Obama on Fannie & Freddie: No More Portfolio Trading?

If he were elected President, would Democratic contender Barack Obama support allowing Fannie Mae and Freddie Mac to continue buying mortgage-backed securities for their own portfolios when they emerge from under the government’s wing? The eventual status of the two mortgage giants, and the extent to which they will continue to have a hybrid public-private role, has already become a source of big debate. While John McCain, like many conservatives, argues that investing for their own account is what’s gotten them in trouble and should no longer be allowed, Obama has been less clear; until now, he has essentially said their future structure and functions should be studied closely without offering up many specifics on this key question. But in the economic policy speech he gave in Golden Colorado on Tuesday, Sept. 16th, Obama appears to be moving towards taking a firmer stance against such investments.

Here's the passage from his speech in which Obama discusses Fannie and Freddie's future:

Going forward, we need to replace Fannie Mae and Freddie Mac as we know them with a structure that is focused on helping people buy homes – not engaging in market speculation. We can’t have a situation like the old S&L scandal where its “heads” investors win, and “tails” taxpayers lose. That’s going to take ending the lobbyist-driven dominance of these institutions that we’ve seen for far too long in Washington

The key passage here is the idea that the new structure should focus on helping people buy homes, not engage in market speculation. There's only one place where the mortgage giants have been able to engage in anything resembling "market speculation": in the giant portfolios they hold in which they trade for their own accounts. Those portfolios allowed the mortgage giants to use taxpayer-subsidized funding to generate huge profits for many years. But both goosed returns by loading up on sub-prime mortgage securities; while that was extremely lucrative for management and shareholders alike, the declining values on those securities over the last year are a big reason the pair are now essentially insolvent.

It wouldn't be extremely surprising if Obama took a stance against allowing them to maintain active investment portfolios. Former Treasury Secretary Larry Summers, who is now advising Obama, has warned of the potential risks at Fannie and Freddie for years, and he made clear in an interview with BusinessWeek last week that such he doesn't think such trading is a good idea.

But forcing the mortgage giants to give up their portfolios is also politically sensitive, since leading Democrats like Rep. Barney Frank, (D. Mass) the powerful chairman of the House Financial Services Committee, have fought past attempts to whittle them back. He and others have argued that the profits earned by Fannie and Freddie on such trading helps provide the funds that allow them to meet their public mission of providing affordable housing for low-income Americans.

There's little doubt that however Fannie and Freddie eventually emerge, such trading will be cut back considerably. The real question is whether they will be allowed to continue to trade for their own portfolios at all. With his Colorado speech, Obama appears to be edging closer to saying no.

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