Fannie Mae and Freddie Mac’s collapse into government conservatorship was a long six and a half years ago. In spite of endless discussions of reform, they remain in conservatorship limbo, where they are run by their regulator as wards of the state, with de minimis capital. Nobody wants the old Fannie and Freddie back; nobody wants them to stay on indefinitely in conservatorship.
What is required are practical steps forward, rather than designing the ideal but politically unachievable solution. We offer Congress the following suggestion as something that can be done now: simply take away all Fannie and Freddie’s special privileges. They could be allowed out of conservatorship when all of the following actions have been taken:
1. Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size. Equity of at least 5 percent of total assets should be their required leverage capital ratio. This is the minimum for all big bank holding companies — for Fannie and Freddie it should absolutely not be less. Given their undiversified business, something more might be prudent. In any case, the hyper-leverage which allowed Fannie and Freddie to put the whole financial system at risk needs to be permanently ended.
The full text of this article is available at thehill.com.
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