News from that other housing GSE

The Cranky Economist has been fascinated by management woes at Fannie Mae for months now. Not only is it a captivating business story, but it's a classic Washington scandal-in-the-making, too. It's all there -- dodgy accounting, fat-cat executives, political connections. Who could ask for more?

But there is another housing GSE (government-sponsored enterprise) that has had a scandal of its own. In 2002, Freddie Mac announced that, thanks to antiquated accounting procedures, it wasn't sure exactly what its earnings were. This was a much more boring scandal, since it seemed to stem more from incompetence than from crass criminality tinged with venality. And in this town, incompetence isn't exactly a rare commodity.

All of which serves as a prelude to the news (from AP via Yahoo! News) that Freddie's 2004 profits took a major hit. A look at exactly why 2004 results were so dismal suggests that the loss could augur well for the future.

Why is that, you ask? Because a lot of the drop in profits arises from two factors: Increasing capital reserves to acceptable levels, and, less significantly, putting the finishing touches on a brand-spanking-new accounting system that will soon allow Freddie to file statements on time for the first time in three years. This, in the GSE world, is what passes for progress.

The long and the short of it is that Freddie appears to be cleaning up its act, and will probably return to some semblance of normalcy towards the end of calendar 2005. Which I suppose is good news. In a perfect world, Fannie and Freddie would both be privatized. But in the meantime, it's not unreasonable to hope that they would behave themselves like real, responsible companies. Freddie, at least, seems to be trying.