This weekend Treasury Secretary Henry Paulson announced that mortgage giants Freddie Mac and Fannie Mae will be placed in a government conservatorship that closely resembles a bankruptcy reorganization. The move puts U.S. taxpayers on the hook for $5.4 trillion in outstanding mortgage debt and commits the government to provide as much as $100 billion to each company in capital commitments. Two months ago, the Congressional Budget Office estimated that the ultimate cost to taxpayers of such a move would be $25 billion. But bankers hired by the Treasury Department now estimate that $50 billion of taxpayer money might be needed to offset the Freddie and Fannie’s combined losses.

How did we get here? The answer is certainly not “too much deregulation” of the marketplace. Freddie and Fannie are not, and never were, private companies. Instead they are quasi-public/private mutants — Fannie is a relic of the New Deal and Freddie was chartered by Congress in 1970 — that are owned by shareholders but, until this year, also enjoyed an implicit guarantee that the federal government would cover their losses. The companies nominally exist to help make homes more affordable for lower- and middle-income families by increasing the supply of money available for mortgages. However, research by the Federal Reserve finds that Freddie and Fannie “have no significant effects” on either primary or secondary mortgage rates. Furthermore, they have completely lost their focus on helping low- and middle-income families. Witness Speaker Nancy Pelosi’s continued efforts to raise the cap on the size of the loans that Fannie and Freddie can buy.

So what did taxpayers get in exchange for two quasi-government agencies that did nothing to help families afford homes? Thanks to their implicit government guarantees, Fannie and Freddie became a massive mortgage industry duopoly that socialized risk while privatizing profit. Contrary to the claims of big government apologists like The New York Times Paul Krugman, Fannie and Freddie are at the core of the housing bubble. As early as 1995, President Bill Clinton allowed Freddie and Fannie to get affordable-housing credits for buying subprime securities. By 2004 Fannie and Freddie purchased $175 billion worth of subprime securities — 44% of the entire market. Even the largest truly private company crippled by the housing bubble was heavily influenced by the government’s market intervention. Countrywide Financial has lost $2.5 billion in just the past year and has another $6 billion in nonperforming assets on its books. Fannie was the biggest buyer of Countrywide loans. Former Walter Mondale and Barack Obama campaign adviser James Johnson worked personally with Countrywide CEO Angelo Mozilo to make it easier for Fannie to buy Countrywide products.

Now that the federal government has officially taken over Freddie and Fannie, the next question is what to do with them. Paulson is staying neutral on the matter, and has said it should be up to the next administration and Congress. John McCain has already said he wants the two entities privatized or liquidated. Congressional Democrats want to keep them intact. Barack Obama is still studying the situation.

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