Nationalizing Two of America’s Biggest Companies
By Youssef Talaat
On September 7, 2008, The United States federal government decided to take over mortgage giants Freddie Mac and Fannie Mae as a result of their financial distress. The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, more commonly known as Freddie Mac and Fannie Mae, are stockholder-owned corporations that are authorized to make loans and loan guarantees. Their primary function is to buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. Freddie Mac and Fannie Mae own or guarantee the majority of the nation’s $12 trillion home loan market which is why these companies suffered the most as a result of the housing market downturn and the credit crunch that started in 2007.
On September 7, 2008, The United States federal government decided to take over mortgage giants Freddie Mac and Fannie Mae as a result of their financial distress. The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, more commonly known as Freddie Mac and Fannie Mae, are stockholder-owned corporations that are authorized to make loans and loan guarantees. Their primary function is to buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. Freddie Mac and Fannie Mae own or guarantee the majority of the nation’s $12 trillion home loan market which is why these companies suffered the most as a result of the housing market downturn and the credit crunch that started in 2007.
As government-sponsored companies, the mortgage giants did not just dominate the nation’s home loan market; they were also masters of influence in Washington. The companies’ operations ranged from campaign contributions and outright lobbying to a charitable giving operation that covered nearly every congressional district in the United States. “They were the most powerful companies in the country, and literally controlled the Congress,” said Peter Wallison, a senior fellow at the American Enterprise Institute. “Congress would not do anything they did not want Congress to do- and that came through some very sophisticated political activities and public relations that made it very difficult to challenge them”. Minorities and opposing companies had trouble contradicting these giants, as they could not pass a law or bill in congress that did not favor Mac or Mae.
The top executives at Freddie Mac and Fannie Mae will both lose their jobs as part of the government bailout, but they may also both receive multimillion dollar compensation packages. Rewards for the CEO's of these companies still remain undecided, as there is still a lot of controversy as to whether these people should be rewarded for bringing down two of the nation's biggest entities. Senator and Presidential Candidate, Barack Obama, has commented on the matter and said, “It would be unacceptable for executives of these institutions to earn a windfall at a time when the U.S. Treasury has taken unprecedented steps to rescue these companies with taxpayer resources.” People should be rewarded when they achieve a task or goal; these leaders lead these companies, just in the wrong direction. The downfall of these businesses was the result of a very bad mix, the mix of business and politics, which eventually leads to corruption.
The real question is, however, whether an action such as this conforms to the American values of freedom and liberalization. A market economy is an economy characterized by freely determined prices and the free exchange of goods and services in markets along with limited government intervention. Is the takeover of Freddie Mac and Fannie Mae an example of limited government intervention in order to address a market failure, or is the United States headed towards a mixed economy in which the government plays a larger role? One thing everyone can agree on is that this takeover is one of the largest government interventions in private financial markets in decades.
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