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Financial reform without Fannie and Freddie?

The Senate debate on a financial reform bill is not focused on the two mortgage giants whose risky loans contributed to the frenzy and near-collapse of Wall Street. Why put off a needed debate on the government's future role in pushing cheap home loans?

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The Senate began debate Thursday on an overhaul of the financial-services industry. Conspicuously left out of the main bill are any big reforms of the housing finance system – whose roguish, risk-taking behavior was at the root of Wall Street’s near-meltdown.

In fact, the Obama administration wants to put off such reforms until home prices are stable, possibly next year. Another reason is that taxpayers are still bailing out the two biggest players in home finance, Fannie Mae and Freddie Mac, which repackage mortgages and resell them as securities.

The two giants were put into government conservatorship in 2008. Since then they have been the largest recipients of taxpayer dollars in a string of bailouts. They’ve eaten up close to $400 billion in rescue funds. And they still have taxpayers responsible for some $6-8 trillion (yes, trillion) in obligations. Five months ago, the Treasury Department had to announce that federal support for the two government-sponsored enterprises (or GSEs) would be open-ended for a long time.

Treasury Secretary Timothy Geithner says past problems with Fannie and Freddie were “symptomatic” of the regulatory failure of the financial industry. The two bought up subprime mortgages “without regard to the risk they posed to the system,” he told Congress last month. And they didn’t have enough capital cushion and were “inadequate” in their risk management.

Yet he and President Obama do not want reform of Fannie and Freddie in this Senate debate.


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