I won't claim to be prescient about Fannie Mae and Freddie Mac. But I've been writing critically about them for a long time, even back in the 1990s when they were riding high. The combination of private profit and socialized risk always got under my skin, and I think I had a resentment of the place the way I didn't like the cool kids in high school.
Fannie Mae, more than Freddie, was the cool place in Washington for pols and hacks to hang their hats and gets rich all under the guise of doing good. I've always had a sinking feeling about the place. As recently as a few months ago, after Fannie's stock has collapsed by 50 percent, I suggested that after we got through this mess, the place be privatized. I had no idea that it would come to this--government receivership of the kind announced this weekend.
It's an incredible moment and I hope that this dramatic move stops the hemorrhaging and the taxpayer bill doesn't climb from the estimated $25 billion estimate of a few months ago into something more cataclysmic. But I think any estimates you hear about the size of the bailout are really pretty worthless. We just don't know.
A few other thoughts:
It was the right thing. Paulson did the right thing this weekend and I'm starting to regret having been so hard on him in a column earlier this year. He seems to have done the right thing here. What was the alternative? Letting Frannie--as they are jointly called---fail? Not putting them under government control could only have led to the companies taking more risky maneuvers and questionable accounting.
Hats off to Morgan Stanley's John Mack. When Treasury asked the investment giant to do an audit of Frannie, it would have been easier to punt. Why get in the middle of this? But Morgan Stanley did the right thing and seemed to have come up with more than Frannie's government regulator.
An investigation. It's time for a full-scale investigation about how we got into this mess. It's not just the fault of the housing deflation. Frannie was built into a Frankenstein through years of lobbying and political cronyism. Time to have all of the major players in from Jim Johnson to Jamie Gorelick to Arne Christensen and others explain how we got in this mess. They didn't break the law but they helped foster a culture that got us into this. Message to McCain: This is a gold mine for a self styled reformer with more Democratic skeletons than Republican ones.
Poor Beth Wilkinson. Can the much-respected and admired attorney from Latham Watkins who prosecuted Oklahoma City Bomber Tim McVeigh be long for Fannie Mae? She must have regretted taking this gig a couple of years ago when she could have written her ticket anywhere. Hope she lands someplace good.
The firings are right. There's no way to keep the current leadership at Frannie. Dan Mudd did some good things like helping to make Fannie a less pugnacious player but it's time for him to go.
Dismantling the lobbying arm. Yessssssss! It was bad enough having companies built on private profit and socialized risk. Having huge lobbying arms to keep it that way was unseemly. Good riddance.
The Wall Street Journal was right. Hey, even a broken clock is right twice a day, as the old saying goes. The Journal editorial page, which I find to be reflexively right wing, was wisely raising questions about Frannie over the past decade. Would that the Times and Post had been as vigilant. It doesn't excuse the page's obsession with marginal tax rates and the likes of Ken Starr but it is to their credit that they led the way on this. Pulitzer to Team Gigot?
Public or Private, Pick a side. Let it be a warning to other public-private endeavors. You can't have private profit and socialized risk. We've now seen the consequences.
This article has 28 comments:
(1) Taxpayers have benefited for decades via (a) potentially lower mortgage rates (b) an entity that served as more or less "NYSE" for mortgages (I know it's more complicated than this) and insurer. (c) someone who actually furthers social justice, via encouraging homeownership for all races, creeds, etc.
(2) Common shareholders have benefited via dividends, but capital appreciation? shareholders have been screwed. At least those with a 1, 3, 5, 10, etc. year time horizon
(3) Preferred investors have been shafted, while subordinate debtholders have not.
(4) Foreign banks have benefited - whether this is public or private is debatable.
(5) Politicians have benefited - Are politicians private or public? I'm not sure.
What I'm trying to get at is, I fail to see how "Private Profit, Socialized Risk", at best is a nice-sounding headline or campaign slogun for Barack Obama, and at worst....totally false, and actually criminalizes the victimizes, and victimizes the criminals...
I'm confused.
populistic intervention indeed, similar to zero risk mortgage loans running wild in the US...common shareholders screwed, unprudent commercial banks and financial institutions honored. great, long way to go US, just wait until in-depth analysis unveils over the next few months...but for now it's time to make some money on the commercial banks' bull joyride, but get off the bull quickly! that's my advice.
the bigshit is yet to hit the fan & short term politics-driven moneygrabbing was victorious again - but its coming...
the world will not come to a halt, will it? sure irresponsible lenders and loantakers will take a hit, but hey there's a lesson to learn everywhere...this is like stabilizing a black hole...
On one hand the massive shorts were disseminating rumor about the immiediate vulnearabilty(clearly interest driven opinions) of both agencies on the other hand we hear criticism about the Treasury's willingness to inject enough capital to permanently neutralize the self serving rumors (shorts) about implied implosion of the both agencies.
True ,the Treasury has an option on 79.9% of the common stock-it is not a dilution in the real sense-they have paid king's ransom for it.
On the other hand the share holders had received a guarantee that the agencies will not be allowed to fail.Ultimately the economic trends and specifically the housing market will determine the price equlibrium of the shares of the both agencies.Both outlooks look great for 2009.At this time the share holders have "invested" in the Treasury itself not really the agencies.In addition they have gained time .The shares of the agencies had never belonged in the eigthy dollar range ,I have stated that more than a year ago. With the latest capital injection,we will have a substantial stock price appreciation in the period ahead-just remember who is your partner(Treasury).I am sure with the activity in Asia ,the rumors will dominate the ealy trading in the both agencies and the market in general.The knee jerk reaction is unpredictable,but the shareholders have the best partner they would want and no potential of a financial failure .That is worth a major rally(in the period ahead).The most important issue overhanging the agencies and the market has been resolved.The market/economic rebound will take care of the next price spike .In the meantime volatility will continue.More importantly the share holders (common) were not eliminated as the rumors have reflected on Friday-the share holders became the partners (diluted) with the Treasury in an entity that will not be allowed to fail.Not too many investments like this exist.As to the A.M paranoia ,treat it with the skepticism within the context of record open short interest in the stock of both agencies.
On Sep 08 06:49 AM gabe borenstein wrote:
> The Treasury had basically paid 100 billion dollars for 79.9% of
> each of the agencies.
> On one hand the massive shorts were disseminating rumor about the
> immiediate vulnearabilty(clearly interest driven opinions) of both
> agencies on the other hand we hear criticism about the Treasury's
> willingness to inject enough capital to permanently neutralize the
> self serving rumors (shorts) about implied implosion of the both
> agencies.
> True ,the Treasury has an option on 79.9% of the common stock-it
> is not a dilution in the real sense-they have paid king's ransom
> for it.
> On the other hand the share holders had received a guarantee that
> the agencies will not be allowed to fail.Ultimately the economic
> trends and specifically the housing market will determine the price
> equlibrium of the shares of the both agencies.Both outlooks look
> great for 2009.At this time the share holders have "invested" in
> the Treasury itself not really the agencies.In addition they have
> gained time .The shares of the agencies had never belonged in the
> eigthy dollar range ,I have stated that more than a year ago. With
> the latest capital injection,we will have a substantial stock price
> appreciation in the period ahead-just remember who is your partner(Treasury).I
> am sure with the activity in Asia ,the rumors will dominate the ealy
> trading in the both agencies and the market in general.The knee jerk
> reaction is unpredictable,but the shareholders have the best partner
> they would want and no potential of a financial failure .That is
> worth a major rally(in the period ahead).The most important issue
> overhanging the agencies and the market has been resolved.The market/economic
> rebound will take care of the next price spike .In the meantime volatility
> will continue.More importantly the share holders (common) were not
> eliminated as the rumors have reflected on Friday-the share holders
> became the partners (diluted) with the Treasury in an entity that
> will not be allowed to fail.Not too many investments like this exist.As
> to the A.M paranoia ,treat it with the skepticism within the context
> of record open short interest in the stock of both agencies.
More importantly the share holders (common) were not eliminated as the rumors have reflected on Friday-the share holders became the partners (diluted) with the Treasury in an entity that will not be allowed to fail.Not too many investments like this exist.
This bailout is the taxpayer stepping in to cover for mistakes made, which is already dubious... and that's before upper management taking in millions in bonuses, shareholders getting dividends... and them then not giving back. In the interest of "limited liability." The GSEs have been riding the implicit (and now apparently explicit) government backing, while not giving the taxpayer/government any return for it.
Your argument that the public benefitted from the GSEs is irrelevant. Wal-Mart benefits the public, by being a retail store and generating jobs (low-paying, sure, but they likely as a result hire more minorities).
I am starting to lose count of how many times in the last year, according to the pundits, the US taxpayer has come to the rescue of the world’s financial system and saved us (?) from a global meltdown.
Under the new conservatorship arrangements (surely a euphemism for nationalization) those commercial organizations active in the mortgage markets have been given what they already thought they had which is an official ratification of the socialization of the liabilities arising from aggressive and mindless risk taking.
There is an old saying that one should be careful of obtaining what one wishes for and the underwriting of trillions of dollars worth of MBS’s may prove just such a conundrum. Greater transparency in financial markets is often held up as a virtue although one suspects that this is primarily by academics rather than those that actually work on a trading desk. With Treasury officials now required to value and understand the products of several years of ingenious securitizations it may prove harder to escape the emperor has no clothes syndrome.
Shareholders are getting zeroed. Is a zeroing of the shareholders punishing? Certainly. Would the common man be able to get away with that? No, a common man 1) would never be ABLE to get into this situation, as banks do credit checks, 2) would lose much more than their investment. They'll lose their house, their car, everything. Put it this way, if I had any semblance to a government guarantee of my loans, I'd be investing it left right and center, on every investment, high risk or low risk. If a corporation I owned had such a guarantee, it'd practically bet the entire bank on the 00 in roulette. It wins, big bonuses to upper management. It loses, who cares. Seems to be what happened in 2005 for FNM.
The bailout protects debtholders. Should they be protected? I'd be inclined to say no. It is that default risk which keeps securities fairly valued. Do you think it's "fair" that GSE debt traded at a premium to US Treasuries, payouts made to Chinese and Japanese bondholders above US Treasury yields, while being fully backed (implicitly) by the government/taxpayer?
My take? I would have left Fannie and Freddie to its own defenses. Explicitly deny any sort of bailout. Expand Ginnie Mae, which is explicitly backed. If FNM and FRE hypothetically survives that ordeal, so much the better for everybody. But if they're going to be privately held, with private profit, they (and their creditors) should be taking private risk as well.
If the country is ruined and the majority of our fellow Americans impoverished, life will not be as happy, no matter how much money we have.
That is the moral tension that I hear underlying the discussions here.
In addition, no matter how rich we become as individuals, if our collective actions bring on a disastrous civil war or revolution where our possessions are confiscated or destroyed by angry mobs, then our investment skills will have brought us nothing.
History has not ended. The past is prologue.
The government program did fine for 30 years, including during WWII and the huge home-buying boom that followed. In 1968, amid complaints about this "government monopoly," then President Lyndon Johnson took it "off balance sheet" from the federal budget and privatized it (i.e., gave it to the bankers).
Over the next 40 years, the bankers and their cronies, both public and private, paid themselves huge salaries, bonuses, and perqs to do the same job some lowly bureaucrats had been doing for the previous 30 years. After all, that's what hotshot bankers do...get people in debt, and then live high off the interest.
So now we are re-nationalizing the mortgage loan business, and paying the bankers to give it back to us. Some deal. Next we're going to have to nationalize the airline industry, the auto industry, the agriculture industry, and the healthcare industry. Because of rising costs, the number of jobs involved, and the economic impact if they collapse, they're all candidates for the Paulson bailout waltz.
But what's everybody want to do? Privatize social security. Privatize pension plans. Privatize prisons. Privatize hospitals. Privatize police and fire. Hell, let's privatize the Army - that worked for Rome, for a while. At least we could take the War in Iraq off balance sheet.
In '38 we got the New Deal. In '68 we got the Sweetheart Deal. In '08 we're getting the Raw Deal. We need more government controls on the profiteers, not more privatization. The Free Market doesn't work if it's routinely manipulated by speculators, price fixing, kickbacks, insider trading, off balance sheet and "cook the books" accounting, and gutless auditors, regulators and politicians.
daylight robbery in case of common & preferred shareholders
On Sep 09 08:37 AM squashnut wrote:
> Welcome to bad capitalism. Socialism would be if EVERYONE owned a
> house, and bank stock. I don't.