Dan, surely you jest: The takeover will make it hard for the GOP to bash Obama as a big-government liberal? Pray tell, since when has anything the Republicans have done counter to their own professed values and principles - e.g., our current deficit - prevented them from labeling Democrats as big-spending liberals?

I wonder if the new managers of the now nationalized companies will receive government salaries or will they continue to be paid the exorbitant salaries of the executives that ran these institutions into the ground.

"I am cheered by the fact that one of the goals of the takeover is to make sure, long term, that Fannie Mae and Freddie Mac will not be “too big to fail” in the future."

Won't happen, though. Rep. Barney Frank and Sen. Chuck Schumer and the rest in Congress will frustrate attempts to shrink Fannie Mae and Freddie Mac, just as they frustrated attempts to shrink them before the crisis. They want to continue ensuring affordable housing, despite any warnings.

The Administration has been trying to get more oversight and shrink Fannie and Freddie for years-- the second article there includes an attempt for more regulation in 2003. To its credit, so did the Clinton Administration under Larry Summers. But Fannie and Freddie have allies in Congress who have block all attempts at reform in the past, and will continue to do so.

I especially doubt that an Obama Administration would shrink them, considering that two of his most important advisors (who helped vet VP candidates) are past Fannie Mae CEOs (and friends of Countrywide's Angelo) Jim Johnson and Franklin Raines.

Off the top of my head for companies that couldn't be allowed to fail:

Lochkeed Martin and Boeing, because they are the Big Two of the Pentagon's key suppliers

why do they wait to talk about these issues ex post facto? an they be forward thinking (obama or McCain)?when will they address something important like deflation or the cash crunch
or north korea

Probably any company in the Top 100 for revenue would be 'too big to fail', so think your question should be along the lines of 'what companies are "too big to fail" that have >15% chance of failing within the next year' otherwise your list will be huge & unwieldy.

Taking over Fannie and Freddie to essentially avoid the biggest financial catastrophe since the Great Depression (see Tyler Cowen: http://www.marginalrevolution.com/marginalrevolution/2008/09/could-you-clari.html ) isn't quite the same thing as nationalizing health care.

In the case of Fannie and Freddie, the government created the problem by messing with the market and creating these "quasi-private" institutions in the first instance, and then letting them gamble with CDOs and subprime mortgages. They were an integral part of the creation of the bubble, which helped them become truly too big to fail. And all of this was taking place prior to the take-over decision, and with the encouragement of the Dems and the acquiescence of the Republicans (see Paul Gigot's columns in the WSJ archive on Fannie and Freddie). So the choice, short of accepting the consequences of a failure, was bail them out and leave them to their own devices, or bail them out and take over. And, hopefully, they will shrink Fannie/Freddie and make them truly private (or even truly public - not the best, but better than what we had).

On the other hand, creating massive new national entitlements, which will include impinging on freedoms of consumers and physicians, to grow government is another creature entirely.

The takeover won't directly matter much for the housing crisis: Fannie & Freddie simply don't hold enough bad debt for their rescue to directly affect the crisis. Sure, if F/F had failed, then it would have been catastrophic, since they hold lots of high quality debt. But their rescue still leaves a lot of cruddy paper out there that has yet to be written down or sold off.

Indirectly, the F/F bailout increases moral hazard. Compare it with Bear Sterns. Bear Sterns was not really a bailout: shareholders lost almost all their value, people lost their jobs, Bear went out of business, it remains to been seen how well JP Morgan did in the deal, and the US govt acted more as a shepherd. But Fannie/Freddie is a nationalization of a publicly-traded company.

Finally, the effect on US debt remains to be seen. If defaults are low, then the US Treasury could actually make money on this deal. And given the quality of F/F's mortgages, that is a real possibility. But the affect on the market will be rough: who really can compete with the US govt in the lending business?

What other publicly traded company was officially created by the federal government and had an implicit guarantee on its performance supplied by the federal government (which was reflected in its historic cost of borrowing)?

There are no analogs to Fannie and Freddie of which I'm aware, unless it's to other federally created debt-purchasing companies like Sallie Mae. This isn't really the private sector, and it needs to be fixed, one way or the other.

Hank Paulson hat been one of the most effective members of the Bush team and one who either Obama or McCain would do well to keep on. He has been exceptionally clear-headed on China at a time when China analysis consists either if euphoria or xenophobia. A case of Goldman Sachs uber alles, I guess.

In reply to #7: Fannie Mae and Freddie Mac don't deal in subprime mortgages. (By definition, a subprime mortgage is one that doesn't meet the standards of Fannie Mae or Freddie Mac.) As far as I know, Fannie Mae and Freddie Mac have never bought or sold CDOs.

Fannie Mae and Freddie Mac hold mortages and issue mortgage-backed bonds. The reason they are in trouble is that the collapse of the housing market has decreased the value of the mortgages they hold.

"Fannie Mae and Freddie Mac don’t deal in subprime mortgages. (By definition, a subprime mortgage is one that doesn’t meet the standards of Fannie Mae or Freddie Mac.) As far as I know, Fannie Mae and Freddie Mac have never bought or sold CDOs."

Fannie and Freddie don't issue subprime mortgages, by definition, yes. Although they did try to "increase our penetration into subprime," in 2006 according to internal documents. In addition, they most certainly have purchased mortgage-backed securities that include subprime mortgages. Their asset portfolio is huge, and dwarfs their direct mortgage lending. Even though they only got into direct subprime-ish lending in 2006 in a big way, they were buying (and thus backing) subprime mortgages at least in 2002. As noted in the same article,

"The company had a long and deep involvement in this market [subprime and Alt-A] through a different form of investment.

Instead of buying the loans and securitizing them itself, Fannie Mae had invested in securities packaged by others from pools of these loans. Going back at least as far as 2002, Fannie Mae had taken on tens of billions of dollars of such securities, according to regulatory data.

Fannie Mae's investment in Alt-A and subprime securities issued by others would later prove costly."

It doesn't entirely matter if Fannie and Freddie didn't issue the loans directly. If they were willing to buy them, and use their implicit government guarantee to do so, then they helped Countrwide, WaMu, and others socialize the risks while keeping the profits.

Sheldon nails it.

Prof. Drezner asked: "isn’t it going to be very, very hard for the GOP to bash Obama as a big government liberal when a Republican administration takes over two of the largest financial institutions in the country with the support of the Republican candidate for president?"

The short answer is "no." SASQ

It won't be hard at all, since the Rovian campaign discourse is fundamentally dialectical: attack your enemy's strengths, not weaknesses; and proudly trumpet, rather than hide, points on which your own candidate is weak.

Your own candidate is a 26-year Senator who previously was a political aide and a pilot, and your Vice-Presidential nominee has governed a small town and a small state? Attack your opponent for lacking 'executive experience'!

Your party's platform abominates 'choice' in reproductive matters? Celebrate your candidates choices!

There's really nothing surprising, here, and I'm sure we'll hear many more attacks on Senator Obama's 'socialist' policies, and his support of 'government interference in the free market' even as Senator McCain heralds the administration's wisdom in returning Fannie and Freddie to government ownership, now that they've stopped churning out profits.

Hank Paulson hat been one of the most effective members of the Bush team and one who either Obama or McCain would do well to keep on.

How long has Paulson been at Treasury now? Wikipedia says a little over two years. It's only been in the past year that Housing and Credit blew up. Is bailing out corporate America a sign of a good Treasury Secretary? I don't think so.

Put another way- Hypothesis: "The main (or only) reason that Hank Paulson took the job is that the President said 'Your country needs you'" And Hank knew that might be true.

[...] was a veritable who’s who of the sovereign wealth funds blogosphere: In addition to Setser, Daniel Drezner testified as well: Drezner…compared the growing role of sovereign wealth funds and foreign [...]

I am reliably informed that "what's good for General Motors is good for America."

Democrats created the Fannie Mae and Freddie Mac problems years ago. They stopped ALL eforts at reform until it was too late. Now they are trying to blame Bush, McCain and Republicans, everyone but themselves. That's the Gods truth and here is the proof:
http://strategicthought-charles77.blogspot.com/2008/09/democrats-created-fannie-mae-and.html