Fannie Mac and Freddie Mae

Or is it the other way around? :-)

Anyway, someone asked me to do a post on the GSEs (government-sponsored enterprises), whose stocks have taken a huge beating in the past week. There's been talk of nationalizing the mega-companies, which - if their assets are as crappy as everyone fears - might increase the national debt by 60%. That in turn might spook the investors who currently buy massive amounts of U.S. treasury bonds (China, Russia, and the UAE), leading to a run on the dollar and the fiscal collapse of our government (see: Argentina, 1999).

How did we get here? As Paul Krugman points out, the GSEs replaced the Savings & Loans when the latter collapsed at the end of the 80s. The S&Ls made crappy mortgage loans; Fannie and Freddie, which were heavily regulated, largely made much better loans (none of the GSEs loans are subprime, for example).

A GSE is a dubious entity - a corporation with private shareholders and a government guarantee. Fannie and Freddie, to their credit, did what they were supposed to do, and didn't do a horrible job of it. But in the end, they acted like "off balance sheet" entities for the government - ways to conceal how much debt our government was really taking on. Now the butcher's bill has come due. We should bail Fannie and Freddie out if needed, but we should never create corporate Frankensteins like this again.