July 15, 2008 / 5:01 PM / in 10 years

Freddie/Fannie crisis new threat to Bush legacy

By Matt Spetalnick - Analysis

WASHINGTON (Reuters) - He came into office touted as America’s first “MBA president,” steeped in deregulatory zeal and determined to run the economy like a business.

But 7 1/2 years later, a rescue plan that President George W. Bush’s administration had to devise for U.S. mortgage giants Fannie Mae and Freddie Mac has served to underline an already troubled record of economic stewardship.

With oil prices at record highs, the housing market imploding and the threat of recession looming, the crisis over the two mortgage giants is the last thing Bush needed in the twilight of his presidency.

And if Fannie Mae and Freddie Mac’s troubles get much worse, he could be faced with the dilemma of deciding whether to bail them out -- anathema to his Republican free-enterprise roots -- or let them fail, with serious consequences for world markets.

How this all plays out could not only affect Bush’s legacy, already weighed down by the unpopular war in Iraq, but may also have implications for his party’s bid to keep the White House in the November presidential election.

“The economy goes in cycles and it’s hard to blame a president for finding himself at the bottom of one,” said Stephen Wayne, a Georgetown University political scientist. “But you can judge Bush as a manager. He hasn’t been a very able one.”

This was not the way it was supposed to be when Bush took office in 2001.

His supporters hailed him as the “MBA president” -- Bush holds a masters of business administration from Harvard University -- who would manage the executive branch like a corporate CEO.

Bush, in fact, spent his first six years presiding over an economy that would be the envy of most presidents.

But Democratic critics say tax cuts he engineered early on mostly helped the rich and his administration was slow to respond to a credit crunch that led to the mortgage meltdown underlying the current economic slump. As his departure from office nears, he faces the very real risk of a recession.

Despite that, Bush kept up efforts on Tuesday to reassure Americans about his policies, insisting the economy was showing “remarkable resilience” and that a $152 billion stimulus package was starting to have a positive impact.

He also stuck to his assertion that the rise in gasoline prices to more than $4 a gallon, a growing cause of consumer distress and an increasingly hot campaign issue, is a supply-and-demand imbalance for which he has no “magic wand.”


If Bush didn’t already have enough economic woes to worry about, he is now confronted by problems with the twin pillars of the U.S. housing market, Fannie Mae and Freddie Mac, which own or guarantee nearly half of all U.S. mortgages.

They are shareholder-owned but government-sponsored enterprises, known as GSEs, entities long a source of distaste for Republican free marketeers.

Investor fears over Fannie Mae and Freddie Mac’s funding prompted the Treasury Department and the Federal Reserve to step in on Sunday with offers of bigger credit lines, equity purchases and access to central bank coffers if needed.

But shares of Fannie and Freddie dragged markets lower on Monday and continued to sink on Tuesday amid worries the steps would not be enough to avert broader financial fallout.

“The crisis is far from over,” said Jaret Seiberg, a financial services analyst with the Stanford Group. “There is still a lot more risk that may necessitate more direct government intervention.”

It has been a problem years in the making, spanning Democratic and Republican presidencies. But the pressure is now on the Bush administration to start sorting it out or else see its legacy further tarnished.

Though Bush insisted on Tuesday the government should not bail out private enterprises, analysts say it must remain an option, if only a last resort, to keep mortgage giants from collapsing.

It would not be the first time that Bush, who has often insisted on letting the markets run their course, had opted for intervention to avert a wider crisis.

In March, Treasury helped engineer JPMorgan Chase & Co’s purchase of investment bank Bear Stearns to prevent it from going bankrupt and sending a shock through the world financial system.

But a Fannie-Freddie bailout would be more far-reaching, explicitly making the government the guarantor of millions of homes, an ironic bookend to an administration that came to power promising to keep its nose out of the private sector.

Editing by David Wiessler

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