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“Crony capitalism”–and a Jamie Gorelick update

By Michelle Malkin  •  July 15, 2008 09:08 AM

Three Fannie/Freddie-related items for you:

The Foundry takes a look at the left’s crony capitalism.

“Profit-side capitalism and loss-side socialism”, as CEI’s Fred Smith put it, is more accurate.

Jim Lindgren pokes around to find out what Fannie corruptocrat Jamie Gorelick has been up to lately. You won’t be surprised.

The WSJ looks at the way forward with Fannie/Freddie:

The Treasury Secretary wants Congress to give the government more power to rein in the companies, including with a preferred stock capital injection if required. This is progress, but it’s not aggressive enough given the risks. He could make more progress more rapidly toward a safer financial system by putting the companies into federal receivership. If current law doesn’t give Treasury that power – and we hear conflicting legal claims – Mr. Paulson should seek it from Congress.

The Secretary could then appoint a prominent financial figure with bipartisan credibility as a receivership czar, with a mission to protect taxpayer interests. A czar would have the power to replace Fan and Fred’s management and directors, as well as give priority to taxpayers above the current private shareholders if the government does inject capital.

It’s true that this might well require a larger up-front taxpayer contribution. But after Sunday, the taxpayers know they are on the hook for big losses in any case. Putting the companies in federal receivership would insulate them from a political class that has shown itself unable or unwilling to control their risks. Without such a move, the companies could easily use the taxpayer cash as protection in the short run, emerging both larger and more dangerous. Mr. Paulson will have been stripped naked twice.

Receivership doesn’t mean the companies will fold up overnight. They continue to hold trillions of dollars in mortgage assets, and they would continue to buy and package mortgages. But as a first priority, a receiver would be able to rein in their portfolios of mortgage-backed securities (about $1.5 trillion now) that are a major source of their risk. Down the road, as the mortgage crisis eases, the receiver could decide whether to wind the companies down, sell them in parts to the private sector, or let them continue in far more restricted form.

Keep in mind that these semisocialist giants (private profit, public risk) were founded in an era when mortgages were sold and held by the same lender. The idea was that Fannie and Freddie, by buying and packaging those loans, could supply more liquidity to the mortgage market. Whether or not that taxpayer risk was worth it at the time, it clearly isn’t now that the bill is coming due and private companies can do the same thing.

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