What Ginnie Mae can teach us about Fannie Mae and Freddie Mac

With all the media attention given to the government bail-out of “privatized� Fannie Mae and Freddie Mac, you would think that some mention might be made of the third of these giant mortgage investment enterprises, Ginnie Mae.

All three began life as government-sponsored enterprises, intended to help borrowers obtain housing mortgages. Two of them, Fannie Mae and Freddie Mac, were “privatized,� that is, turned over to largely unregulated “free� market forces, and both have gone broke, belly up. Meanwhile, Ginnie Mae (the Government National Mortgage Association) remained government-owned, and appears to be doing just fine. How come? Let’s compare.

Fannie and Freddie are working examples of the Reaganomic view that unregulated “free� market, private and corporate enterprise is the the best arbiter of the public good. If you just wait long enough, the benefits of deregulated capitalism will trickle down to all. This is the ideology that has dominated U.S. economic and political thought and practice for the last quarter century, reaching its zenith under the current Bush administration.

The turning point between responsibility and “deregulation� came with the repeal of the New Deal-era Glass Steagall Act, which, as columnist Bill Greider has put it, “prevented commercial banks from commingling business with investment banks — a combination that was a source of incestuous self-dealing and fraudulent stock valuations that led directly to the Crash of 1929 and the Great Depression of the 1930s.�

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So, here we have the example of “privatized� Fannie Mae and Freddie Mac. Clearly, they overextended and over-leveraged themselves. They engaged in practices and developed and traded in derivatives and other instruments of such complexity and obscurity that they themselves couldn’t understand and keep track of what they were doing. They took extreme and self-serving investment positions. They purveyed false valuations. For lack of sufficient regulation or supervisory oversight, they failed to provide transparent, accurate or meaningful financial reporting. They puffed up the bubble, and then blew it.

As incentive reward for all this work, the top executives at Fannie Mae and Freddie Mac have been paying themselves unconscionably high six-figure annual salaries. They gave themselves all manner of perks, in the high style of the other big boys in private banking and finance. Doing so well, they gave themselves over $ 90 million in bonuses. For what? Being socially minded, they gave themselves full medical insurance and generous pensions. They gave each other seemingly luscious stock options (now valueless). And why shouldn’t they? Isn’t this the way of private enterprise? Doesn’t this accord with the philosophy of self-help?

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By contrast, we have Ginnie Mae, which has remained government-owned and solvent all these years, while doing its job of providing safe guarantees on mortgage-backed securities, thus helping homeowners to get mortgages, banks to issue them and investors to safely finance them. Ginnie Mae issues bonds and securities but doesn’t take a position in them. No self-dealing. The fundamental idea is service, not profit. Ginnie Mae is well-regulated and well-managed. Their accounts are publicly available, transparent and accurate. Officers at Ginnie Mae are reasonably remunerated, honest and accountable. The result? Ginnie Mae is operating “in the black.�

Ginnie Mae teaches us something. Ginnie is a working example of the alternative view that responsible, democratic government is a social compact for cooperation to help serve the rights, needs and security of the American people. We need to stop and think about this. When it comes to broad issues of the public good, such as public education, health insurance, public transportation and basic infrastructure benefiting all, the deregulated “free� market model cannot be the sole answer. We need responsible, engaged government. Sure, there is an important role for private industry and investment, but the moral is clear: there must also be reasonable regulation, cooperation and accountability. That’s what good government can ensure.

The short term solution (or “fix�) for Fannie Mae and Freddie Mac is for government to take them over and bail them out. In short, we appear to agree to “privatize� profit and “socialize� loss. But that cannot be a viable long-term strategy for America. Notwithstanding the current hoopla of presidential campaign politics and personalities, finding the right long-term balance between the private and public good is what the November 2008 elections are largely all about. So while much is said about Fannie and Freddie, let’s not forget the lesson of Ginnie Mae.

Sharon resident Anthony Piel is a former director and legal counsel of the World Health Organization.