Making Housing Sane Again
If you think most equity investors have been in an ebullient mood since Election Day, consider the euphoric owners of Fannie Mae and Freddie Mac. With both stocks soaring more than 130% since Nov. 8, Fan and Fred shareholders are ready to do the Juju on That Beat in the middle of Wall Street. The Trump Administration needs to shut down this block party before it gets out of hand.
The cause for revelry is the expectation that Treasury secretary nominee Steve Mnuchin is going to revive the Beltway model of public risk and private reward. When the Senate Finance Committee hosts his confirmation hearing, likely soon after Inauguration Day, lawmakers should extract a promise that he won’t.
Fan and Fred’s owners feasted for decades on implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.