Obama on Fannie & Freddie: No More Portfolio Trading?

Posted by: Jane Sasseen on September 17

If he were elected President, would Democratic contender Barack Obama support allowing Fannie Mae and Freddie Mac to continue buying mortgage-backed securities for their own portfolios when they emerge from under the government’s wing? The eventual status of the two mortgage giants, and the extent to which they will continue to have a hybrid public-private role, has already become a source of big debate. While John McCain, like many conservatives, argues that investing for their own account is what’s gotten them in trouble and should no longer be allowed, Obama has been less clear; until now, he has essentially said their future structure and functions should be studied closely without offering up many specifics on this key question. But in the economic policy speech he gave in Golden Colorado on Tuesday, Sept. 16th, Obama appears to be moving towards taking a firmer stance against such investments.

Here's the passage from his speech in which Obama discusses Fannie and Freddie's future:

Going forward, we need to replace Fannie Mae and Freddie Mac as we know them with a structure that is focused on helping people buy homes – not engaging in market speculation. We can’t have a situation like the old S&L scandal where its “heads” investors win, and “tails” taxpayers lose. That’s going to take ending the lobbyist-driven dominance of these institutions that we’ve seen for far too long in Washington

The key passage here is the idea that the new structure should focus on helping people buy homes, not engage in market speculation. There's only one place where the mortgage giants have been able to engage in anything resembling "market speculation": in the giant portfolios they hold in which they trade for their own accounts. Those portfolios allowed the mortgage giants to use taxpayer-subsidized funding to generate huge profits for many years. But both goosed returns by loading up on sub-prime mortgage securities; while that was extremely lucrative for management and shareholders alike, the declining values on those securities over the last year are a big reason the pair are now essentially insolvent.

It wouldn't be extremely surprising if Obama took a stance against allowing them to maintain active investment portfolios. Former Treasury Secretary Larry Summers, who is now advising Obama, has warned of the potential risks at Fannie and Freddie for years, and he made clear in an interview with BusinessWeek last week that such he doesn't think such trading is a good idea.

But forcing the mortgage giants to give up their portfolios is also politically sensitive, since leading Democrats like Rep. Barney Frank, (D. Mass) the powerful chairman of the House Financial Services Committee, have fought past attempts to whittle them back. He and others have argued that the profits earned by Fannie and Freddie on such trading helps provide the funds that allow them to meet their public mission of providing affordable housing for low-income Americans.

There's little doubt that however Fannie and Freddie eventually emerge, such trading will be cut back considerably. The real question is whether they will be allowed to continue to trade for their own portfolios at all. With his Colorado speech, Obama appears to be edging closer to saying no.

Reader Comments

ODIGWE VINCENT

September 18, 2008 01:31 PM

Fredemac and Fannie are passing through trying moment of their existence and by special Grace of God they will rise again and become stronger companies than ever before.

Mel

September 18, 2008 01:58 PM

Obama and the Democrats cannot be trusted on this issue. Both have received huge contributions from Fannie & Freddie. Both have sought to protect Fannie & Freddie from scrutiny. Both have forced banks and lending institutions to lend money to those who were not qualified by imposing laws and the threat of litigation.

I am sick of congress in general. These politicians are out of control!

Steve

September 18, 2008 02:36 PM

I am not surprised about Barney Frank. He is one of the largest recipients of campaign contributions from Fannie Mae and Freddie Mac. Also, Obama is the second largest recipient of campaign contributions from these two institutions.

Brian

September 18, 2008 03:28 PM

Obama is a recipient of EMPLOYEES of these companies. He does not accept money from them in the form of lobbying.

They are not one in the same. When I donated to him, I had to disclose the company I work for. Just because I back him does not mean that my company has the same viewpoints.

Bob

September 18, 2008 03:33 PM

Both these companies (and their shareholders) are primarily victims of the recklessness of others, many of whom were out to destroy the GSE model. Half of their credit losses are in their prime portfolios and the other half are in their "Alt A" portfolio which constitutes only 10% of their holdings. They bought sub-prime mortgages onlyto meet their obligations to finance houses for low and moderate income people. Both political parties contributed to this fiasco and now they say the shareholders are to blame?

We've destroyed a model that has worked pretty well for a long time but was shown, that in the 100 year storm, it needed a bit more capital. So, instead of helping these companies live for another day when capital could be added to the model, we put a bullet in them. Sadly, we did this before creating a more viable alternative.

harriet

September 18, 2008 04:05 PM

Not true on Barney Frank or Obama.
John McCain's campaign manager served as president of a lobbying association who fought to protect FM and FM from similar regulation that McCain NOW proposes. Also read about Andrew McCain, who now serves as CFO at Hensley and Company...

Peter L.

September 19, 2008 09:53 AM

This is typical political hypocrisy. Obama is complaining about how Fannie and Freddie's lobbyists are running Washington, but guess what: Obama ranks #3 on the list of Senators taking cash from Fannie and Freddie! Don't take my word for it, go to http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html and see for yourself.

janalee

September 22, 2008 02:55 AM

Obama has dirty money on his hands. Of course he didn't vote to regulate them as he was bought out. He is OLD politics and tries to portray himself as something new? Yeah right. A vote for him will send us spiraling into a the worst great depression!

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Election 2008

Washington Bureau Chief Jane Sasseen and other BusinessWeek writers cover the run-up to the Nov. 4 presidential election, paying close attention to how the candidates will handle issues such as housing, the economy, unemployment, and immigration.

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