Why Barney Frank Tied His Tongue In Knots Over Fannie and Freddie

Barney Frank got caught in an interesting bit of backpedaling and sidestepping this week on mortgage giants Fannie Mae and Freddie Mac after he suggested that, as the Washington Post worded it, "investors who have lent money to the two firms or bought their mortgage-backed securities could one day suffer losses."

In other words, he tried to make the case that Fannie and Freddie don't enjoy implicit U.S. government support, as investors have been assuming for a long time.

This created predictable consternation. Later Frank executed a cute little spin move and sought to clarify: His position, he said, "does not prevent the Treasury from treating the debt of Fannie and Freddie in the manner that it believes best supports the important goal of stabilizing the financial system." So Congress won't try to interfere with the folks at Treasury as they infuse billions of dollars ($100 billion so far, the Post tells us) into the tottering agencies.

Got that? Here's what he's saying: "No, we don't stand behind Fannie and Freddie, but yes we do stand behind Fannie and Freddie."

What's going on and why would Frank even start down this loser of a path in the first place?

Here's the important background: Fannie and Freddie are frauds. Easy to remember: all three words begin with the letter "f." They're accounting frauds. They're not "government-sponsored entities;" they're off-balance sheet vehicles of the U.S. government.

For decades people have suspected as much ... the difference now is, this financial crisis finally presented us with the irrefutable proof. Fannie and Freddie started to tank, and before you could blink an eye, the U.S. government rushed in to rescue them in early September of 2008. Then came the Christmas Eve surprise a few months ago. The Obama administration sprang a biggie on us while we were trilling fa-la-la-la-la's and getting groggy on the eggnog, pledging unlimited financial assistance to Fannie and Freddie.

Now think about that word. Unlimited. What else does the government support in an unlimited way? Oh, maybe the Defense Department. Medicare. Social Security.

Things that are part of the government.

So what prompted Frank's initial comments was that some on Capitol Hill want Fannie and Freddie's finances to be incorporated into the federal budget. That would be honest accounting. If Aunt Fannie and Uncle Fred are living in your attic, you may tell Tom living next door that you're not responsible for them even though Tom suspects otherwise. Then, once you decide to guarantee them unlimited assistance, that game should be over. You can't pretend any longer. Aunt Fannie and Uncle Fred belong in your household budget somewhere.

The problem: Frank knows that if Fannie and Freddie are on the books, the budget blows up -- the deficit would soar. Then we'd really look like Greece. So Frank tries the conflicted damsel pose. He thrusts out one arm, protesting that Fannie and Freddie bondholders are mistaken to think the U.S. will automatically bail them out (see? the government doesn't support the mortgage companies after all!), then when the investors get nervous, he gives them a sly wink and beckons them a little closer (see? the government does support the mortgage companies after all!).

Well, it's time to stop jerking everyone around. Either Fannie and Freddie are U.S.-backed and they belong on the government's books or they're private entities and caveat investor. It's bad enough that Wall Street plays these off-balance sheet games; the U.S. government shouldn't be given a free pass to do so as well.