Bush and Congress Want to Raise Your Taxes to Help out Fannie and Freddie's Management and Shareholders
That's the word from the press reports. Apparently the government is going to hand Fannie and Freddie bucket loads of taxpayer dollars, no questions asked. The NYT reports that they will be given access to $300 billion of government loans at below market interest.
That's nice. Shareholders who would have lost all their money if matters were left to the market, may instead walk away with billions of dollars. Similarly, the top executives of these companies, who earn salaries in the millions and tens of millions of dollars, will keep collecting their paychecks.
We should all be thankful that the government intervened. After all really rich people and investment fund managers can't be expected to be able to handle their investments on their own. They need the helping hand of the government when they really screw up.
Similarly, we don't want the fate of highly paid executives to be left to market. If this happened, some might lose their vacation homes and private jets.
Some people say that we had to hand tens of billions of dollars to the country's richest people to prevent a financial collapse. This is simply not true.
We had to keep Fannie and Freddie in business, but we could have done this by putting conditions on the bailout. The government uses conditions all the time when it offers help to low and moderate income people. Unemployment insurance, TANF, food stamps, and even student loans come with all sorts of conditions.
It is only when it comes to giving money to extremely rich people that we find it impossible to impose conditions. Again, we could have told Fannie and Freddie that no executives will get more than $2 million a year in total compensation. We could have told their shareholders that they are out of luck, because that is what is supposed to happen when you invest in a bankrupt company.
Instead, we told the people who work as truck drivers, school teachers, and fire fighters that they will have to pay more in taxes to help some of the richest people in the country escape the consequences of their own stupidity. While kicking the poor is always fun for politicians, neither the Bush administration nor Congress are prepared to tell the very rich that they are on their own.
Thank you for this, and for your previous comment. They sound pretty darn cogent to me.
July 14, 2008 12:23 AM | Reply | Permalink
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Treasury Secretary Henry Paulson 7/13/2008
Since a failing institution is unable to guarantee much of anything -- and certainly not $300 billion, maybe someone should ask Mr. Paulson exactly what these "terms and conditions" amount to.
July 14, 2008 2:01 AM | Reply | Permalink
Paulson was appointed by Bush, going by past experience with this gang, I expect very little from him regarding "terms and conditions."
July 14, 2008 12:54 PM | Reply | Permalink
First thing... Perspective.
You are complaining about a few million in compensation for a pair of companies that hold about 6 trillion in debt. WHO CARES? Maybe I am just used to seeing rich folk screw people over, but really, this is a minor point.
How about being a little constructive here. Maybe examine the rrot of the problem? Deregulation of banking along with gov't directed rate lowering that went on far too long. (As an aside, my metaphor here is imagine a dumb guy goes into a hospital a sees a man in cardiac arrest being revived by an adreniline injection. He walks away thinking adreniline saves lives and proposes that every person be given adreniline all the time to stay healthy. Such is Bush and greenspan with the artificially low fed rates)
When you combine the losses in the stock market going from 14000 to 11000 and the average house losing 15% of value since 2006, the country has lost a few TRILLION in wealth. Perspective!
If Fannie and Freddie go down, the housing market will be left to private industry, and with an inflation rate of about 5%, expect a lending rate in the double digits on mortgages for the highly qualified. A house does not have an intrinsic value, it has a monthly cost of ownership that translate to value. A person does not buy into a 200k house or 300k house, they buy into a 1500/month payment or a $2500/month payment, the actual value is ancillary because the cost is determined by the monthly carry.
What it comes down to is bailing out fannie and freddie which would hopefully stabilize the market while incurring 5-6 trillion in debt, most of which performs. The other option is letting them fail, which would drive up rates and kill housing values to the point that the country as a whole would lose trillions in wealth due to housing value declines.
There is no good solutions at this point, but griping about compensation is wasteful.
July 14, 2008 3:48 AM | Reply | Permalink
I respectfully disagree on a couple of points.
First, as a taxpayer (soon to be a partial owner of Fannie and Freddie, even though I'd rather not be), I care about whether the idiots who ran the companies into this iceburg are getting fair compensation. Sounds like Dean Baker thinks they are overpaid somewhat. I'd be inclined to agree with him.
Second, Fannie and Freddie ARE "private industry". Through lobbying influence they have received special treatment from the government for years, with an implied (but not real) backing of their securities -- making these private companies EXTREMELY profitable. But they ARE private companies. (Or, at least, they were.)
Finally, you offer a false choice: "What it comes down to is bailing out fannie and freddie ... The other option is letting them fail." I think Dean's point is that you could bail them out and still make them, and their shareholders, feel some pain. But we (the gov't) chose to let them all off the hook.
-- ARG
July 14, 2008 11:17 AM | Reply | Permalink
If any of you readers/posters have a mortgage or have owned a large-cap mutual fund over the years, you have owned and benefitted from Fannie and Freddie. The issue of these two institutions should basically be non-partisan. As GSE's but not 100% government backed, they have been in a confusing position in the capital markets - one that I found totally incomprehensible - but a position that Fidelity and the famed Peter Lynch, among many others, found appealing and profitable. Congress has been their regulator and now with Treasury and the Fed involved, their independence and opus moderandi will be dramatically altered. They are the country's mortgage lender of first and last resort and must remain so.
July 14, 2008 7:34 AM | Reply | Permalink
I meant to say modus operandi not opus moderandi. Too early in AM and before coffee, and getting late in life.
July 14, 2008 8:08 AM | Reply | Permalink
What if my mutual fund owned them while their stock dropped dramatically in recent weeks? I guess I would not have fared so well then.
What I don't understand is why can't the Fed help them with their debt by giving them access to borrow money, but not with their equity?
It just seems crazy to me that the federal government may buy their stock on the market.
July 14, 2008 4:12 PM | Reply | Permalink
You seem to be late to the party. The WSJ has for years been screaming about the lax oversight, cushy highy paying director jobs for the politically well connected, opaque accounting, private profit with public risk, and similar issues. IIRC, Jamie Gorelick knocked down $26 million as a director.
Where were you on this before the stuff hit the fan?
July 14, 2008 9:21 AM | Reply | Permalink
Mr. Amir,
If you perform an Internet search of Mr. Baker's writings, you will find that he has given the topic some consideration.
July 14, 2008 10:03 AM | Reply | Permalink
but...but...but I thought high compensation meant high talent.
July 14, 2008 10:30 AM | Reply | Permalink
Not talent. High compensation means control of the rules that establish the amount of compensation.
CEO's appoint the members of the Board of Directors in private companies, then the Board determines what the pay for the CEO will be. The Board also winks at cute little practices like giving the CEO stock options, but backdating them to a time of low stock prices so that the reimbursement is a lot higher than it should be when the CEO borrows the money from the company that he needs to cash the options in.
That's why the average CEO of a large public company gets $16 million a year, in good years and bad, and why the top managers who have driven Circuit City into the ground got a $million "bonus" last year. That's why the top managers of American Airlines have gotten multi-million dollar bonuses that came directly from reduced wages of pilots, stewardesses and ground crew.
The CEO of CountryWide walked away with a $169 million going away present as the company collapsed behind him (IndyMac is one result of his management.)
Top managers pay no price for piss poor performance in this country. It's not talent. It's power that protects them.
July 15, 2008 5:20 PM | Reply | Permalink
aaayup
July 16, 2008 6:17 PM | Reply | Permalink
Dean,
This may be a dumb question but I'd like an answer in any event if you could provide one. The question is: why, instead of bailing out the bankers and lenders, doesn't the government simply use it's authority to make more reasonable mortgage rates available to the citizens who need the relief? Seems to me simply by allowing citizen homeowners to borrow at a fixed rate they can afford keeps cash flowing into the irresponsible lenders, but also makes it possible for the little people who keep the nation working to avoid disaster in their own lives.
July 14, 2008 11:08 AM | Reply | Permalink
For those homeowners who did not buy homes as a gamble the home would make them rich-and who have already defaulted and skedaddled often with the plumbing-our government leans to making the financial instruments and financial institutions whole rather than the individual citizen- they are let to the mercy (or lack of it) of their lender.
July 14, 2008 11:59 AM | Reply | Permalink
"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy," Bernanke... link
Proposals to 'Crack Down' on 'Dubious Practices'
• bar lenders from making loans without proof of a borrower's income.
• require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.
• restrict lenders from penalizing risky borrowers who pay loans off early.
• prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.
Wow! The Fed is really clamping down on the mortgage/money lending business, how is anyone going to make money with rules like this in place?
The bar on 'repaying a home loan from the home's value' -why was this legal before?
July 14, 2008 11:42 AM | Reply | Permalink
"The bar on 'repaying a home loan from the home's value' -why was this legal before?"
It's called DE-REGULATION, and it started with Reagan.
At work today (in the cubicle farm) I overheard one co-worker explaining to another that "the Democrats in Congress pushed the President to lower interest rates and make it easier for people to buy homes, and this is what happens..."
WHAT A LOAD OF CRAP!!
We have to make it clear to people that this melt-down (and we're only in the second inning, folks) is 100% a REPUBLICAN disaster, caused by de-regulation -- you know, "getting guvment off the backs of big business" -- and that the answer is RESPONSIBLE GOVERNMENT which includes some reasonable regulation of business practices. Oh yeah, and ENFORCEMENT of existing laws.
Sorry for yelling. This gets me worked up.
-- ARG
July 14, 2008 11:52 AM | Reply | Permalink
We all should get "worked up" over this current false Republican meme that bleeding heart Democrats are responsible for the crisis.
We can start by pointing out that as late as four weeks before the two Bear Stearns hedge funds went under in July 2007 and signaled the credit/insolvency crisis ahead, President George W. Bush was still plumping for his ownership society urging, for example, "Congress to expand the American Dream Down-Payment Fund."
This slander which has been gaining currency over the last year or so has to be halted in its tracks.
July 14, 2008 1:53 PM | Reply | Permalink
The Fed could have put on the brakes by requiring even minimal standards in mortgage lending, but no.
They didn't require income checks or any documentation, allowed very confusing terms on adjustable rate and interest only loans and advanced repayment, plus mortgage fraud was not properly prosecuted, leading entirely predictably to mortgages people couldn't afford, high rates of default, and the current situation.
July 14, 2008 4:09 PM | Reply | Permalink
And there are counter arguments to the meme that it's all the fault of the greedy, lying home buyers.
I don't recall the exact statistic (maybe somebody can help me out), but I heard that a report or a study recently showed the following: Among people who are currently in trouble due to their adjustable rate mortgages adjusting upward, a large percentage (maybe 40%?) could have qualified for conventional fixed rate mortgages, which they could have afforded. But they were steered toward the adjustable rate mortgages, because these were more profitable for the loan originators!
With even the slightest amount of analysis it seems CLEAR that the majority of the fault lies with the mortgage companies and the un-regulated system that allowed them to make bad loans, bundle them together with good loans, then sell the SIVs and CDOs to "investors" (hedge fund managers risking other people's money) who didn't know any better, or just didn't care.
-- ARG
July 14, 2008 5:22 PM | Reply | Permalink
. . . the meme that it's all the fault of the greedy, lying home buyers.
But that's between the voter and his ne'er-do-well neighbor!
This is the meme, straight out of the Washington Post (who else?) that the Repugs are trying to hang around Democrats' necks. A sample ---
Eager to put more low-income and minority families into their own homes, [HUD] required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers.
. . . that contributed to an escalation of subprime lending that is roiling the U.S. economy.
In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers.
And Jerry Bowyer in The New York Sun:
The government compels banks to make loans in poor neighborhoods even if the applicants are not considered prime borrowers.
Countering this disinformation, as Barry Ritholtz does here, is critically important.
July 14, 2008 8:33 PM | Reply | Permalink
The fed was being run by the Ayn Rand acolyte and Libertarian, Alan Greemspan. He also wants to return America to the Gold Standard, like his fellow Libertarian Ron Paul (a devoteed of the Astro-Libertarian school of Von Mises.)
The deregulation was pushed through Congress by Senator Phil Gramm, a failed Economist who is also a Libertarian of the Astro Libertarian school. Dick Armey also is an Astro Libertarian.
Then there is the NO Tax Increases Grover Norquist, also a Libertarian.
This is the Reagan Revolution conservative movement at work, and the result will always be a series of economic booms and busts, each greater than the one previous until the government steps in and re-regulates the financial industry.
The financial industry exists to trade in documents that establish ownership of property and of flows of cash. There is no real product here. They are selling promises, nothing else. It's clearest in life insurance. You pay money for a promise that upon your death, they will give money to someone else. Health insurance? You only get it when you are healthy, then they promise for all your premiums they will pay some of your medical bills - until it gets to be too much, when Blue Cross of California goes back to the original applicatio0n, declares it fraudulent, and they refund your money.
And so on. The point is, there is no real product, just promises you pay for. The value of the promise is as ephemeral as the promise itself - unless the government enforces the promise.
Deregulation removes that enforcement. Which is why doctors today don't get paid for as much as 20% of the work they submit to insurance companies according to my last Sunday newspaper.
July 15, 2008 5:37 PM | Reply | Permalink
And obscenely overpaid for the 80% they do get paid for.
July 15, 2008 9:53 PM | Reply | Permalink
"If Fannie and Freddie go down, the housing market will be left to private industry, and with an inflation rate of about 5%, expect a lending rate in the double digits on mortgages for the highly qualified."
Let's see now....
I paid 7% on a 30 year loan. I am now having to pay much more for the previous and this current (and possibly future) bailouts.
As far as I can tell, my interest rate is already at double digits. the difference is it is now called taxes, and it will go on forever, not for thirty years.
Now that I have figured this out, I would call my original loan papers and my current cost deifferene fraudulant, at the least...
By the way... this current fiasco has been brought to us by all those good folks we have been electing to Washington these past twenty years, since decontrol has been given to to us by BOTH parties...
July 14, 2008 5:32 PM | Reply | Permalink
Anyone would have to have a flat line EKG to believe 'Keating Five' S&L bailout schmoozer McCain would have a snowballs chance in hell of changing one damn thing about the fact that the Wall Street and big money own Congress. McCain has been there for 26 years. Obama is trying to create a base outside of the lobbyists circles.
July 14, 2008 7:36 PM | Reply | Permalink
I find it beyond mind boggling that we have come to this point in time in our history, which obviously has taught us nothing. while other countries with overflowing stashes of worthless dollars are using them through their Soverign Wealth Funds to purchase valuable properties ie: something of value here at home, I have to wonder when Hank Paulson will establish the USA Poverty Fund?
If this wasn’t so scary it would be hilarious: Paulson has asked Congress for permission for the Treasury to by Fannie & Freddie’s stock!! With what money, may I ask? The government debt is running at 10T$ and the total unfunded liabilities over 60T$! This means that the Treasury would merely increase its debt even further to invest in bankrupt companies! Countries such as China, UAE, Saudi, Kuwait etc have sovereign wealth funds to invest and diversify their surplus foreign currency to ensure the wealth of their countries continues for generations to come. The USA is going to have a Sovereign Poverty Fund so as to invest money that the country has not yet earned (and never will) in the worst investment choices on the planet! This will ensure that not only this generation is poor but generations of Americans to come will be poor, with the exception of a few elite bankers as Goldman Sachs and JPMorganChase.
So Paulson proposes that the government buys bankrupt company stock ON MARGIN and the stocks take-off out of the gate this morning! There are certainly some sick puppies on Wall St who think that is a trade.
Considering that at the first sight of financial trouble at the IMF there was a rush to propose selling gold to bridge the gap between expenses and income, I can’t help but wonder when someone will propose selling the US gold reserves to buy Fannie and Freddie stock. This would certainly upstage Gordon Brown for the trade of the century selling englands gold at $250. an ounce and then losing billions as the price has now risen to nearly $1,000.
While the Working Group On Financial Markets is in high gear trying to pretend that all is well and that the rescue of the two mortgage delinquents is cause for celebration, what the analysts and media fail to recognize is that this is not ONE of the mortgage behemoths in trouble, it is BOTH. That means it is not a CORPORATE PROBLEM but a SYSTEMIC PROBLEM.
Can’t think of a better investment than gold right now!
July 14, 2008 6:05 PM | Reply | Permalink
Fannie opened near 13 and closed under 10 for a loss on the day of 5%, Freddie opened just under 9 and closed just over 7 also for a loss of 8%, so the big Fed 'rescue' was a flop for the 'taxpayer bailout will pay us' dip buyers today.
There were millions of shares of these stocks bought today that ended up as losers to the tune of tens of millions of dollars.
July 14, 2008 9:28 PM | Reply | Permalink
You can't be serious!
FNM opened 25% above its Friday close and was sold down most of the day. The traders made a fortune -- hundreds of millions of dollars. The only losers were the long-term buy-and-hold investors.
Sort of like those greedy uninsured depositers in IndyMac who couldn't give up the interest on their CDs and so, left their money in the bank.
Bears make money. Bulls make money. Pigs get slaughtered.
July 14, 2008 10:20 PM | Reply | Permalink
This is stupid. Fannie Mae and Freddie Mac have been screwed up for a long time (and there's a lot of blame to go around for that - starting with each of us), but Congress is not raising your taxes to bail out shareholders and management. That's just stupid.
Republican and Democratic politicians have sworn for years that there was no government guarantee for these corporations, but the fact is (as most people realized), they are just too big to fail. We just can't afford to let that happen. You think the economy is bad now? Hah!
Now, the shareholders (including mutual funds in your 401-k, pension plans, etc. - we aren't all fat cats!) in Fannie Mae and Freddie Mac have already lost hugely. The stock value was down something like 80% last I heard. Upper management will almost certainly get booted for this fiasco. Yeah, they won't suffer much, but get real. There's a certain saying about cutting off your nose to spite your face. That definitely applies here!
This is the same kind of knee-jerk response we heard after the Bear Stearns fiasco, and it's just as stupid now. It's like we can make up for our earlier apathy and inattention by complaining about unfair bailouts afterwards. Well, this whole mess is (collectively) OUR fault - the fault of the American people who let this happen. Well, it's a mess now, and measures to stave off even further disasters won't be pretty and won't be fair. So what? It's an emergency. We need to grow up and start acting like adults.
July 15, 2008 8:49 AM | Reply | Permalink
Right you are!
When it's everybody's fault, nobody's to blame. So suck it up, Americans, and stop whining!
Your friends,
Phil & Wendy
July 15, 2008 10:16 AM | Reply | Permalink