Fannie& Freddie: More Than Politics As Usual

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Last week, just before Christmas, the Obama Administration quietly increased the amount of losses it would cover at Fannie Mae and Freddie Mac -- the two Federally-chartered (and now controlled) securitizers of home mortgages -- from a combined $400 billion to infinity. I'm going to look at this move in two parts, first considering the political considerations then the economic ones.

"All politics is local, " said the late Tip O'Neill when he was Speaker of the House. If Tip was right, and it is easy to argue that he was, then there is a local political basis for this action by the Obama Administration. Political pundits (the worst kind) are tending to see it as a shifty move by the President against Congress, but I tend to see it as a shifty move by the President for Congress -- at least for Democrats in the House and Senate.

The original Bush-era deal to take Fannie and Freddie under conservatorship allowed the White House to modify the deal without further Congressional approval until the end of 2009. So this week, expanding the amount of losses covered by the Feds requires nothing but a signature. Next week, it would require literally an Act of Congress.

So did Obama sneak one past the Congress, thus avoiding a withering debate by the Republican minority? Not really. What Obama did was take one for the team by increasing the bad debt coverage without requiring his Democrats to vote for it or even speak up in defense of the action. In fact, we can probably look for at least some Democratic dissent in the aftermath of this action, which I'll chalk up to Congressional ass-covering.

If you are a moderate Democrat this might be a great time to criticize a necessary action that you can't really do anything about, all with the 2010 Congressional elections in mind.

The 2010 elections are at the heart of this. Putting the bad news as early as possible also puts it as far as possible from the election. Keeping it out of Congress and in the Executive Branch (which isn't up for re-election) might save a few seats.

But wait a minute! Did I write that this was a "necessary action?"

Yes.

As of a week ago, Fannie and Freddie had used only 26 percent of the funds allocated by Congress to cover such losses. With $289 billion still available and the economy improving, how could they possibly need more than that?

The spin we'll get on this, if the topic comes up at all, is that the increase is symbolic, that it effectively puts the "full faith and credit of the United States" behind these securities -- which is what the Chinese and the Saudis thought was the case all along but really wasn't. Now it is, end of discussion.

Except it won't be the end, because all Hell is about to break loose in the mortgage market during 2010. Details will follow in my next post.