Two entities should be forced into transformation

By DAVID MOON, Moon Capital Management, LLC
December 12, 2010

The economy is still dangerously weak, yet Congress is spending its lame duck energy in games of procedural maneuvering. The President ought to use the same type of procedural maneuvers to address – and eventually kill – the two 800-pound gorillas sitting in the room.

Fannie Mae and Freddie Mac have done enough economic damage and must be stopped.

Congress elected not to address these government-sponsored black holes when it passed the massive financial overhaul bill in July. The cost of bailing out these two companies will be greater than the combined cost of TARP and the GM bailout.

Rather than wait on Congress, the President should simply instruct the Treasury Secretary to withhold his approval for any future Fannie Mae or Freddie Mac borrowing.

That will get their attention.

This approval process is a technical requirement before the agencies can borrow money, but has become perfunctory. Secretary Geithner can withhold his approval if he believes the financial condition of either entity can’t support the amount of money they propose to borrow.

That should be an easy call, even for a guy who can’t do his own taxes.

Now that the republicans are in charge of the House of Representatives, they are threatening to undo the 2010 health care financing act piece-by-piece by withholding funding for the parts that don’t suit them. President Obama can do the same thing to Fannie and Freddie. Starve them of capital.

Congress could have addressed this problem six months ago, but chose not to. Fannie and Freddie have continued to lose and borrow money like drunk gamblers since then.

President Obama can be a hero.

The housing markets around the country need to find their natural, equilibrium price levels. We can’t have real recovery – including lasting job growth – until we clear the excess housing inventory and allow buyers and sellers to freely set prices.

If Geithner begins to starve these entities, they will be forced to undergo radical needed transformation, as will the mortgage market and the balance sheets of thousands of Americans.

This would begin the long overdue process of re-privatizing the mortgage market. And the President could do it without asking Congress to revoke the charters of Fannie or Freddie. He could simply choke those well intentioned, corporate kudzu plants of their sole nutrient: capital.

There would be an outcry of protest from big banks and other loan originators who love the easy mortgage money that implicit and (now) explicit government backing affords. That should please the far left.

Private lenders will fill in the gap, but they may be more discriminating in their lending standards or pricing. Maybe. Maybe not. If not, they should suffer the consequences, not the US taxpayer.

Everyone in the housing industry will complain, but in the long run it is in their interest to rid the market of its current excess inventory. No industry can be its strongest when it is dependent on government financing. Ask the hospitals.

The current system of perpetually bailing out Fannie and Freddie has had the unintended consequence of perpetually postponing our economic recovery.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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