Does this make sense?

Bloomberg reports a miserable quarter for Fannie Mae:

Fannie Mae, the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut its dividend and said it will raise $6 billion in capital

The $2.19B, while eye catching, isn't the real story. For that let us turn to the New York Times:

As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat.

But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

Remember Fannie and Freddie are not regulated as banks. They would be capitally inadequate if they were as their leverage is frightening: a combined $83B of capital vs. $5T of debt according to the NYT. Instead they have the Office of Federal Housing Enterprise Oversight, which has consistently acted as their cheerleader. With losses rising politicians are beginning to worry:

“They are on real thin ice financially,” said Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee. “And the way the law is written right now, there is very little we can do to correct that.”

The real issue is how these entities came to be in the first place. Their debt is viewed as government guaranteed (although that is not explicit). Yet they have shareholders. In addition to not bearing the weight of Basel, they have preferential tax status and are exempt from many SEC securities regulations. But they are hardly government pawns:

“We have to bow and scrape and haggle each time we need help,” said a senior Republican Senate assistant who spoke only on the condition of anonymity [...]

In a March meeting, Freddie Mac’s chairman, Richard F. Syron, bolstered those fears by saying the company would put shareholders’ interests first.

This is clearly bizarre. Either regulate them as banks and let the shareholders keep their stakes or nationalise them and have them act in the interest of the state. Privatised gains and socialised losses is not a good compromise.

Update. Talk about putting out the fire with gasoline. The Office of Federal Housing Enterprise Oversight has just said that it will lower requirements for surplus capital at the agencies to 15% from 20%, allowing the agencies to increase their leverage yet further. This might help the mortgage market in the short term but the US tax payer will be left holding the baby. S&P already thinks this is a trillion dollar problem. In the immortal words of Homer Simpson, shimatta-baka-ni.

Further Update. The FT reports that Fannie is planning a $5.5B capital raising. Too little, too late.