Earlier this week, the Wall Street Journal’s John Carney argued that recapitalizing Fannie Mae and Freddie Mac is a bad idea, and that it would be more of a risk for taxpayers than another bailout.

“It’s important to note there is no insurance-like feature allowing Fannie and Freddie to build capital. The income foregone by the government wouldn’t lower the likelihood of losses or the ultimate costs. It would simply move the cost to the certain present from the contingent future. That’s a bad deal for taxpayers,” Carney wrote on the Wall Street Journal’s blog.

Now, it’s a given that the folks at Investors Unite think Carney’s wrong, and they are now offering a multi-point rebuttal to Carney’s assertions.

Carney’s blog (read the full piece here) was a response to the recently released paper co-authored by William Isaac and former Senator Bob Kerrey that argues that the government had every right to drive a hard bargain in its restructuring of Fannie Mae and Freddie Mac — once it makes a deal, it needs to live up to that deal.  

The Isaac-Kerrey paper further argues that the government’s decision to change the terms of the deal by enacting the third amendment sweep set a bad precedent, and has led to dangerous exposure for the taxpayer by leaving Fannie and Freddie undercapitalized. 

Here is what Investors Unite says about Carney’s points.

  • Carney is wrong in claiming that Fannie and Freddie can't rebuild capital. HERA allows Director Watt to suspend dividend payments to the federal government for this purpose.  
  • Carney is also wrong to say that allowing them to rebuild capital is allowing them to come back to life without addressing the flaws that previously existed. First, HERA addressed these flaws and the entities have been reformed. Second, it's still up to policymakers (specifically Federal Housing Finance Agency) to determine the outcome of the conservatorship.   
  • Carney's logic that the sweep protects the taxpayer more than allowing Fannie and Freddie to rebuild capital makes no sense. We don't allow any large institutions to operate with no capital.  Why are Fannie and Freddie any different?  
  • Carney's Buffett analogy is not really a good one; Buffett put money into Goldman Sachs before the Treasury acted. So that really isn't an example of private capital working alongside government.