I can't think of a single good argument for bailing out the shareholders.

The governement wants to use MY MONEY to buy up shares of Fannie and Freddie, to artificially prop up the stock price of these bankrupt companies.

Well I don't want to own stock in these companies. If I had, I could have bought the stock myself (rather than having the government buy it using my money). I mean, seriously, what do I/we get in return?

No, this is a bad deal for us. And a stupid idea.

-- ARG!

By not bailing out the stockholders I assume that you mean allowing the firms to go into bankruptcy and then be reorganized.

The problem with this is that the creditworthiness of their debt instruments would be compromised by this action. This means that the retirement funds and mutual funds holding these bonds would be forced to sell them off (at a sharp loss), since they aren't suitable holdings for those with this type of fiduciary responsibility.

This might lead to pension funds of private firms (like GM) having to pony up more capital to meet their ERISA standards as well. All this can cause a snowball effect.

Furthermore many of these same pension funds may be stockholders as well and thus, indirectly, so are you - even if you don't know it.

The alternative would be to nationalize the firms as the UK did with Northern Rock, but we don't have this sort of tradition - that's why the Fed bailed out Bear Stearns.

40+ years of Reaganism, "government bad, private good", ideology has made nationalization of failing assets politically impossible.

The only politically viable plan I see is an FDIC-type guarantee of their assets while allowing the stock to do whatever it will. Paulson's idea of the government buying existing or newly issued stock is just appalling. It is one thing to stabilize core financial institutions, it is another to give a sure profit to his cronies who are perched like vultures on the sidelines.

Any chance the feds are letting taxpayer dollars be used to prop ailing/failing banks?

Washington Mutual announced yesterday afternoon after the market closed that they lost $3,300,000,000, a loss more than three times the analysts' estimated loss predictions. Today, Washington Mutual's share price rose as much as 9.7% after this devastating capital jeopardizing loss.

The day before Wachovia Bank, the nation's 4th largest bank, lost $8,900,000,000, well in excess of analysts' estimated loss predictions, yet this issue rose 27% yesterday and has risen as much as an dditional 16.4% in today's trading.

What gives? Well, I would wager that the feds opended the discount window up to the brokerages (Lehman, Goldman Sachs, Merrill Lynch and Morgan Stanley) and allowed them to "borrow" taxpayer dollars (in other words loot the Treausry) with the proviso that they purchase shares of ailing/failing banks like Wachovia and Washington Mutual.

When the current shareholders of these poorly ran banks dump their shares at a decent price in an inflated market today and should the banks/brokerages thereafter fail it will be the fed (i.e. the Treasury and the taxpayer) that gets left holding the bag. Alternatively, the government could come to own all banks indirectly.

"Free" market my ass, this is a government's market.

Is Paulson really talking about bailing out stockholders? I thought the authority to buy equity could mean some sort of purchase directly from the company of some form of preferred equity which a cash-poor company might offer.

Continuing:
5.

The principle of Occam's Razor is that the simplest answer is usually the best: Our system of Selective-Capitalism forces us to Privatize Profits & Commonize Costs. It's how the power imbalance within the machine works. Many, many examples to be found...with the corollary of the relative disparities between blue-collar justice & white-collar justice. Both are manifestations of the same power imbalance.

Here's an argument: In order to support the mortgage markets and to help Americans buy their own homes, Fannie and Freddie need to be able to raise capital. One way that companies raise capital is by selling stock. If the government wants Fannie and Freddie to support the mortgage markets then it needs to support Fannie and Freddie's ability to raise capital and that means it needs to support the stock.

That's easy...
To get money from them for reelections and new congressional crooks...

Oh... and to perhaps get a lobbying job from them after retirement...

It strikes me that promising a future possibility of a gov't bailout, and expecting that we therefore are unlikely to have to actually make good on the bailout is too akin to the scam that the Bushies ran on us with the AMUF- we authorize them to use force, and therefor they won't have to use force. My mother had a saying: if it looks like a duck, and it quacks like a duck.....
I don't know enough about the minutia of these deals, but I sure hope that smart folks like you are watching out for the inevitable hidden trap that will eliminate the risk/ losses that the cronies are liable for, increase their profits, and leave us taxpayers holding a sack of debts-while our kids go homeless and hungry.

"Too big to fail," the next political platitude from the republican thinktanker's "guilded age" playbook trots out. Perhaps not without some truth, but how stunned must be their generation of history-challenged acolytes that "pure" capitalism is not perfect. Those in charge on the otherhand fully understood how their own greed would catch up with them, so it's on to the "Too big to fail" chapter to rescue their houses of cards.

Freddie, Fannie and the Home builders are paying for a big party at the Republican Convention. Why is the MSM ignoring this story?

We bail them out and they party with the Repuglicants. This make me vomit. Where is the outrage?

Because if you let them fail, chaos reigns.

Because the best way to stimulate the economy is to stimulate housing. Housing brings construction jobs, construction orders, home repair purchases. Housing brings lending jobs. In order to stimulate housing, mortgages must be available.

Because offering to bailout Freddie and Fannie allows people to feel secure in the mortgage industry.

Because if you don't offer to secure the companies, then nortgages become harder to get. When mortgages become harder to get, people feel less secure in their homes. Stabilizing them allows people to feel more secure. The more secure people feel in the value of their home -- which is, most of the time, their largest investment -- the more secure the feel about the economy in general. The more secure they feel, the more they spend. The more they spend, the more the people they spend to make. And so on and so on.

And as much as Dean thinks we should all be living in newly urbanized 1200-square foot rental units, people with families want yards. Securing the future of Fannie and Freddie -- making it possible for them to be attractive to investors again, is in the nation's best interest.

Bailing out the American rich is what Congress is for. If you doubt it, just watch how they vote.

You don't have to be a blind conservative not to see it, just an ignorant one to deny it.

We aren't bailing out the shareholders. In fact, they'd be wiped out.

The plan is for a new class of stock to be created and issued to the federal government. Those shares would effectively dilute the existing shares to the point of worthlessness. That's how new stock offerings work.

If you have 10,000 shares of stock, and they're trading at $10/share, then you have $100,000 in stock. Now, if the company creates another 10,000 shares (20,000 shares total), that means there's twice as many shares available, so your stock is now worth 50% of what it was (ie.- $5/share).

In Fannie/Freddie's case, it'd be more than a 50% dilution.

What concerns me is the open-endedness of the proposal. It basically says that if the Treasury decides to bailout Fannie/Freddie, then they can, however they want, using whatever money they want. I'd prefer a much more solid outline of what conditions would trigger it, what the plan is for ensuring the government gets its money back, how will the executives that ran these companies into the ground will be punished, etc.

I think that what they're hoping is that the mortgage market and investors will see that there is this safety net in place and relax. That would mean that the net would never be used.

I thought that when you bought stocks, you were doing so by gambling that the company you invested with was a winner.
This time the gamble didn't win. I would be like sitting at a blackjack table and when your cards started to come in wrong and you were losing - asking the casino for a "do over".
Losing is losing when you gamble. No bail out.

Would it be rude to note that they aren't bankrupt? That they are "adequately" capitalized which is the highest regulatory designation? That the standards for capitalization are quite precise, yet almost never get mentioned during this crisis?

This is the first formal usage of the Too Big to Fail policy for their benefit. It hasn't cost the taxpayers a dime, although it might. Has anyone realistically quantified that chance? Or are there just mountains of ignorance, some willful like Gigot, building on each other?

Why support these companies and their mission of a public good? Because they are the mortgage buyers of last resort. They are all that's left of a liquid market. It is the biggest business in our country. Without confidence in them, there is no one, save our government who could keep the market functioning. By the time the governement directly intervened in that market if the GSEs could not, we would be in the deepest recession of our lifetime and home prices (and wealth) would truly plummet.

It has nothing to do with stockholders, bondholders, or the executives of the companies. The systemic risk is not the companies, but the market for mortgages itself. It will ever be such, unless it completely blows up and then we can look for the next biggest thing and call it a systemic risk.

C'mon, you can do better than that, Mr. Baker.

The twins are highly leveraged: it might be difficult for them to raise funds in the bond market without an equity cushion. [1]

The alternative is allowing them to collapse and have the government take them over. But that scenario should be discussed explicitly, rather than alluded to. It certainly would not inspire public or investor confidence.

As it is, the Feds are relying on the twins to provide liquidity to the mortgage market.

At any rate, isn't the issue whether the Fed & Treasury would be *permitted* to buy equity, and not whether they would be required to?

[1] In 2007, $83 billion of core capital supported $5.2 trillion of debt, a gearing of 65 to 1. Source: The Economist Magazine. Presumably it's a lot worse now. http://www.economist.com/finance/displaystory.cfm?story_id=11751139

I see two choices. Nationalize Fannie and Freddie or don't do a bail out. Anything in between and the taxpayer gets screwed (again). Taxpayers can't be expected to bail out private companies or investors forever. It is time to seriously rethink this. It's a bad idea that effectively allows people to play with public money with taxpayers having all the risk exposure and none of the upside. This is crap. There are consequences to failure. Look at what we have in this country right now. We have a president who has failed miserably and who is not going to be held accountable and consequently the nation is being torn apart. This is messed up. If I screw up and cost my company a lot of money I'm out of a job. That rule needs to be applied to everyone. A screwup is a screwup is a screwup. Who you are or what you do doesn't change it.

Legitimate Reasons to Bail Out Fannie and Freddie Stockholders

How else are F&F expected to continue on with in such highly leveraged positions while coninuing to live beyond their means?

F&F both operate under guise of being free market institutions while in reality they are political onions whose business paradigm is nepotism, cronyism and favoritism with full backing of Uncle Sam and the not so almighty dollar.

As cynicalgirl so deftly typed:

We shouldn't privatize profits and socialize losses.

She's right, although, I wouldn't classify it as socialized losses but rather out right theft in broad daylight with some 300,000,000 witnesses who will do nothing to stop it.

Raw-power baby you've got to love it.

Repeat after Ben and Paul:

They're just too big top fail... They're just too big too fail... They're just too big to fail...

Our Government created the need for additional capital at the GSE's by changing the $ definition of a conforming vs jumbo mortgage as part of the stimulus package. As the GSE's are required to make a market for all conforming loans, and the stimulus package greatly increased the pool of conforming loans, the need for the capital increase was created by Government mandate and not by the ownership/management of the GSE's. Denying the shareholders their rights here would be the same as allowing the Government to pass a law that would criminalize actions after the fact.

Let me make sure I have this right:
The Government, in the guise of a stimulus package, changes the rules so as to create a capital shortfall in a private company, and then gets to use the capital shortfall as an excuse to deny the shareholders their rights. This sounds like good government to you? The government invents an event and then gets to use that event to deny you your rights? Is that really how you think government should work? Good luck with that.

Baker:

TO anyone who doesn't think this is a shareholder bailout, I have a bridge I want to sell you. The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level.

If you are going to sell that bridge, can you at least provide some support for your claim about what the Treasury is allegedly "telling the market"? The plan announced on Sunday, 7/13, was for the purchase of a new class of preferred stock, which is plainly not a bailout of the common stock.

Maybe something different has happened since then, but I could not find it after a simple google search. And if the stock they are telling the market they will buy is the preferred stock, then you can keep your bridge.

I don't know if this is completely off base, but wouldn't an authorization to purchase equity leave open the chance that if things go sufficiently pear shaped then the USG could more or less nationalize these companies by purchasing a controlling share? That would certainly mute outcries at an outright nationalization by conservatives.

Summation of this thread:
Ellen=The Shell Answer Woman

Repeat it, learn it and love it.

Of course it is a bailout...And echoing what Ellen just said, even just by saying they had $25,000,000,000 to keep Fannie and Freddie afloat, if it ever came to that, the government just guaranteed any current holdings of or future investments made in the companies. Just made them a much 'smarter choice' to invest in. If that is not a 'bailout' I don't know what is...

Now it could be debated whether it is smart policy to bail them out, but it is a bailout nonetheless.

> Are you saying that if FRE had had to pay 2.231% rather than 2.005%* on $3 billion of short term debt on that Monday the world as we knew it would have ended? Are you telling me that the banks who have been sucking at the FRB's teat for the past four months couldn't have been "persuaded" to step in to make sure the auction was successful?

*I* wasn't saying that FRE would have paid marginally higher funding costs. I think there was a distinct possibility that the deal would have been pulled due to no buyers willing to stick their necks out in the time of panic. Confidence had dried up and no one was willing to throw good money after bad.

And if that was the case the last liquid portion of our mortgage markets would have dried up, and what would that have meant for the rest of our credit markets? And what effect would that have on the rest of the world's credit markets?

Thankfully we won't be finding out.

UPDATE - here's another piece of the puzzle.

Treasury gets no authority over other shareholders:

"Why the Stocks Are Ripping"

The House bill doesn't require Fannie and Freddie (known as GSEs, or government-sponsored enterprises) to eliminate, or even reduce, their dividends to shareholders even if they draw on the government's line of credit. That's left to the discretion of the Treasury Dept. Treasury also can't compel them to issue more shares. And if it buys preferred shares in them, it doesn't get seniority over other holders.

"It sounds like the GSEs got what they wanted again," said Paul Miller, an analyst with Friedman Billings Ramsey in Arlington, Va. "They got a big backstop and they got language that the Treasury doesn't necessarily have to stop them from paying dividends or cap compensation. That's why the stocks are ripping."

http://www.businessweek.com/bwdaily/dnflash/content/jul2008/db20080723_593585.htm?chan=top+news_top+news+index_news+%2B+analysis

Re: Well, I would wager that the feds opended the discount window up to the brokerages (Lehman, Goldman Sachs, Merrill Lynch and Morgan Stanley) and allowed them to "borrow" taxpayer dollars

Why the scare quotes? Do you have any information you can share showing that these loans will not be paid back, with interest?
Also, this is not "taxpayer" money; the Fed does not get its funds from the federal government's tax revenues.

Mr. Baker, care to chime in here?

That's oxymoronic. If they're preferred they get some sort of preference, either in dividends or distributions or both.

Exactly. There is no automatic meaning to the term "preferred shares," but at a minimum, it means first in line ahead of common stock for its cut of the equity. It can also mean a guaranteed dividend before common stock and a preferred rate of return on capital before any distributions to common, as well as other voting rights and privileges ahead of common stock. The exact package of rights is whatever gets done for the deal, and I have not seen the package for this deal.

But everything that has appeared in the press indicates that the stock that is to be purchased based on certain triggering events (the deal has not happened -- it is only proposed) is preferred stock.

Yes, if it props up the company, the common stock will benefit compared to tanking without a rescue plan. But not at the expense of taxpayers who hold the preferred stock.

Contrary to what Baker suggests, this is actually a likely win-win situation for the government and the economy.

Chicken Little, me? We had a recently retired Fed governor calling them "fundamentally bankrupt", which Mr. Baker seems to believe as well.

Take a look at what happened to a thriving, well-managed company like Thornburg Mortgage when the market for its assets (AAA Jumbo Mortgages) froze up. They got margin calls that couldn't be met - economically bankrupt. The equity was essentially wiped out.

Are we not to have leverage any more? Are we going to mark all assets to market - as Goldman allegedly does? Even though they are always held to maturity? It was a crisis in confidence that caused the government to step in for the favor of the mortgage market. FNM and FRE are the tools; the shareholder's may ultimately benefit, but it is not a bailout for them, it's for the leveraged mortgage market.