Cerberus’ Snow Compares Fannie, Freddie To Hedge Funds

Jul 14 2008 | 11:32am ET

It’s not the first time “hedge fund” has been used as an epithet, but a former U.S. Treasury chief is using the H.F. words to describe mortgage giants Fannie Mae and Freddie Mac.

The two firms, into which Treasury said yesterday it will inject billions of dollars in loans and investments, have been “arbitraging their lower borrowing costs that came about because of the implied status as government entities,” John Snow, who now serves as chairman of private equity firm Cerberus Capital Management, told Bloomberg News.

“The business model they were using was really the model of a hedge fund,” he added.

Snow, who led Treasury from 2003 until 2006, complained about the two government-chartered firms, which together account for almost half of U.S. mortgages, and their “enormous political organization.” He chastised Congress for failing to regulate the two, and argued that “nationalization should not be an option.”

“The most important thing is that systemic risks that those institutions present get dealt with,” he said. “They play such an important role in the secondary mortgage markets, but it’s coming at such a high cost in terms of potential blowup of the whole financial system.”

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