Economist Peter Schiff is warning that President Donald Trump’s plans for a unified listing of the Federal National Mortgage Association (OTC:FNMA) or Fannie Mae and Federal Home Loan Mortgage Corp. (OTC:FMCC) or Freddie Mac could create economic risks far greater than those that led to the 2008 Financial Crisis.
Schiff Warns Investors Assume ‘Implicit Guarantee’
On Tuesday, in a post on X, Schiff shared the history of the two mortgage giants, starting with President Franklin D. Roosevelt, who created Fannie Mae in 1933, followed by President Lyndon Johnson, who turned it into a government-sponsored entity in 1968, but “without a government guarantee,” he notes.
“Then Richard Nixon created Freddie Mac in 1970 to compete with Fannie Mae, allowing both to buy non-FHA insured mortgages for the first time,” Schiff says, adding once again that this was “without any government guarantee.”
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According to Schiff, investors wrongly assumed the government would always stand behind the firms, despite repeated warnings to the contrary. He, however, acknowledges that this assumption, “the so-called ‘implicit guarantee’ proved correct,” when they were placed under government conservatorship following the 2008 financial crisis.
Schiff says that Trump’s plan takes this a step further, turning this long-criticized “implicit guarantee” into an official one. “He claims they'll retain their ‘implicit' guarantees, but once the government officially acknowledges such a guarantee, it ceases to be implicit by definition and becomes explicit,” he says.
Such a move, he says, could prove disastrous. “The damage Fannie and Freddie did before 2008 will pale in comparison to the harm they can cause if released from conservatorship under Trump's plan,” Schiff says, adding that it could go down as “one of the worst economic decisions ever made by a U.S. president.”
A ‘Moral Hazard’ In The Making
Last week, Schiff warned that a potential merger of Freddie and Fannie could create a “moral hazard” that would be far greater than what existed leading up to the Great Financial Crisis of 2008.
However, Hedge fund manager Bill Ackman, whose Pershing Square Holdings is one of the largest shareholders in Fannie Mae and Freddie Mac, has come out in support of Trump’s plan.
Ackman believes the resulting synergies from this merger can help lower mortgage rates. “A merger would also reduce the cost and risks of government oversight as there would be only one institution that would require FHFA oversight,” he said in a post on X.
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