Fannie & Freddie (FF) should be (its not too late) allowed to fail. The cash raised from the sale of all of their assets to the highest bidders should be used to pay their creditors in appropriate order, considering term-to-maturity and degree of security. They should not be allowed to borrow any additional funds from, or sell any stock to, any entity. When all of the assets are sold and the proceeds paid to the creditors, FF should be terminated, as should their upper-level employees (interpret that latter any way you care to), and the lower-level employees should be let go. Obviously, there would not be enough funds to have any residual for the shareholders, preferred or common, and for some of the lower-ranked creditors.
Two interrelated issues arise. One, because of the implicit guarantee of their debt, should the creditors and others; e.g., banks and their depositors, negatively affected be made whole by the U.S. Government? Two, what should the goal of the asset sales be?
If we wish to discourage such schemes as FF in the future, the government should disclaim any guarantee. And, the all of the assets should be sold immediately, which would minimize the proceeds from the sale thereby really sticking it to the creditors. This would serve as a real warning for potential investors, creditors or equity, in any future such machinations. This would be my preferred choice. Apparently, many banks own FF preferred stock. Writing that off would reduce their regulatory capital.
To the extent that any of them were to become insolvent because of this, they should be allowed to go under with FDIC paying their depositors as per the $100,000 guarantee. Their stockholders and non-depositor creditors should lose 100% of their investments and the owners of deposits not totally covered should lose the uncovered deposits. If this wiped out FDIC, then another blow against the Tyrant.
If the above is too radical for some, various steps could be taken to make it less harsh; e.g., 1) an “orderly” sale (not selling all at once, but allowing the market to “digest” each partial sale before going to the next); 2) the U.S. Government making explicit the guarantee of FF debt and making good payments to creditors that can not be covered by the sale(s) of assets; 3) the U.S. Government giving funds to banks to replace any capital lost because of the total loss of value of FF preferred stock; FDIC covering any and all deposits in failed banks; and, the U.S Government providing whatever cash is necessary to FDIC to meet its commitments, including covering deposits of more than $100,000.
I think that the most important action is to terminate FF, regardless of how it is done, because if it is not terminated – if it is allowed to continue to exist – at some point in the future it will rise, phoenix-like from the ashes and come back even bigger and stronger than it has been.