Daily News

By FLOYD NORRIS
The New York Times
Published: Sep 08, 2008

No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.

— Matthew 6:24

Fannie Mae and Freddie Mac were intended to serve at least two masters — the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The government tried to navigate a narrow line, aimed at allowing Fannie and Freddie, as government-sponsored enterprises, to borrow at low interest rates through implicit government backing, while publicly criticizing what the Treasury Department earlier this year called “the financial markets’ misperception that G.S.E.’s are backed by the federal government.”

Now, with its rescue plan, the government hopes that perception will return to financial markets that have grown dubious.

Remarkably, the country that prides itself on being the beacon of free enterprise finds itself with a financial system that needs government money to finance the most important asset most Americans will ever own.

There have been bailouts before, but none that seemed more crucial than that of Fannie and Freddie. The housing boom and bust have left them virtually the only sources of large amounts of money for home loans in the country.

The steps announced Sunday stop just short of full nationalization of Fannie and Freddie. The companies’ common and preferred shares will remain outstanding, but will be junior to new preferred shares that the government will receive.

The Treasury will get $1 billion in preferred shares in each institution — and with it $100 million a year in dividends — and can get a 79.9 percent stake in each company, without putting up any money. The existing common and preferred shares are unlikely to have much if any value for a long period of time, if ever.

The government has tried before to restore faith in Fannie and Freddie, but the passage in July of the law that made the actions on Sunday possible did not have the desired effect.  (more…)

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