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Why Unlimited Help for Fannie and Freddie?

December 29, 2009 – Comments (2) | RELATED TICKERS: FMCC , FNMA

December 29, 2009 01:59 PM EST by Elizabeth MacDonald

Submarined in an "update" on the "status" of Fannie Mae (FNM) and Freddie Mac (FRE), the White House quietly announced on Christmas Eve that, instead of just pumping in hundreds of billions of dollars, its support for the GSEs' damaged Hindenburg-sized balance sheets would be unlimited for the next three years.

Yes, unlimited.

But what is behind this drastic move to uncap the Treasury’s credit pipeline for Fannie and Freddie, since the two have been in full implosion mode for a year and a half?

Is the government quietly planning to force these two invalids, permanently stuck in the government’s emergency room, to take on rotting mortgage loans?

That would present a sea-change in policy, even though it’s in the bylaws of Fannie and Freddie to take on sour loans in extreme circumstances. Fannie and Freddie were placed into conservatorship in the early fall of 2008 and are now hostage to the government's every crisis move.

The dramatic shift would come as the Obama administration is putting off any effort at reforming Fannie and Freddie, and at a time when pay czar Ken Feinberg has no jurisdiction over the two companies, both of which just agreed to pay their top executives up to $6 million in compensation for 2009.

If this drastic move is made, the U.S. government would push the poisonous swamp of moral hazard beyond the tipping point. It would show it’s willing and able to not just explicitly back the biggest bailouts in the history of the country, but also continue to give support to the worst, most irresponsible crop of borrowers taxpayers have ever endured.

The government-dependent enterprises have already cost taxpayers $110 billion in losses, they’ve already drawn down $111 billion from the Treasury, and both admit in SEC filings that they will continue to bleed money for some time to come in order to prop up the Administration's effort to revivify the U.S. economy by supporting home buying.

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