The Gaffe that Wasn't

The Huffington Post is gleefully reporting that Sarah Palin made her first gaffe. They point to what she said at Colorado Springs about Fannie Mae and Freddie Mac:

Gov. Sarah Palin made her first potentially major gaffe during her time on the national scene while discussing the developments of the perilous housing market this past weekend.

Speaking before voters in Colorado Springs, the Republican vice presidential nominee claimed that lending giants Fannie Mae and Freddie Mac had “gotten too big and too expensive to the taxpayers.” The companies, as McClatchy reported, “aren’t taxpayer funded but operate as private companies. The takeover may result in a taxpayer bailout during reorganization.”

Economists and analysts pounced on the misstatement, saying it demonstrated a lack of understanding about one of the key economic issues likely to face the next administration.

“You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do,” said Dean Baker, co-director of the Center for Economic and Policy Research. “These are huge institutions and they are absolutely central to our country’s mortgage debt. To not have a clue what they do doesn’t speak well for her, I’d say.”

Oh, please. In a nutshell Fannie Mae and Freddie Mac are not private companies in the real sense.

Added: I obviously have to include additional information for some folks. What do I mean when I say they are not private companies in the real sense? Who took the risk and put up the capital to create these companies? The US government. Who is ultimately responsible when it is mismanaged and driven into the ground? The US government.

A private company in the real sense is one that is created privately by someone willing to take the risk, put up the capital, and who doesn’t have the US government and, by extension, the US taxpayers as a safety net in case they need to be bailed out because of poor business decisions. You can insist that Freddie Mac and Fannie Mae are private institutions all you want, but in reality, the folks who ran them were in the end taking risks with taxpayer money.

Ok, back to the original post.

These two companies were created by the US government and are under the control of the US Department of Housing and Urban Development. In the investment/banking industry they are known as Government Sponsored Enterprises. So what is that? From HUD’s website:

Fannie Mae and Freddie Mac are the largest source of housing finance in the United States. Their Congressional charters require each corporation to achieve public purposes that include providing stability and liquidity in the secondary mortgage market, providing secondary market assistance relating to mortgages for low- and moderate-income families, and promoting access to mortgage credit throughout the Nation, including underserved areas.

In exchange for carrying out these public purposes, the GSEs are accorded various privileges that provide them with some benefits not available to other private corporations. These benefits include an exemption from state and local taxes (except property taxes) and conditional access to a $2.25 billion line of credit from the U.S. Treasury Department.

While the securities that the GSEs guarantee, and the debt instruments they issue, are explicitly not backed by the full faith and credit of the United States, such securities and instruments trade at yields only a few basis points over those of US Treasury securities with comparable terms, based on the belief of many investors that the Federal government would intervene if a GSE were to become insolvent. Consequently, the GSEs are able to fund their operations at lower costs than other private firms with similar financial characteristics.

In other words, the US government is the ultimate safety net, allowing Fannie Mae and Freddie Mac to issue all the loans they want to make all the money they want no matter how high the risk because the US government will be there to bail them out should they fall flat on their faces. And that is exactly what happened. No other private companies get that kind of help.

So, what does this all mean? Sarah Palin was absolutely right. Fannie Mae and Freddie Mac have grown too big for US taxpayers to bail out.

Michelle Malkin wrote about the Freddie Mac and Fannie Mae scheme four years ago and saw the writing on the wall back then. Head over to her site and read what she has to say. About Sarah Palin’s remarks, she says this:

Now, we are on the verge of bailing out these behemoths to the tune of $200 billion in taxpayer backing — while potentially forking over untold millions in severance packages to Democrat cronies.

That makes Palin in tune with reality — and her critics flailing once again.

Update: Fred Thompson writing in the September issue of Townhall magazine explains further:

Fannie and Fred were “government sponsored enterprises” which means heads they win, tails you lose. If they make money stockholders, creditors and Fannie and Freddie employees – some making millions annually – get the benefit. But now that mortgages have hit the skids, with mounting losses, the taxpayers potentially face trillions in exposure. This is because there is an “implicit” (read “actual”) government guarantee of Fannie and Freddie’s obligations and both are now too big to be allowed to fail. This is called the “bailout phase,” which will probably lead to a bigger bubble in the future.

Update II: Mike Huckabee is now on Cavuto and said that the CEO’s of Freddie and Fannie are going to make $15 million each in exit money. These people need to be investigated not rewarded.

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