WaPo is asserting [1] that Fannie’s and Freddie’s capital may or may not have been sufficient when they were taken over. Well, this [2] should clear up the ambiguity ;)

FHFA’s management is beginning to look more like Love Canal than a conservatorship.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
…

“For now, they’re under conservatorship and they have to be used to keep the flow of capital going to the housing market,” former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff.” “They’re important to maintaining the flow of government finance” and need to be used actively, he said.

Adding underperforming assets to Fannie and Freddie’s combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury’s relief program, their regulator said Oct. 5.

From the WikiPedia entry: "Ramsey & Head advise that an insolvent bank should go into receivership rather than conservatorship to guard against false hope and moral hazard."

 

It’s easy to see why. That Bloomberg article suggests FHFA is letting the GSEs stuff themselves with the very same toxic waste that helped them get into (if they did) their present state. Implode-O-Meter’s comment on the issue expands on the idea:

It’s really not all that surprising. After all, the U.S. government is the ultimate off-balance sheet place to stick toxic assets and now with Freddie and Fannie in "conservatorship", they can start sucking up more troubled assets sight unseen!

So in a sense, Fannie and Freddie are now the bailout that keeps on giving … er taking … whatever.

If the government is going to exploit their quasi-nationalized enterprises instead of putting them to rights, the least they could do is fully nationalize them and turn them into a real federal agency, like Fannie was until 1968. Then at least there would be some legal basis for controlling how it / they could be used.

 

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Notes and References

[1]: "Were They Or Weren’t They?", by Zachary A. Goldfarb, Washington Post, October 10, 2008.

Fannie Mae and Freddie Mac had said at the end of June that they had billions of dollars more of a financial cushion than required by their regulator. The report by the Federal Housing Finance Agency Thursday reaffirmed that, saying Fannie Mae had $9.4 billion and Freddie Mac had $2.7 billion more capital than required.

But, even though the companies were adequately capitalized, the regulator Thursday declared them undercapitalized. How did it square that circle?

 

[2]: "Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets", by Dawn Kopecki, Bloomberg, October 11, 2008.