Normally when a company becomes insolvent an administator is appointed by the courts (or in some instances voluntarily by the directors). Rather than manage the company according to shareholder interests (as a board of directors is meant to) the administrator is there to manage it in such a way as to protect the interests of creditors.
If Fannie Mae and Freddie Mac had not been taken over by the US federal government then after the dust settled they may instead have ended up being under administration. Perhaps we can consider the US federal government as simply being a different sort of administrator. Yet reading the following article leaves me wonders whether governments make good administrators:-
Oct. 11 (Bloomberg) — Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
If this is true then Fannie and Freddie are essentially being made to swallow toxic financial waste. Is this how you cure a financial entity that has swallowed too much toxic financial waste?