Effects Of The Fannie/Freddie Takeover

Host Liane Hansen speaks with Nariman Behravesh, Chief Economist at Global Insight. Behravesh says that without major action, chances of the housing crunch and credit crisis dragging on for another year are very high. But early action will probably save taxpayers in the long run, because the damage to the economy will be less.

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LIANE HANSEN, host:

Nariman Behravesh is chief economist at Global Insight, an economic research and consulting company. He's on the line to discuss the rescue plan for Fannie Mae and Freddie Mac. Thanks for being with us.

Mr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): My pleasure.

HANSEN: We've just heard some of what the Treasury Department likely has in store. And while all the details aren't yet known, how are the markets likely to react to the plan?

Mr. BEHRAVESH: I think they will react quite positively. It's - the whole concern and uncertainty about whether or not Fannie and Freddie had enough capital to keep going or at least to keep maintaining their operations has really been quite a drag on the market, and the recent jitters I think reflect that to some extent. So this will be sort of a boost of confidence, if you will. And it will avert what could have been a much worse situation if it had been allowed to drag on.

HANSEN: But how necessary is it to take such a radical step as a government takeover?

Mr. BEHRAVESH: Well, I think one of the things that's come out in recent days is - at least rumors - that because of questionable accounting practices, the capital base of Fannie and Freddie was overstated. And so it looks like things were a lot worse than at least people thought a while ago. So I think at some point radical action was needed to, as I said, forestall a worsening of the situation both in terms of confidence in the financial markets, but also in terms of at least putting an end to or at least trying to bring a quicker resolution to this ongoing housing crunch and credit crisis.

HANSEN: A number of people posted questions for you on our blog. Here's a couple of them. What might happen if Freddie Mac and Fannie Mae were allowed to fail? Is anyone coming up with creative solutions from outside the government?

Mr. BEHRAVESH: Well, the problem with allowing them to fail is that you lose control of the situation, and you could get a sort of a financial crisis that spirals out of control. I mean, one of the bigger concerns here is that a lot of people who've loaned money, or creditors, to Fannie and Freddie are things like foreign central banks, foreign sovereign wealth funds. And any loss of confidence on the part of these people in the U.S. government, in the U.S. ability to deal with this crisis could have severe ramifications for things like the U.S. dollar, and so on. So, I think radical action was needed here.

HANSEN: Are there other creative solutions outside the government?

Mr. BEHRAVESH: Well, I think at some point some thought has to be given to, you know, how much of Fannie and Freddie's activities belong in the public sector in terms of the guarantee and so forth, and how much could conceivably end up in the private sector through the re-privatization of Fannie and Freddie. And I think, you know, some thought has to be given to that.

HANSEN: Here's the second question from our blog. If they're fired, will the CEOs of Freddie Mac and Fannie Mae be obliged to give up their retirement bonuses and other perks if the feds(ph) bail their agencies out of the current crisis, and if not, why not?

Mr. BEHRAVESH: I certainly don't know the details of what's been worked out with the CEOs of these two organizations. So, I mean, for sure what's happened is the value of the stocks of Fannie and Freddie has fallen something like between 70 and 80 percent. And so, already the senior management of these two organizations - part of the compensation, I think, was stock - have lost a lot of money, or at least on paper lost a lot of money. So there have been some ramifications. Some senior management have been let go already, others will be I'm sure. So, there is going to be some cleaning out. So it's not without consequence here, major consequence for the management of these two organizations.

HANSEN: Nariman Behravesh is chief economist for Global Insight. Thanks a lot.

Mr. BEHRAVESH: My pleasure.

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