Fannie Mae and Freddie Mac have been called the platypus of American business, an ungainly mixture of private business backed by the public purse.
A platypus is one of the few mammals that can lay an egg. Fannie and Freddie laid a doozy over the weekend. The costs will be borne by the American taxpayer.
The Treasury Department seized control of the two mortgage giants rather than see them fall off a financial cliff, taking the housing market and a big chunk of the overall financial system with them. Now taxpayers might be on the hook for up to $50 billion to recapitalize the companies, with no guarantees that they will get all of their money back.
The crumbling price of mortgage securities had eroded much of the capital held by the two government-secured enterprises. The companies back three quarters of all new mortgages. Had Fannie and Freddie been allowed to fail, home loans would have dried up and home prices would have collapsed. A default on Fannie and Freddie bonds could have set off a new financial panic, halting all sorts of lending.
Fifty billion dollars is a steep price to pay, but not as steep as the price of failure would have been.

Over the last decade, Fannie and Freddie were run by risk-happy leaders who bought and guaranteed $5 trillion worth of mortgages. They did so while maintaining very little capital, a strategy that maximizes profit in good times while providing only a small margin for error.
“They’ve grown into these horrific institutions that suffer from gigantism,” says Stuart Greenbaum, a banking professor and former dean of Washington University’s business school. “They are not manageable and operate in a netherworld between private ownership and government guarantee.”
While Fannie and Freddie’s leaders weren’t particularly good business people, they were marvelous lobbyists who spread $19 million around the White House and Capitol Hill over the past 18 years, according to the non-partisan Center for Responsive Politics. They spent $7 million on lobbying in the first half of this year alone.
Critics, including former Federal Reserve chairman Alan Greenspan, warned that the companies were growing too large too fast, but members of Congress ignored those warnings and took the money. Now come the consequences.

For some people, the consequences are more painful than for others. Fannie Mae’s chairman, Daniel Mudd, and Freddie’s chairman, Richard Syron, will both lose their jobs, but each man gets a severance deal worth more than $6 million.
Shareholders are left holding the bag; on Tuesday, Fannie’s shares were trading at $1.17, down from $60 a share last year. Treasury Secretary Henry Paulson, believing failure should have consequences, arranged the takeover to maximize pain to Fannie and Freddie’s shareholders.
The takeover could have a small silver lining. Mortgage interest rates could go down slightly, perhaps by a quarter of a percent, now that the government backing is direct rather than implied. And because Fannie and Freddie owned mainly prime-rate mortgages, families who are having trouble paying might find the government more willing to restructure their loans.
But Uncle Sam now finds himself nursing a very sick platypus. The next president and Congress will have to decide the long-term future of Fannie and Freddie.
One option is to nationalize them, putting the federal government in direct control of the mortgage market. The danger there is that political pressure would create too-generous borrowing terms and hesitancy to foreclose, creating losses for taxpayers.
The government could stabilize Fannie and Freddie, then turn them back to private ownership while insisting on more capital cushion. But private owners could again run them into the ground again.
A third option would be to break the companies into smaller pieces, and then privatize them. Each little piece, by itself, would be not be “too big to fail.” Mortgage rates would be slightly higher without an implicit guarantee that the government would step in at times of trouble. But with proper regulation, such a litter of baby Fannies might create actual market competition. What a concept.

Caption:  A platypus