On page 157 of The Puritan Gift (published in March 2007), Kenneth and I drew attention to the danger that Fannie Mae posed to the economy when we quoted Randy Quarles, undersecretary for finance at the US Treasury, as declaring that ”it posed a ‘systemic risk’ to financial markets”. We also drew attention to the statement by the company’s official regulator, Armando Falcom Jr., to the effect that it had engaged in a “pervasive and willful misapplication of generally accepted accounting principles”. What was true of Fannie was and is also in every sense true of its sibling, Freddie Mac. Fannie and Freddie were ’accidents waiting to happen’. They were also “open secrets”; everyone in Washington knew what was wrong but no politician was willing to say or do anything about it.
The Terrible Twins were abortions; the left-hand or liabilities sides of their balance sheets belonged to the public sector (since the risks were de facto borne by the taxpayer), while the right-hand or asset sides were situated in the private sector (since the outrageous profits arising from this weird arrangement went to the shareholders and managers). The simplest solution is to take them fully but temporarily into the public sector, through custodianship; and then, when they have been cleansed and healed (a procedure which might take a year), to launch them fully into the private sector, where they truly belong, possibly by selling off their portfolios. The first step is to get rid of their current disatrous management teams, while recovering for the benefit of the unfortunate taxpayer as much as possible of the ill-gotten gains which have accrued to them. Some attempt might also be made to recover some of the money spent by those managers on so-called public relations.
THE PURITAN GIFT argues that in recent decades there has been a serious failure of management in the United States affecting many aspects of government and society . The Terrible Twins constitute egregious examples of this weakness.
