Lawrence Lindsey, former advisor to the U.S. president for economic policy, either read the 700 pages of the Fannie-Freddie bailout or had a staff person do it – more than any member of Congress has done, he suspects.
In the Wall Street Journal he offers a devastating critique of what happens when Congress has its way. The mortgage agencies have provided nice employment for ex-Capital Hill residents, and they have showered money on housing nonprofits across many Congressional districts. Their good work shows in the recently passed housing bill which allows them to continue to pay dividends to shareholders even while taking injections of capital from the government. They become a pass through.”Congress chose to protect the shareholder at the expense of the taxpayer.” Moral hazard, anyone?
Second, notes Lindsey, the government left the shareholder the sole beneficiary of the upside. In the Chrysler bailout, the government received warrants which it cashed out for $300 million when the company recovered. Chrysler did make an effort to talk the government into returning the warrants, but it lost. Another detail of the bailout – the government made Chrysler chief exec Lee Iacocca give up his jet, which he absolutely hated to do. No indication that Fannie and Freddie execs have had to trim their lavish ways. As another commentator noted, they could be run by civil servants and civil servant pay…

For a country that claims to be free market, the folks in Washington just hate to let the markets operate without their wise guidance. So the new bill bans risk-based pricing and sets down payments at 3.5 percent of the mortgage. Ah, what Washington has learned about risk!
“If any other country announced that its finance minister could print unlimited debt to do something similar, financial markets would dump both the country’s debt and the country’s currency.”
Makes Northern Rock look like a walk in the park.

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