How to destroy an industry
By: Fred Johnson; Columnist
Our nation was founded on the free enterprise system where government governed and did not own businesses. This lasted for almost two centuries until Congress set up Freddy Mae and Fannie as stockholder owned corporations to provide a secondary market for home mortgages. They were not really independent corporations.
The government gave them a $2.25 billion line of credit from the U.S. Treasury; exemption from SEC registration requirements and exemption from most state and local taxes. The system worked well at first. Fannie Mae and Freddy Mac purchased home mortgage loans from mortgage companies and banks and resold them as mortgage bonds to willing buyers. The government line of credit made these bonds a AAA rating.
However, Congress could not pass up a chance for social engineering and, in 1989, Congress gave the Department of Housing and Urban Development regulation authority over Fanny Mae and Freddy Mac. HUD proclaimed that the mortgage companies were not doing enough for low-income families and asked for annual performance goals.
This was the birth of subprime loans. Mortgage lenders were told to lower their standards and give mortgages to people with lower credit ratings. This fueled a boom in the housing market. Builders built homes as fast as they could, mortgage lenders loaned money as fast as they could and Fannie Mae purchased the mortgages.
The only problem was that subprime mortgages did not have an AAA rating. So insurance companies such as AIG began insuring those subprime mortgages, which transformed them into high quality AAA rated bonds.
These bonds were snapped up by banks, pension funds and 401K plans both in the U.S. and abroad. Everything worked great for a few years as home prices kept rising and foreclosed homes could be resold at a profit.
But then the housing bubble burst, home prices fell and foreclosures rose. AIG found that they did not have enough assets to pay the holders for losses in those insured AAA rated bonds. So the government used TARP money to make good those loans. So far, the taxpayers have put in $160 billion and now own 80 percent of AIG. Congress would like you to believe that it was incompetence and greed that caused AIG’s problems. But it could be said that much of the blame falls on Congress when they tried to use Fannie Mae to solve social problems. The case can be made that it was government interference and tampering with the free enterprise system and not the lack of government regulation that caused the housing bubble. Now sadly, the government not only owns Fannie Mae, they own most of AIG.
They are not doing a very good job of managing AIG as evidenced by the circus going on in Congress right now. Congress is micromanaging the companies that receive TARP money; dictating salary caps, bonus caps, monitoring the menus at corporate hospitality rooms, threatening companies with subpoenas and threatening a 90 percent tax on certain AIG executives. They seem to have been successful in making AIG the villain instead of their own incompetence. Meanwhile, the housing meltdown now threatens our entire economy. It seems that our founding fathers were wise in keeping the government out of businesses.
Fred Johnson is a member of the Morgan County Republican Party.
Printed in the January 26, 2009 edition.