Taxpayers to the rescue!
September 8, 2008 – 12:31 amThis 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.
[My previous post, which is also filed under the tutorials page, will help you understand the basics. If you aren't familiar with how Fan and Fred operate, check it out before you read on.]
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.
Posted in bailout, Economy, government spending, politics, taxpayer issues |
7 Responses to “Taxpayers to the rescue!”
Always look for a new post by you–one of the more eloquent writers on the most dour of topics.
I believe we’re close to a dollar freefall if this is the kind of stuff sovereign funds are strong arming the US govt into.
But don’t take my word for it:
http://www.nakedcapitalism.com/2008/09/chinas-central-bank-is-short-of-capital.html
An excerpt:
“The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value….
But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.
For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”…
China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar. China spent more than one-eighth of its entire economic output last year on foreign bonds, and then picked up the pace during the first half of this year….
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses.
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
If US officials privately assured the Chinese government that Fannie and Freddie debt were government guaranteed, as reader Scott’s well-placed sources say, there is a germ of truth in the Chinese view.”
They’re going to cut us loose. It’s when, not if.
By Lisa on Sep 8, 2008
PS–FDIC is next
By Lisa on Sep 8, 2008
What the general public does not seem to understand is that this will not stop one foreclosure. All this bailout does is protect the lenders from having to actually absorb losses when they foreclose on homes that they never should have financed in the first place. The facts that the borrowers overextended and that the homes were not worth the purchase price is not a situation that lends itself to a post closing correction. We can lower mortgage rates to 2% and not restart the housing boom. The prices went too high. Now all we have done is rewarded the institutions that enabled the bubble by forcing everyone, including those of us who did not overextend ourselves in a ridiculous house purchase (or more) to cover the losses. And we used to be a free market economic system…
By Peter on Sep 8, 2008
Foreign governments, and many of them not at all our allies, control the US now. We sold so much ownership to foreigners that they now know, and they know we know, they can pull the rug right out from under us at any time and WE MUST DO WHAT THEY SAY. Think greed and incredible national debt don’t come back to bite you in the ass now people?!
What a total disaster this is. The “brightest minds of our time” put all of this together and look where we’ve ended up. Classic example of why street smarts kicks the ass of book smarts everytime.
Book-smart will not walk into the dark alley in South Central at midnight first. Nooo, instead they’ll pay the bum laying in the gutter $5 to walk through first to see if he gets murdered. If he doesn’t, well then it’s the all clear and they can parade on through. Trouble is, ol’ book smartie, in his infinite wisdom, never calculated the risk the sucker posed to him. China, Korea, Japan, Russia, soveign wealth funds around the globe are none too happy being played as the sucker. They’ve now pulled a gun on book smart guy inside that dark alley. Brilliant move!!
Street-smart doesn’t need to calculate a damn thing!! He walks around the building, didn’t sucker anyone, got some exercise, and saved themselves from getting stabbed in the damn neck in the process. I don’t know about you, but I’m with street smart guy.
This little financial exercise that was left entirely unchecked over the past 10 years has just cost this country it’s LIFE. Literally.
Take some advise from the street-smart guy: Stock-up, Cash-out, and hunker-down because it’s going to get wild, wild west up in here!!
By JRB on Sep 8, 2008
I completely agree with you Peter. I wonder when people will start opening their eyes to the massive amounts foreclosure law firms are making these days? All these firms are getting rich on whose dime? The taxpayer. The lenders, since they’ve lost so much already, don’t bother to regulate and tighten control over the firms and how much they are charging.
By Julia on Sep 8, 2008
Are we emulating Hugo Chavez or is he emulating us?
By js290 on Sep 8, 2008
The founding fathers made a lot of money with slaves. I must admit that they now have expanded the concept to the whole country. Your politicians are proud descendants of the slave merchants and buyers ! Congratulation to the Congress and the Senate. Taxpayer is really another for slavery and serfdom. Ir really is. And next week SS Paulson will be introducing another 3 trillion dollar aid package for another industry or another well connected banking institution. It’s nice to see how this superpower is runned; exactly like communist/facist Chna and the ex USSR !
By Marc Authier on Sep 9, 2008