Do Fannie And Freddie Need A 'Bad Bank?'

As the Obama Administration mulls ways to reorganize the mortgage giants, the idea of creating a "bad bank" to hold toxic assets is back, but drawbacks remain

As the Administration weighs options for reorganizing Fannie Mae (FNM) and Freddie Mac (FRE) in the wake of their dismal financial performance, a strategy that spawned a lot of chatter but little action earlier in the financial crisis may be back on the table. Months ago, policymakers and outside experts weighed the benefits of creating a "bad bank" to hold commercial banks' toxic assets, but the idea never gained traction. Now, some suggest, the concept could help to restructure the mortgage giants—but the hurdles that caused commercial banks to adopt a different solution remain.

Fannie Mae said on Aug. 6 that it lost $14.8 billion in the second quarter and plans to draw down another $10.7 billion from the federal government to balance its books. That brings to $85 billion the amount of funds that it and Freddie Mac have received from Uncle Sam since the government took over the companies last September, driving home just how shaky the government-sponsored entities remain. Small wonder, then, that speculation has resumed over what the government will ultimately do with the companies, which long functioned as publicly traded firms with a government-defined mission to bolster the housing markets.

GO HERE to read more.