Freddie Mac had a rather sweet deal going: it is privately owned while being government sponsored. As we found out during the financial crisis, this means that the owners get the profits and the taxpayers (or China) gets the loss. When Freddie Mac was seized by the state, this might have been seen as a loss for the company. However, this is a bit like seizing a credit card that is loaded with debt and then accepting that debt. Hardly a win.
In an interesting turn of events, the IRS claimed that Freddie Mac owes $3 billion in back taxes from the period of 1998 to 2005 and is trying to get that money. Freddie Mac’s well paid lawyers are contending that the company does not owe this money. There is, of course, a certain irony in the IRS suing a company for unpaid taxes that would certainly use the bailout money to pay the back taxes. Naturally, the lawyers think the lawsuit is a great idea.
The Freddie Mac situation is yet another poster child (or poster monster) for the need to keep a separation of corporation and state. These cozy relationships enable certain corporations to operate without properly taking on the risk of the free market and without sharing the profits with those who pay for their failures. As others have said, this is a situation of privatized profits and public risk.
While this is a great deal for corporations, it is obviously not a very good deal for the rest of us. Not only does it consume our tax dollars (and/or add to the deficit) it also seems to encourage risky and irresponsible behavior. After all, if they know that the state will bail them out, they have little reason not to take risks. To use an analogy, if I go to Vegas and have to pay my losses myself, I will (if I am rational) gamble with only what I can afford to lose. However, if someone tells me that I get to keep my winnings while someone else pays for my losses, I would certainly take far more risks. After all, either I win or I do not lose-and that would be awesome.
Freddie Mac recently reported a loss (a shock) and now wants $500 million more in bailout. While I am not a financial expert, it seems to me that Freddie Mac and its equally doomed cousin Fannie Mae should simply be disbanded and those involved should be properly investigated. If we are going to shovel money into housing, it makes more sense to simply give it to the people who hold the mortgages-at least that would do some good.
If there is money to be made via legitimate and honest means, then perhaps private companies should step in to take over the mortgages. In any case, the lesson of Freddie Mac and Fannie Mae is that a better wall needs to be built between the private and public sectors.
