McCain May Privatize Fannie, Freddie; Obama Sees Federal Role

By Rich Miller and Matt Benjamin

Sept. 9 (Bloomberg) -- John McCain and Barack Obama agree the Treasury needed to step in to rescue Fannie Mae and Freddie Mac. They disagree over how much the U.S. government should be involved in the housing market once the immediate crisis is past.

Republican Senator McCain of Arizona wants the government to take over the two agencies, split them up, and then exit the mortgage-finance business by selling them off. Democratic Senator Obama of Illinois is suggesting a more lasting federal involvement.

``The role of the U.S. government in the housing industry is in play,'' said Jim Leach, a former 15-term Republican congressman from Iowa who is now an Obama supporter. ``There are pragmatic and philosophical issues at stake.''

The differences between the two presidential candidates over the lenders mirror a broader philosophical divide over the part the government should play in the economy. McCain supports steep cuts in taxes and spending to promote growth. Obama, while backing some tax reductions, favors increased public investment to boost the economy and job growth.

Conservatorship

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart placed Fannie and Freddie in a government-operated conservatorship over the weekend, ousting their chief executives and eliminating their dividends.

McCain, 72, and Obama, 47, have both endorsed the Treasury rescue of the two firms as necessary given the fragile state of the housing market and economy. They were also sharply critical of the managements of the government-sponsored companies, which together own or guarantee almost half of U.S. home loans.

The candidates found less common ground on the mortgage giants' long-term fate, which Paulson, 62, said remained undetermined until at least after the November election.

``The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market,'' he told reporters over the weekend.

Robert Litan, vice president for the Kansas City, Missouri- based Kauffman Foundation, said the next president faces three choices for dealing with Fannie and Freddie: retain the current public/private partnership in some form, nationalize the companies, or privatize them.

McCain Plan

McCain is clear on what he wants to do. He backs a solution put forward by former Federal Reserve Chairman and fellow Republican Alan Greenspan that would break the companies up and sell the pieces off.

McCain would ``get them completely off the taxpayers' back,'' Douglas Holtz-Eakin, McCain's chief economic adviser, said in an interview on Bloomberg Television yesterday.

He added though that the Republican nominee saw some role for government in ``making credit available to those who otherwise can't get a mortgage'' through the Federal Housing Administration and other agencies.

Obama has been more circumspect on what should be done once the crisis is over, while making clear that a return to the status quo that existed before the rescue is unacceptable.

``We must ensure that any plan clarifies the true public and private status of our housing policies,'' the Democrat said over the weekend. ``We have to make clear that in our market system investors can't be allowed to believe that, unlike working families, they can simply invest in a `heads they win, tails they don't lose' situation.''

`Hasty' and `Ideological'

Jason Furman, Obama's top economic adviser, attacked McCain's privatization plan as ``hasty'' and ``ideological.''

``These institutions do serve a lot of vital public functions for affordable housing that just aren't served right now by any other government institutions,'' he told Bloomberg Television in a separate interview yesterday.

Furman said the outcome would depend on ``disentangling'' the important roles that Fannie and Freddie perform that can't be replicated by the private sector from those functions that can be handled by the market.

``Both candidates agree that the current model doesn't work,'' said Daniel Clifton, head of policy research in Washington for Strategas Research Partners. ``They have different solutions based on their ideological bent.''

Democratic Congress

In any case, whoever wins the presidential race will have to get a plan through a Democratic-controlled Congress that has strongly supported Fannie Mae and Freddie Mac.

``You can't eliminate them,'' Connecticut lawmaker Chris Dodd, the chairman of the Senate Banking Committee, told Bloomberg Television yesterday. ``They have been a tremendous source of stability and strength'' for the housing market.

His counterpart in the House, Massachusetts Representative Barney Frank, who heads the Financial Services Committee, lauded Fannie and Freddie's ``vital role'' in a statement issued Sept. 6.

Charles Calomiris, chairman of Reston, Virginia-based Greater Financial Corp. and a long-time critic of the two firms, told Bloomberg Radio that Congress had persistently opposed overhauling the companies.

``McCain would be inclined toward a more radical solution, though Obama might have a better chance at a less radical solution,'' said Gerald O'Driscoll, a former vice president of the Federal Reserve Bank of Dallas and now a scholar at the Cato Institute in Washington. ``But both of them face a Democratic Congress that is very wedded to these two firms as they exist.''

To contact the reporters on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net; Rich Miller in Washington at rmiller28@bloomberg.net.