The government bailed out mortgage giants Fannie Mae and Freddie Mac yesterday, belying dozens of Fannie and Freddie executives who said year after year that such a thing would never - could never - happen.
"The U.S. government does not guarantee, directly or indirectly, our securities or other obligations," Fannie said in its last annual report. "We are a stockholder-owned organization, and our business is self-sustaining and funded exclusively with private capital."
The companies are about to receive what we can conservatively estimate will be tens of billions in taxpayer dollars. That's not private capital.
But whatever the total bill, however maddening it may be to lose again in Wall Street's "heads I win, tails taxpayers lose" version of capitalism, the price is worth it.
The cost of doing nothing would have been higher.
Yesterday, Treasury Secretary Henry M. Paulson Jr. announced a plan to replace Fannie's and Freddie's leadership and inject unlimited amounts of government cash to keep them above water.
Washington will take large ownership stakes in the companies, lend them money and also start buying Fannie and Freddie mortgage bonds trading in the open market.
The rescue should lower mortgage interest rates and rekindle the courage of the home buyers and home sellers who make the whole thing work. The government's effective new role as national mortgage lender may - may - finally slow the dangerous spiral of defaults, declining home prices and dwindling home sales.
Together Fannie and Freddie guarantee mortgages worth $5 trillion, an amount bigger than every economy in the world except that of the United States.
One way or another, they must reimburse nearly half of U.S. mortgage holders in the event homeowners don't pay. As mortgage losses depleted Fannie's and Freddie's reserves in recent months, their ability to do so eroded and soon would have disappeared.
That would have been catastrophic.
Investors everywhere own Fannie- and Freddie-backed mortgages. China alone holds more than $300 billion worth. You're probably a Fannie- and Freddie-guaranteed lender if you're part of a pension plan or have bonds in your 401(k) plan.
Default would trigger a diplomatic crisis and a worldwide bond-market plunge. "Conservative" mutual funds would get creamed. The dollar would crash. Banks would go under, requiring bailouts from the Federal Deposit Insurance Corp.
