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President Bush Insisted Fannie and Freddie Would be Owned by Shareholders

We are in the ninth year of Fannie and Freddie’s conservatorship, the fifth year of the Net Worth Sweep and fourth year of multiple lawsuits delving into what the law says about the rights of shareholders.  Stepping back from the political twists and turns, legal contortions and scholarly surgery of the last eight years, recall what the President of the United States said in the summer of 2008.

When asked about government support for private sector companies during a July 15, 2008 press conference, President George W. Bush made it a point to say the proposed conservatorship of Fannie and Freddie he was announcing was a temporary, confidence-building step and added, “I hear some say ‘bailout’ — I don’t think it’s a bailout. The shareholders still own the company. That’s why I said we want this to continue to be a shareholder-owned company.”

Remember, by mid-July 2008 it was clear that something was terribly wrong in the financial world. Many mortgage banks had failed and financial powerhouses had been merging to prevent systemic collapse. Just six weeks after this press conference, the government engaged in a mad dash of unprecedented interventions in the marketplace to prevent what threatened to be a catastrophe that would dwarf the Great Depression.

As the crisis loomed, President Bush made it a point to calmly explain that, “The newly proposed authorities will be temporary and used only if needed. And as we work to maintain the health of Fannie Mae and Freddie Mac, we’ll work to ensure that they remain shareholder-owned companies.” He used the phrase “shareholder-owned” repeatedly and without equivocation that day.

Bush, then-Treasury Secretary Hank Paulson and other top Administration officials, along with the bipartisan leadership of Congress, went to work. The Housing and Economic Recovery Act of 2008 created a conservatorship modeled on decades of legislation on financial insolvency. It would be a temporary arrangement that would “preserve and conserve” the assets of the companies for shareholders in anticipation of restoring them to a “sound and solvent” condition so they could resume their indispensable role in providing liquidity and stability in the home lending market.

Bush was a foe of a heavy-handed, ubiquitous federal government. Nonetheless, he was keenly aware of the importance of Fannie and Freddie’s role and regarded the conservatorship as a way of making sure the companies had access to a line of credit, if needed.

“And so the purpose was to send a clear signal that, one, we understand how important these institutions are to the mortgage markets, and two, to kind of calm nerves,” Bush said. “The truth of the matter is, by laying this out, it is — makes it less likely we’ll need to use this kind of authority to begin with, which, by the way, is temporary authority.”

CBS News’ Bill Plante pressed Bush about the perceived federal backstop for privately-held companies and asked, “Should they be privatized altogether and be subject to normal business rules?”

Bush’s response was revealing. He talked about the need for Fannie and Freddie to focus on their “core mission” under a reformed regulatory arrangement and then insisted, “But these need to remain private enterprises, and that’s what our message is.” In essence, he already regarded them as privately-held companies but he recognized reforms on how they operated and were regulated were in order.

Eight years later it seems hard to believe how straightforward the conservatorship was in its design and intent: Temporary lines of credit – if needed – to shore of up confidence in vitally important shareholder-owned companies and an opportunity to consider ways to better regulate them going forward.  Things only became complicated when Treasury officials in the current Administration decided in 2012 to bar the door when Fannie and Freddie were returning to profitability and should have been released and then put them in a financial straightjacket.  

The final weeks of the 2008 presidential campaign were as unsettling as the current campaign’s final weeks are unseemly. But in 2008, policymakers at least worked together for the good of the country. The HERA President Bush described was prudent, common-sense legislation. Its misapplication and misuse since then is emblematic of Washington machinations that are fueling this year’s populist revolt.