Why the GSEs are doomed

A Motley Fool article by Alex Dumortier, CFA, contains a nice, concise explanation why Freddie and Fannie were doomed.

The worse they behaved, the more they were supported
If I'd followed my own advice to its logical conclusion, I might have realized that the current crisis was inevitable, or at least highly likely -- because the 'shareholder-owned GSE' model is inherently unstable. As government-sponsored enterprises, Fannie and Freddie are chartered by Congress to provide liquidity in the U.S. mortgage market, and to promote affordable home ownership. Investors naturally believed that the U.S. government would act as ultimate guarantor on their debt, enabling the government-sponsored enterprises to obtain lower-cost funding than their competitors.

However, the GSEs serve a second master: their shareholders, who require profit growth to stay happy. Growth is what they got, as Fannie and Freddie increased the size of their commitments, despite inadequate capital and poor risk management. After all, what's the worst that can happen when you've got Uncle Sam (i.e. taxpayers like you and me) ready to foot the bill in a worst-case scenario?

This is a textbook illustration of moral hazard at work -- a situation in which the government's implicit backing created a one-sided bet that encouraged management to take on ever-greater amounts of risk. Perversely, the more risk they took on, the less the government could allow them to fail.

As a government-chartered duopoly, Fannie and Freddie were the ultimate golden-egg-laying goose. It now looks like greed and short-sightedness have led their managers and Congressional backers to cook that goose.