Fannie Mae and Freddie Mac, Your Tax Dollars At Work - Bailing

Last week we took a look at lemon socialism, the practice of using public dollars to bail out the failing private companies that were run into the ground though ineptness and greed.

The use of tax dollars is prop up a business is not limited to completely private enterprises. Throughout the country there are hybrid operations that often take on the worst characteristics from the public and the private sectors and combine them.

They can be government licensed or chartered companies like Freddie Mac and Fannie Mae. They operate with public protection, but they have independent private money-making characteristics, which allow their directors and officers to accumulate large quantities of wealth no matter how poor their decision making.

There is no question that bailing out Fannie Mae and Freddie Mac is in the public interest. To allow these giant corporations to go under would have a devastating impact on the nation's economy.  But that begs the question. Federal regulators, conspiring in silence with the two mortgage giants, allowed the situation to get out of hand for years.

Another success story brought to you by the invisible hand of the market. Which is not so much invisible as it is cowardly and weak.

As noted, U.S. Senate to Take Up Fannie-Freddie Bill After House Approval     

The bill gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac and provides for a federal agency to insure refinanced home loans.

Paulson overcame opposition within his own party after some Republicans said the bill risked taxpayer funds and fell short on overhauling the mortgage-finance firms. The Treasury chief said the measure was critical to U.S. financial-market stability and persuaded Bush to drop a veto threat

The Treasury secretary would get power to make unlimited equity purchases in and lend to Fannie Mae and  Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure as much as $300 billion of refinanced mortgages for struggling homeowners.

``The legislation will give the new regulator the tools necessary to ensure the safety and soundness of the GSEs so they fulfill their mission of providing stability, liquidity and affordability to the mortgage market,'' James Lockhart, director of the current regulator, the Office of Federal Housing Enterprise Oversight, said in a statement.

The Congressional Budget Office two days ago estimated the cost of Paulson's plan at $25 billion.

These problems are solved by action before the crisis, not after. But when things look good above the surface, there are cries of too much govenment interference and regulation.

Comments

[John]

There's an attitude by conservatives and the Bush administration that confounds me. If "government is bad," and a waste of taxpayer dollars, why do they depend so much on using it's size and money to help prop up bad corporate management? I've put together a few revealing clips that demonstrates their "tail between their legs" humility when things go bad. Bush on the other hand shows off what he has learned in his 7 years as president with his "down on the ranch" description of Wall Street as "drunk" with a "hangover."

http://democurmudgeon.blogspot.com/2008/07/bush-says-wall-street-drunk-has.html

[antpoppa]

If we were living in any other country than the U.S.A. which rewards serial robbery by the oligarchy, these private industries would have been nationalized. Likewise, the Federal Reserve Bank would have been nationalized. But, with the rotting institution of American Government, being eviscerated by lackey dog politicians of a foul, corrupt cabal of global capitalists, our voting republic is being told stories of a mighty heritage that never was and a thought process that thinks there is nothing better. We receive our abuse and crawl back to a fetid corner and pray for a magic black man to fight our fight.

[anh]

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[Phil Collins]

This is the opinion of Robert Sheridan, CEO of Sheridan & Partners, a Chicago real estate & development company. Their site is www.sheridanpartners.com/market.php.

Not All Financial Woes Are Created Equal
The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.

The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.

In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.

If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.

We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.