Tax payer not a crutch

At Fannie and Freddie, as at other financial firms, highly paid executives stoked profits during the housing bubble by piling into loans and mortgage-backed securities that were bound to tank — unless house prices rose forever and the economy never soured. Greed and poor management skills should not be rewarded with a government guarantee on their future. Private sector risks should shoulder the consequences of choice in bad times as it did in good.

Their higher quality assets, being mortgage related, also made them vulnerable to a housing downturn. In addition, the companies have been poorly supervised — by lawmakers who put a higher value on campaign contributions than on their duties, and by federal regulators who failed to stop the bad lending that fed the bubble.

In that event, taxpayer interests must come first. That implies wiping out the shareholders, so that available cash goes to taxpayers and their claims on the value of the companies take precedence. It should go without saying that taxpayer money should not be used to prop up private shareholders.

Fannie and Freddie may yet make it through without an explicit bailout. Their near-death experience seems to have wised them up. For instance, they are now putting a greater effort into modifying the mortgages of hard-pressed borrowers.

Regulators should clean house now and ensure that never again can so much be screwed up by so few.