Another Privatization Horror Story [VIDEO]: Taxpayer-Backed Mortgage Giant Bets Against Its Customers

Above is a video of a conversation I had the other night with Thom Hartmann on his television show, The Big Picture, about the latest - and one of the most shocking - revelations about the government-sponsored housing finance agency Freddie Mac: That it created a pre-2008 style risk package so that it could bet billions against the very homeowners it's supposed to help. This is another privatization horror story, and it illustrates how badly the American public gets shafted when politicians turn what should be a government function over to the greedy-minded.

The short version is this: A government-backed agency used billions in taxpayer money to bet against the economic well-being of those taxpayers. (Even people who don't have mortgages are being hurt, because the housing crisis is crippling the entire economy.) It undercut its own social function. And because these were risky bets, it went back to the glory days of banker recklessness - once again gambling with our money but keeping the bonuses for themselves it worked out. Heads they win, tails we lose.

The moral of the story? Government is better than the private sector at doing many of its historical functions. More often than not, when it comes to well-run agencies we need to re-learn a lesson: Privatization stinks.

Fannie Mae, Freddie's sister organization, worked perfectly as a government agency for thirty years. Then Lyndon Johnson 'privatized' it, mainly to get its costs off the books because he was spending so much on the war in Vietnam. Freddie was created afterwards to introduce 'competition' - another concept which can be useful in some circumstances, but is too often invoked as something that good on its own merits.

Wrong.

Both agencies, and the privatized student loan agency Sallie Mae, traded on their status as "GSEs" - government-sponsored enterprises - to enrich their executives. (Sallie Mae also bought two corporate jets, even as student loan debt was on its way to surpassing credit card debt in this country.)

Contrary to conservative spin, Freddie didn't tank the real estate market. (If it had, we wouldn't be seeing plunging values in international markets, or in other markets where Freddie and Fannie aren't involved - wealthy homes and commercial real estate.) It imitated greedy and reckless bankers, it didn't lead them.

The taxpayers had to take Freddie back after the crisis, and have sunk more than $140 billion to keep it afloat. The regulator in charge refuses to let it do more to help underwater homeowners. Now we learn that it also bet $5 billion or more in taxpayer money to bet against many of these borrowers - most of whom are also taxpayers who help to subsidize Freddie.

This excellent ProPublica/NPR article [1]has the details, but the gist of it is this: Many struggling homeowners are paying very high interest rates to US banks, and much lower rates are available. But the banks won't refinance their loans (who would they, without government pressure?) and Freddie won't help them. After the government took it over, Freddie continued to bet against them by using $3.4 billion to invest in financial products that earn money if they keep paying higher rates.

The executive in charge of this program earns $2.5 million as a base salary - again, paid by the taxpayers - and a bonus that's driven by how much his investments earn, not by the value they provide. He has no incentive to use our money for the greater social good. His pay package is designed to make him behave exactly the way he did.

And as we said before, this story underscores the both the evils and the foolishness of privatizing a well-run government agency. The private sector does some things well. Serving the greater good at the expense of profits isn't one of those things - and it never will be.

It's a topic that should be discussed much more widely.