A Real GSE Reform Solution?

Huey Newton, the provocative co-founder of the Black Panther Party, once commented, “We have two evils to fight: capitalism and racism. We must destroy both racism and capitalism.” It seems that half of Newton’s wish has come true. Racism, while it is not officially tolerated, has not vanished completely and it is still a hardship faced by people of color. But Newton’s death wish for capitalism is another story.

In the past five years, Washington has sank hundreds of billions of dollars into propping up mega-corporations while burdening smaller institutions – the real backbone of the economy – with a crippling tax and regulatory regimen. As a result, the traditional definition of capitalism as the cornerstone of a healthy democracy has certainly been challenged to the fraying point.

Mercifully, there are those still among us that believe that capitalism is the solution and not the problem. A case in point: the Miami-based hedge fund Fairholme Capital, which audaciously offered to buy up the mortgage-backed securities insurance businesses of Fannie Mae and Freddie Mac in order to create the foundation of a secondary market consisting of two new state-regulated private insurance companies that will do the jobs of the government-sponsored enterprises (GSEs) without soaking the American taxpayers for operating expenses.

Of course, the Fairholme concept isn’t entirely altruistic – the company stands to earn a few bucks under this proposal. Fairholme, lest we forget, also has an axe to grind with Washington: in July, it sued the government to seek “just compensation” over changes to the bailout terms set for Fannie Mae and Freddie Mac, claiming that these changes lethally impacted shareholder value in the enterprises.

Fairholme’s managing member and chief investment officer, Bruce K. Berkowitz, made his pitch in an open letter to Edward DeMarco, who has been the “acting” director of the Federal Housing Finance Agency for more than four years. To date, DeMarco has not publicly responded to the Fairholme offer, but that is no surprise because this offer is radically different from his bureaucracy-driven strategy to realign the role of the GSEs – and, besides, the complexity of the plan is not something that you can absorb over a cup of coffee.

Berkowitz did not propose this idea to Congress or the White House. And why should he? After all, neither entity has done very much to speed to conclusion of the federal conservatorship of Fannie Mae and Freddie Mac. And, besides, DeMarco has already been reconfiguring the state of federal housing finance without bothering to consult with the Legislative or Executive Branches – score one for Berkowitz for speaking to the guy in charge.

I don’t pretend that this plan is flawless – I can’t believe the states will want to absorb a lot of the pressures borne by the federal government – but the Fairholme solution deserves praise if only because it offers evidence that some people in the private sector are tired of waiting around for government to do its job. Fannie Mae and Freddie Mac have been in federal conservatorship for more than five years, and at the current political pace it seems unlikely that their fate will be seriously discussed until after the 2014 elections.

Yes, there have been a number of GSE reform plans from trade groups and think-tanks, but they seem to be part of the Washington babble machine – a lot of talk and a lot of posing, but very little in the way of genuine results. By boldly forcing DeMarco to think outside of that proverbial box, Fairholme is providing a lesson that too many people in Washington have forgotten: it is the private sector that pumps the economy with ideas, initiatives and action.

With Thanksgiving coming up tomorrow, here is something we can all be thankful for: there are still passionate people in the private sector that are not willing to let Washington ruin the economy further. Cheers to Fairholme for reminding us about what really makes this country strong.

About The Author


Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.