It would have made for better drama if Fannie & Freddie had told Paulson to shove it.
I don't think any GSE watcher would have ever thought what happened could have happened.
Fannie and Freddie worked out very well, but ultimately were undone by not what they did, but what Wall Street & the private MBS market did.
Fannie and Freddie didn't create subprime CDOs, they didn't start this run on mortgages.
They aren't the ones who drove cheap capital into real estate, driving up prices and providing easy credit. Wall Street did.
And now one of Wall Street's very own, Henry Paulson, former Goldman Sachs 'elite', will fix the GSEs for good.
He didn't want any bail out plan to "to be seen as bailing out
investors who profited from the companies' hybrid status as private
entities that have the implicit backing of the government."
So, lets trash equity investors- those who had faith in Fannie and Freddie- the ordinary investors, and surprisingly enough, many banks.
But lets bail out the debt investors.
For all the investors who bought subprime MBS that they thought were AAA- screwed. But, buying Fannie & Freddie- that implied guarantee, which recently became explicit- you earned better than treasury because, well...why?
The federal government, not only borrows money for itself, but now guarantees that home owners will pay back there mortgage.
What does this fix?
Well, I guess Fannie and Freddie can start buying and guaranteeing mortgages again, with perhaps even less regard for consequences.