Let the GSEs Fail

The Housing Bill containing the Paulson GSE bailout plan goes to the House floor for a vote today. The bill, as written by the Senate, has a $4 Billion in grant provision for local governments to buy foreclosed homes directly. The President threatened a veto if this provision is in the final bill.

Treasury Secretary Paulson is on a crusade to get the bill passed quickly to assure investors both domestic and foreign that the credit of the United States is still 'AAA'. It hasn’t worked as well as he’d like since at least one sovereign fund, the KIA, stated recently they won’t be buying anymore GSE debt.

The $4 Billion for direct foreclosure purchases will remain in the bill according to Speaker of the House Pelosi and House Financial Services Committee Chairman Barney Frank.

Too Many "Firsts"

The bill allows the Treasury to directly buy stock in both Fannie Mae (FNM) and Freddie Mac (FRE) (a first), to provide seemingly unlimited lines of credit (another first), and to open the Fed discount window to both GSEs (and a third first). Never in the history of this country were these meddlings in private companies and markets allowed. It also provides for a strong regulator which hasn’t been defined and seems like "too little too late" if you ask me.

Some are estimating the bill could cost taxpayers at least $25 Billion. However, the same problem Wall Street is having determining the extent of the bad loans in their own portfolios would plague the Treasury in determining what it would cost to back the GSEs as well. The final cost for the over $5 Trillion in loans in the GSEs' portfolio could top out over $100 Billion.

That’s a lot of cheddar baby!

The Double Standard

And yet the American public seems rather oblivious to this double standard. The double standard that you or I would not be afforded. If we risk our capital and lose, we go under. No government subsidy or bailout is in the offing.

If Fannie Mae and Freddie Mac take wild risks, reap ungodly profits, make literally billions of dollars only to find later the profits were an illusion and millions of homeowners, shareholders, and world-wide investors got hoodwinked, they get bailed out.

The government's response: "No problem. Here’s $100 Billion…just don’t do it again!"

Unbelievable!

Paulson believes the GSEs are "too big to fail"... and I believe that if that's true, then they are too big to bail out as well. If the GSEs were rogue mortgage security creators, then keeping them alive won’t instill confidence with our foreign investors…they, just as I, will be wondering when they’ll do it again.

If the Federal government can be held hostage by two private companies, the ransom we pay this time will only pale in comparison to the ransom they ask for next time.

Just Like the War

There is no political leadership on this bail out. All, Democrat and Republican, conservative and liberal, are asleep at the switch. If the Democrats get their measly $4 Billion to "help out the little guy" then they’ll give Paulson a blank check to spend $100 Billion…with no end in site.

Does anyone really believe two stock exchange traded companies with shareholders and investors crying for more profits won’t dunk Paulson’s head in the toilet again and again like some high school bully once they know they "own him" like this.

Since American homeowners are going under by the millions, the GSEs should be allowed to go under too. What’s good for the goose is good for the gander.

When are Americans going to stop allowing their government to get "bullied" by both foreign oil-producing cabals and domestic financial cabals? As a parent if you give your child lunch money only to have it stolen by the school bully, sooner or later you have to step in.

It’s time for us to step in…teach our kid to fight back, to say "No More, I’ve had enough!" Standing up is the only way to stop the bully.

I am ashamed of how much of a "wussy" government we raised…it’s time for some tough love. It’s time to get off the couch and teach this government a thing or two about pride.

Disclosure: None

Comments

[Paul S fromChicago]

It's good that the Scorched Earth folks are so easy to pick out....

[debtacid]

I suspect that the spike up in Financials is just the Mother of all Wall Street Pump and Dump scams to make the massive Fannie/Freddie bailout more appealing to those idiots in Congress. Once Wall Street has the tax payer on the hook, they will let it collapse again...

[vmonter]

While I have no love for the socialist Washington and its Federal reserve money printers, it's hard to sit aside while the GSE stock is so cheap. Every article essentially says "stay away" but the reward is worth the risk.

Especially when Washington has such socialist aims.

[scarletwilco]

I'm sick that they're doing this. It's only delaying the inevitable and there isn't anyone we can elect in the fall that would do any differently.

[buyitcheap]

but before i recommend wiping out the common shareholders, let me get short asap! Ackman part 2....

[PDaddy]

All the cynics fail to understand the root cause for the feds willingness to cover the interests of Fannie and Freddie . . . the fact the feds over the last 15 years have mandated the GSE's provide riskier transactions in the form of low to mod loans. If the GSE's failed to do so, all the benefits of GSE's would be dramatically modified. The old carrot and stick game. Additionally, many of todays whinners are the same individuals and companies crying that Fannie and Freddie would only finance the highest quality loans, thereby failing to comply with the GSE's mandate. Yes, 15 years ago, the GSE's overlooked the riskier low to mod loans in the central cities and rural jurisdictions, but performed for their investors and the feds. Returning anticipated profits and splitting on a fairly regular basis. Unfortunately, we can't have it both ways!! Risk is risk. Unfortuately, the magical artificial underwriting systems created by the GSE's . . . Fannie - Desktop Underwriter and Freddie - Loan Prospector were ill conceived and have finally caught up with loans having 60% total debt ratios and marginal collateral!!

Wake up my friends and ask yourselve's whether you'd like to return to the S & L debacle of thirty years ago where private financial institutions were dialing for dollars in CD's at 16% interest rates while loaning money at 6% creating imbalanced sheets and a failing industry!!

[Eric in IL]

If we let Fannie and Freddie fail home ownership in this country will plummet and we will be in a sever depression. Home values will plummet, equities will plummet. This moral high road thing is ridiculous. I am happy for our govt to pay 25B - 100B to bail these guys out instead of it costing the entire economy trillions upon trillions.

[Muzie]

To Eric:

It's going to cost trillions and trillions anyway.

Think about it. You can't magically create value out of thin air. If the market says a house isn't worth 500,000$, then it's not worth 500,000$. Having the government bail (some) banks out by, say, guaranteeing the extra 200,000$ on that house which is now valued at 300,000$ still cost society 200,000$, regardless if the bank or the government pays it.

All that Paulson is doing is trying to shift the damage so it hits as many people as possible so the total burden loss on each individual and institution is not as great. The cost will still show up, whether it bank losses, homeowners stuck barely paying the interest on their loans for years, or just plain folks who cannot afford to buy a home right now, and who will be priced out as long as the government tres to prop up house prices in this manner.

[icandoitdon]

"Wake up my friends and ask yourselve's whether you'd like to return to the S & L debacle of thirty years ago where private financial institutions were dialing for dollars in CD's at 16% interest rates while loaning money at 6% creating imbalanced sheets and a failing industry!!"

yes i would. savings were rewarded and borrowing was penalized...a normal and healthy reationship unless you're a nation accustomed to its citizens consuming beyond what they can afford to pay for.

today's problems didn't simply occur because of loans made to deadbeats. that would barely register as a blip on the radar screen. absurdly low interest rates, scam mortgages with teaser rates, overleverage by borrowers both rich and poor, securitization run amok, incompetent rating agencies and regulators asleep at the switch had just a tad to do with it too, don't you think?

"If we let Fannie and Freddie fail home ownership in this country will plummet and we will be in a sever depression. Home values will plummet, equities will plummet. This moral high road thing is ridiculous. I am happy for our govt to pay 25B - 100B to bail these guys out instead of it costing the entire economy trillions upon trillions."

spoken like a true socialist who has nothing...therefore nothing to lose.

[WilliamFeader]

Your economy and culture are just fucked. Period. End of story.