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Why A Fannie Mae Conservatorship Is Appealing To Bush Administration

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The reason the Bush administration is leaning toward bringing Fannie Mae and Freddie Mac into conservatorship rather than backstopping the two home mortgage companies is that concern about moral hazard problem. Bailing out Fannie and Freddie would reward years of aggressive use of financial mismanagement, according to some members of the administration.
In the Old Executive building and the White House, Fannie Mae is viewed by many as a hotbed of waste, fraud, abuse and Democratic featherbedding. What's worse, the administration believes that both companies failed their public mission of making housing affordable. But these criticisms are not driving policy right now. Instead it is the concern that bailing out financial companies may lead shareholders and counter-parties to become lax about risky behavior.
Conservatorship, which could wipe out existing shareholders and humiliate past and present executives, is appealing because of the signal it would send to the market. Some key members of the Bush administration's economic team believe putting Fannie into conservatorship would create stability in the housing market without sapping discipline from financial markets.
U.S. Weighs Takeover of Two Mortgage Giants [New York Times]


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