The WSJ, Fannie, and Freddie

The Wall Street Journal editorial page, having called in January of 2008 for Treasury Secretary Paulson to name a "czar" who "would have the power to replace Fan and Fred's management and directors, as well as give priority to taxpayers above the current private shareholders if the government does inject capital," now complains that under government conservatorship the housing finance institutions are losing too much money. The Journal tries to cover itself by saying that what it wanted back in 2008 was a "receivership," not the "conservatorship" established by Mr. Paulson, but it's an awfully fine distinction. When the conservatorship was established in September of 2008, the Journal editorial cheered: "this time Mr. Paulson has at least demanded something in return for his blank taxpayer check." The Journal's big complaint then was, "We only wish Mr. Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure. ...the current common and preferred holders deserve to lose everything." The Journal has another really wonderful editorial this morning defending property rights against eminent domain seizure in the Kelo v. City of New London Supreme Court case, but when it came to the Fannie Mae shareholders, the Journal displayed about as little respect for private property rights as the City of New London did. As least in a privately owned company, the losses are the responsibility of the private owners (or should be.) Now that Mr. Paulson followed the Journal's advice and put the government in charge at Fannie and Freddie, the taxpayers are on the hook for the losses. Meanwhile, far-sighted fund managers are snapping up residential mortgage-backed securities at steep discounts, preparing for a windfall in an eventual recovery. A similar self-correcting free-market dynamic might have taken place at Fannie and Freddie, but instead, the government stepped in. The Journal is a giant, great voice for freedom and capitalism and it did some fine work warning of accounting problems at Fannie and Freddie. One can understand the paper's concern with the existence of an implicit federal guarantee for Fannie and Freddie debt. But a lot of the anti-Fannie and anti-Freddie fervor was driven by Wall Street banks who didn't like the competition and yet, when it came down to it, had government guarantees of their own. Some of the rest of it was driven by funds shorting the stock. Those funds did pretty well, while taxpayers are now stuck with the bill. What today's Journal editorial is acknowledging, in so many words, is that taking Fannie and Freddie out of private hands and putting it under government control hasn't worked out so well. There were those who warned at the time that it was a bad idea.