Ah, if only Michael Corleone were in charge at the Treasury. Then Fannie and Freddie would be getting exactly what they deserved from the government: Nothing.
Since when did nationalizing any industry, let alone one as significant as housing, make prudent economic sense? It simply is abhorrent to the concept of economic freedom and limited government.
For many years, numerous constituencies have raked in exorbitant sums of money due to the implicit government guarantee of Fannie and Freddie debt. Here is how it worked: Fannie and Freddie bought mortgages from banks. In order to pay for the mortgages, they borrowed money from the marketplace. Because the markets (correctly) assumed that the federal government would back the debt, Fannie and Freddie were able to borrow at extremely favorable terms.
The problem is - the government never charged Fannie and Freddie for this insurance. Well, not explicitly at least. Thus, the taxpayers gave a gift to Fannie and Freddie in the form of theoretical insurance. Fannie and Freddie monetized this to the benefit of private shareholders, executives, and those in Washington who received contributions. Now, taxpayers are picking up the tab.
Of course, the question to ask is - why bail out Fannie and Freddie? Why not simply give them nothing, and let them fend for themselves as virtually every other private enterprise is doing at this very moment? Why give yet another gift to the holders of Fannie and Freddie debt, while so many other holders of credit are getting skewered?
What the public is told is a garbage story about keeping the housing market stable. As far as anyone knows, the housing market has been in a free fall. The bubble has long since burst. What will stabilize the housing market is when prices correct enough such that they reflect the realities of what people can actually afford - not some Fed-induced haze of housing euphoria.
Another excuse being doled out is protecting some large bond holders. No where in the prospectus of Fannie or Freddie debt is the United States Government listed as a guarantor. If the Chinese government assumed that, well - whose fault is that? One might also argue that Goldman Sachs should have read the prospectii, but they probably didn't need to.
The bottom line, though, is that bailing out Fannie and Freddie is simply wrong. It is wrong to put the burden on taxpayers who did not take the excessive risks that two private companies decided to take and profit from.
Michael Corleone concluded the exchange by asking the Senator to put up the money personally. The public should be asking the same of all those in Washington who have been at the receiving end of Fannie and Freddie's largesse, including Paulson himself.