from The American Prospect:
Shorts and Fannies: A Brief History
An explainer on Fannie Mae, short-selling and government economic regulation. Robert Kuttner | July 22, 2008 | web only
Americans who are not financial experts have been scratching their heads lately, trying to understand just what short-selling is and why it threatens banks, and what exactly Fannie Mae is, and how it might be dragging down a housing sector that it is supposed to help.
A brief history lesson is in order. Fannie Mae, (nee the Federal National Mortgage Association or FNMA) was once an irreproachable government agency -- its troubles began only after it was privatized and wise-guy executives started paying themselves multi-million dollar bonuses for taking excessive risks. And reformers have been trying to get rid of short-selling since before Franklin Delano Roosevelt.
This is a little technical, but stay with me. It's a good story.
For a year now, the Bush administration has been pursuing emergency regulatory interventions in practice that it does not accept in theory. Since mid-2007, the ad-hoc rescue operations conducted by Treasury Secretary Hank Paulson with the help of Federal Reserve Chairman Ben Bernanke have included:
* An emergency takeover of Bear Stearns by JP Morgan Chase, at fire-sale prices, putting $30 billion of taxpayer money at risk.
* Offering a general line of credit to large investment banks that previously enjoyed no special government guarantee or supervision.
* Putting government capital at the disposal of Fannie Mae, leading to outcries from across the political spectrum.
* Invited banks to exchange dubious paper for government-guaranteed Treasury bills, in order to recapitalize banks and move markets in risky securities that nobody else wanted to buy. .....(more)
The complete piece is at:
http://www.prospect.org/cs/articles?article=shorts_and_fannies_a_brief_history