CBS Approves of $25-Billion 'Lifeline' for Fannie, Freddie

The massive housing bailout bill, meant to prop up beleaguered government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) and help homeowners refinance adjustable rate mortgages, was praised in a segment on the CBS broadcast. It passed in the House July 23 and won't face resistance from President Bush.

"This afternoon, the House passed a bill that throws an estimated $25-billion lifeline to Freddie Mac and Fannie Mae - the backbone of the home mortgage industry," CBS chief White House correspondent Jim Axelrod said. "The bill makes it easier for both to raise unlimited capital from the government if needed and would allow hundreds of thousands of homeowners to refinance rather than face foreclosure."

But Axelrod's reporting didn't explain that the "unlimited capital from the government" comes from taxpayers' money, nor did he explain the bill eliminated the risks associated with lending.

Even liberal Economic Policy Institute senior economist Jared Bernstein, who said the bill is good for the economy in the short term, noted this substantial commitment from the federal government was bad in the long term.

"[T]hat's why I said in the long-run, I think this doesn't solve the problem, it kicks it down the road," Bernstein said on CNBC's "Kudlow & Company" July 23. "As I said on this show the other night, as long as Fannie and Freddie have now an explicit government guarantee, you've got moral hazard deeply embedded in there and that's a problem."

But Axelrod saw the increase in the value of Fannie's and Freddie's stock as an approval from the financial community.

"Wall Street seemed to agree today," Axelrod said. "After the president said he wouldn't veto [the bill he had previously opposed], shares of Fannie Mae shot up by close to 12 percent. Shares of Freddie Mac rose by 11 [percent]."

However, Axelrod's analysis that Wall Street approved of the legislation is misleading. The stock prices reacted because a federal guarantee makes investment in Freddie and Fannie less risky. The stock prices didn't increase because the entire financial community approved of the massive government commitment.