As Fred Smith, president of the Washington, D.C-based Competitive Enterprise Institute, has noted, these financial beasts are a textbook example of "profit-side capitalism and loss-side socialism." When things go right for Freddie Mac and Fannie Mae, they keep the profits. But when things go wrong, taxpayers -- not just private shareholders, managers, and employees -- will be on the hook.
Freddie Mac and Fannie Mae each receive $2.25 billion lines of credit with the U.S. Treasury. These special pipelines give the institutions an implied federal guarantee available to no other private sector competitors in the mortgage market. That protection makes them immune to the costs normally associated with riskier and riskier behavior. Moreover, Fannie Mae and Freddie Mac are not required to pay state and local income taxes. In addition, the standard for how much money the government requires them to keep on hand in case homebuyers default on their mortgages is lower for Freddie Mac and Fannie Mae than for fully private banks and thrifts. The two corporations receive an estimated $10 billion a year in hidden taxpayer subsidies.
Political appointees to the companies' boards pocket millions in stock options to bolster support on Capitol Hill. Clinton-appointed board members at Fannie Mae include Marc Rich lawyer Jack Quinn and Janet Reno's lieutenant at the Justice Department, Jamie Gorelick. At the helm of Fannie Mae is another Clinton appointee, Franklin Raines, who was paid more than $4 million and had almost $6 million in unexercised stock options in his first year at the helm. Cheerleaders in both major political parties have opposed privatizing Fannie and Freddie.
If Martha Stewart is the face of capitalist excess, Fannie Mae and Freddie Mac are the poster children for government-sponsored gluttony. The potential fall of Freddie Mac or Fannie Mae could rival the savings and loan collapse of the 1980s. Too bad the Martha bashers, blind to the far greater catastrophes of market socialism, won't pay attention until it's too late.