Federal Judiciary

The GSEs Are Dead. Long Live the GSEs!

‘I feel like Marc Antony presiding over Caesar's funeral,' said Lewis Ranieri. The financier, a legend on Wall Street for practically inventing mortgage securitization, was made even more famous in Michael Lewis's Liar's Poker. Now he was addressing a room full of housing-industry officials at the Treasury Department. The subject of the conference? The future of housing finance, broadly speaking, in a post?Fannie Mae and Freddie Mac world.

Antony came to bury Caesar, not to praise him, but the GSEs (government-sponsored enterprises), as Fannie and Freddie are known, aren't dead yet. They are on taxpayer-financed life support, with an unlimited line of credit at the Treasury. The conference had the feel of 'an elegant funeral for Fannie and Freddie,' a phrase that Rep. Barney Frank (D., Mass.) originated and Treasury Secretary Timothy Geithner employed (so are they all honorable men). What is important, Geithner said, is that reform be about more than just designing a funeral: 'It requires a broader reassessment of how much support the government should provide for housing finance.'

#ad#The consensus at the conference? The government should provide quite a lot of support for housing finance. The panels were stacked with people who shared a broad conception of the government's role in the housing market, from industry players who enjoy making profits backed by government guarantees to 'affordable housing' advocates who fear that government subsidies for high-risk lending might disappear in the wake of the crisis.

At the same time, all the panelists were mindful not to sound too supportive of the GSEs, which have cost taxpayers $150 billion and counting. Even Ranieri -- who analogized himself to the man who stealthily turned the crowd against the fallen tyrant's assassins -- made sure to stress that Fannie and Freddie 'permitted what they were meant to prevent.'

Geithner took an even tougher-sounding line: 'We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.' And yet: 'I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing stability in access to mortgages, even in future downturns.'

This phrase 'carefully designed' popped up again and again throughout the conference, as one speaker after another denounced Fannie and Freddie in the strongest terms, only to follow this condemnation with a solemn warning that the government must not let the GSEs' irresponsible behavior give a bad name to the service they were designed to provide, namely, a subsidy for moderate-to-low-income homebuyers made possible by the implicit government backing the GSEs enjoyed. Speaker after speaker stressed that some more 'carefully designed' government program must take the place of the GSEs in providing this subsidy -- as if the government planners behind Fannie and Freddie had set out to create a sloppily designed mortgage subsidy.

#page#Only a few participants in the conference had the temerity to note that the design flaw is intrinsic to the subsidy. AEI's Alex Pollock was chosen to be the token conservative on a panel of industry special-pleaders such as PIMCO's Bill Gross and liberal activists such as the Urban League's Marc Morial. Pollock, to his credit, gave as good as he got. Pollock's three-step plan for the future of housing finance? 1) Counter-cyclical lending standards, which would actually work to tighten credit risks as speculative bubbles started to form. 2) The reprivatization of mortgage securitization. Contrary to the claims of Bill Gross, the mortgage-bond trader who claimed that private investors would not step in to replace the GSEs in the secondary mortgage market, Pollock noted that the private sector was heavily involved in this market before the financial crisis and would probably return if there was money to be made. That means 3) No more GSEs.

Pollock found few takers for his plan, which was odd considering how many conference participants were eager to declare the GSEs already dead. Later, during one of the breakout sessions, it became clear that, while these specific GSEs are dead, the idea of government-guaranteed mortgage lending is going to be with us for a long time. Numerous participants from the private sector and academia voiced support for some sort of combined mega-GSE that would concentrate the government's mortgage activities into one entity. The classic Washington game of reshuffling the bureaucracies has not worn out its usefulness as a solution for keeping useless agencies alive.

#ad#Why can't Fannie and Freddie be put out of our misery? The answer lies in the horror with which conference participants reacted to the idea of a private secondary market of the kind Pollack suggested. Private investors would get involved in such a market only if lending standards were much tighter than they were during the boom -- and the problem is that the community advocates already think standards have gotten too tight in the wake of the bust. Several participants called the idea of robust down payments 'extremely disturbing.' We have to find the right trade-off, they said, between tightening lending standards and making sure that home ownership is affordable, and if the private sector is unwilling to make cheap credit available to poor credit risks -- well, in their view, that's government's job. All the Obama-administration officials in the room nodded solemnly in agreement.

The GSEs are dead. Long live the GSEs!

-- Stephen Spruiell is an NRO staff reporter.

Full post as published by Bench Memos - National Review Online on August 18, 2010 (boomark / email).