collaboration that made so many
people happy. Until, of course, the real-estate bubble finally burst. Until the
market ended up taking its revenge on the State, which was obliged to pay a
heavy price (possibly several hundred billion dollars) for its incompetence.
Courriel : delhommais@lemonde.fr
CLICK HERE FOR FRENCH
VERSION
[Posted by WORLDMEETS.US
September 17, 1:59am]
