As Fannie Mae and Freddie Mac flounder around on the verge of collapse, who do they turn to as the lender of last resort?
Why, the American taxpayer, of course.
At the beginning of his administration, President Bush made it clear that the government would not provide guarantees against the risk associated with these companies’ activities. The firms’ leaders balked as this because, after all, they had the sweetest of sweetheart deals going. They would share in millions of dollars in executive options and bonuses if things went well, while shouldering none of the risk if things went badly. After all, the government would never let the nation’s largest mortgage lenders fail.
To these guys, making money at Fannie and Freddie seemed almost as easy as shooting fish in a barrel. Only now is the picture becoming clear. The massive risks that these corporations shouldered, including accounting irregularities used to overstate profits (and thus increase executive compensation), are now coming back to haunt these institutions and compound the crisis facing the U.S. mortgage industry.
Corporations that traditionally acted much more conservatively than private institutions, Fannie and Freddie were once the bulwark’s of the mortgage lending system. Now they stand as stark examples of greed run amok.
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