When last we looked, both Fannie Mae and Freddie Mac were the backstop of the American mortgage system, the place most local lenders were able to sell their loans, get cash and then have funds to make more loans.

But nothing about Fannie Mae and Freddie Mac is ever simple: Both companies used to be government agencies but years ago were spun-off into the private sector. Now shareholder owned, they still have a line of credit with the United States Treasury, a line available to no other private companies.

Investors have generally argued that Fannie Mae and Freddie Mac could never fail because the government would step in to rescue both firms, a view discouraged both by federal officials and company representatives. Because of what investors believed, however, Fannie Mae and Freddie Mac have had access to lower-cost capital than might otherwise be available to competing companies without such federal entanglements.

Much has now been made of the purchase of Bear Sterns by JPMorgan Chase at a cost of $2 per share and the willingness of the Federal Reserve to guarantee some $30 billion in potential losses. In other words, a lot of federal dollars -- your dollars -- are potentially at risk in the purchase of one private company by another private company, a purchase that won't put a dime in your pocket.

Despite claims to the contrary, does anyone now believe that the federal government would allow Fannie Mae and Freddie Mac to fail? Both are vastly larger and more important than Bear Sterns.

Truth is, it's in the national interest to assure that large companies don't fail. But it's equally in the national interest to assure that homeowners are not victimized by toxic loans. And while the federal government moved quickly and forcefully to protect big interests on Wall Street, it did nothing to protect mortgage borrowers nationwide.

Had federal regulators acted in 2002, 2003 and 2004 there wouldn't be option ARMs, predatory prepayment penalties or the widespread use of "liar loans," financing based on stated-income mortgage applications. Federal regulators were as mum, still and compliant as potted plants when it counted, and the result today is that the credibility of the entire financial system is at stake.

Published: March 26, 2008

Use of this article without permission is a violation of federal copyright laws.