http://www.aei.org/research/contentID.20040927152122935/default.asp
read few then u will better prepared.
http://www.aei.org/publications/pubID.12235/pub_detail.asp
The Fundamental Problem with Fannie Mae and
Freddie Mac
Fannie Mae and Freddie Mac have a public
mission for which they enjoy an implicit subsidy from the federal
government, yet their corporate structure obligates them to
maximize profits for their shareholders. That dual role creates a
fundamental conflict of interest, one with worrisome consequences
for taxpayers as well as the future of our competitive private
financial markets.
The Federal National Mortgage Association (now
known as Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) are two government-chartered and government-sponsored
corporations. Both have been assigned the statutory mission of
enhancing liquidity in the middle-class residential mortgage
markets by buying and selling residential mortgages.
Fannie and Freddie were originally government agencies but were
"privatized" when they were permitted to sell shares to the public.
Today, both companies are among the largest and most profitable
financial institutions in the world, with their securities listed
on the New York Stock Exchange.
Their apparent success, however, obscures an inherent
contradiction. They are shareholder-owned companies, with managers
who have a fiduciary obligation to maximize profits, but they are
also government-chartered and empowered agencies with a public
mission. It should be obvious that they cannot achieve both
objectives. If they maximize profits, they will fail to perform
their government mission to their full potential. If they perform
their government mission fully, they will fail to maximize
profits.
In 1996, the Congressional Budget Office found that these two
companies had received subsidies in 1995 of approximately $6.5
billion but that only about two-thirds of that subsidy was actually
delivered to the mortgage markets. The remainder was retained for
the benefit of the companies’ shareholders and management
teams.
That is exactly what one would expect from this hybrid form. If
Fannie and Freddie were fully performing their government mission,
their entire subsidy would have gone to the mortgage markets. The
fact that they retained a portion for themselves reflects their
obligation to their shareholders and the incentives of their
executives to increase their own compensation.
This conflict of interest has direct practical consequences.
Since 1992, Fannie and Freddie have had an obligation to assist in
financing affordable and low-income housing. Obviously, doing so
would be costly and would thus reduce their profitability. Studies
now show that their performance in financing low-income
housing—especially in minority areas—is far worse than that of
ordinary banks. In other words, despite the fact that Fannie and
Freddie receive subsidies to perform a government mission—in this
case support of low-income housing—their need for and incentives to
retain a high level of profit-ability is an obstacle to their
performance.
By Peter
J. Wallison Posted: Friday, December 1,
2000 
ON THE ISSUES AEI Online
(Washington) Publication Date: December
1, 2000
