This blog knew it was coming, but now it’s official: Fannie Mae and Freddie Mac are now wards of the taxpayer and will receive $200 billion of freshly-minted taxpayer cash to repair their balance sheets. Unfortunately for taxpaying Americans, that’s just a down payment on the amount that will have to be pumped into the two behemoths over time, especially if Congressional Democrats have their way.
Treasury will take up to an 80% ownership position in both Fannie and Freddie as part of the government’s “conservatorship” plan. Common and preferred stock dividends will be eliminated, and the claims of both on Fannie’s and Freddie’s assets will be subordinated to the government’s. So the stock is virtually, but by no means entirely, worthless. Though Paulson would eventually like to see the companies shrink, the idea remains for them to emerge in tact on the other side of the housing crisis. This is a travesty.
Treasury should take this opportunity to wipe out all private interests in the companies and then wind them down over the next decade or so. Taxpayers should never have been put in a position to guarantee the majority of home loans. Now it appears they may stay in that position indefinitely.
And while initially promising $100 billion in funding to each company, essentially the Treasury just wrote a blank check.
The two companies have hundreds of billions of high risk loans on their balance sheet currently worth cents on the dollar. Because the companies have virtually zero capital to support those liabilities, taxpayers will have to absorb all the losses on those loans if the companies are to maintain “positive net worth.” And after absorbing all those losses, taxpayers will have to pump billions more into the companies so they can continue to “support” the housing market. [Lost? Read this.]
As the WSJ is reporting in today’s paper, Paulson wants to shrink the GSEs starting in 2010, the Democrats appear dead-set against that idea. On that point the Democrats are utterly misguided…..
Mr. Paulson signaled that he wants to remake the U.S. housing-finance system in the longer term, ditching the “flawed business model” of government-sponsored enterprises like Fannie and Freddie. The Treasury plan limits the size of each company’s mortgage portfolios to a maximum of $850 billion as of the end of 2009. (Fannie currently owns about $758 billion of mortgages and related securities, while Freddie’s total is about $798 billion.) After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company.
Wrangling over the future shape of Freddie and Fannie will likely be kicked to the next Congress. Already the majority Democrats are pushing back on elements of Treasury’s plan. “Good luck on that,” said Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee, when asked about the Treasury’s plan to start reducing the firms’ portfolios beginning in 2010. Mr. Frank called it “more of a sop to the right” than a real policy prescription and said it wasn’t going to happen.
Is Frank nuts? It’s a “sop to the right” to stop the current system of pumping taxpayer dollars into the housing market? A system that has clearly failed and will end up costing taxpayers hundreds of billions? If I don’t vote for Obama, this will be why: Democrats already control Congress. If they also control the White House, there will be nothing to stop them spending trillions to “save” various sectors of the economy. I choose the term “trillions” deliberately: there was the $150 billion “stimulus” plan, $300 billion housing bill, $300 billion (?) for Fannie and Freddie, $500 billion for the banking system (more in my next post), and possibly $50 billion for automakers. They also want to pass a second stimulus plan which will cost billions more.
Folks, we don’t have the money. America needs to wake up and realize that we’re already bankrupt. The proximate reason for today’s bailout was that foreigners threatened to stop buying Fannie and Freddie debt. They’ve accumulated hundreds of billions (trillions?) of the stuff over the past few years. We’ve allowed ourselves to fall so deeply in debt to foreign nations that they are now driving U.S. economic policy. The deeper into debt we go, the more power foreigners will have. This is the kind of stuff that ends empires.
As much as I hate the idea of putting a creationist a heartbeat away from the Presidency, there is simply no issue more important right now than stopping spending in Washington—not Iraq, not the war on terror, not saving “the economy.” In fact, if we don’t stop spending, the U.S. economy will be wrecked for generations. But don’t take my word for it.