Rich Lowry

"Unlike many well-capitalized savings and loans and commercial banks," Alan Greenspan warned in 2004, "Fannie and Freddie have chosen not to manage that risk by holding greater capital." Why would they, if Uncle Sam is underwriting them? Fannie and Freddie kept Congress from limiting their expansion and from tightening their capital requirements. Instead, Fannie and Freddie have been recklessly undercapitalized at debt-to-equity ratios of 20-1 or more, when Bank of America and J.P. Morgan are at roughly 4-1.

When a market loss of confidence plunged Fannie and Freddie toward the abyss, Treasury Secretary Henry Paulson made the implicit federal guarantee explicit. The feds had no choice, lest Fannie and Freddie take down the financial markets with them. But, incredibly, Congress wants to pony up the tax dollars without asking for major reform.

The usual Democratic horsemen of regulation -- Sen. Chris Dodd (the top recipient of Fannie and Freddie contributions since 1989), Sen. Chuck Schumer, and Rep. Barney Frank -- are Fannie and Freddie apologists. That's not surprising. If the institutions are bipartisan influence-buyers, they have had a Democratic coloration. Former Walter Mondale aide Jim Johnson headed Fannie during the Clinton years, and was replaced by former Clinton OMB director Franklin Raines.

Breaking up a political cash cow is hard to do. But ultimately Fannie and Freddie should be put in federal receivership, busted up and sold off. It's an experiment in crony capitalism that has failed. Even Nicholas Biddle lost his battle to save his bank so long ago. Fannie and Freddie may, unfortunately, prove a more enduring lesson in how to win friends in Washington.

Rich Lowry

Rich Lowry is author of Legacy: Paying the Price for the Clinton Years .
TOWNHALL DAILY: Be the first to read Rich Lowry's column. Sign up today and receive daily lineup delivered each morning to your inbox.