According to this theory, Fannie and Freddie would have been capable of raising money on their own -- but then Paulson went and announced that he might (possibly, maybe, hopefully not) intervene with government cash. And as anybody who saw what went down at Bear Stearns knows, when Paulson intervenes, he intervenes with a vengeance, and shareholders are left with essentially nothing.
So on top of the normal risks of injecting new capital into leveraged entities with trillions of dollars of housing exposure, there was an extra political risk that all that capital could be wiped out at any time by an executive decision at 1500 Pennsylvania Avenue.
Writes Sorkin:
For the last two months, Fannie and Freddie ran around Wall Street searching for a savior. Private equity? Sovereign wealth funds? Anyone?
But Wall Street was never really sure what Mr. Paulson would do -- and that was a problem. "He never laid out a roadmap and how he would use the power. Because of the uncertainty nobody was willing to put in money" into Fannie or Freddie, said Doug A. Dachille, the chief executive of First Principles Capital Management.
Sorkin for one is skeptical that there was any real emergency, and even hints that Paulson's decision was political in nature:
Many people in financial circles can't quite figure out why Mr. Paulson, the former chairman of Goldman Sachs, pulled the trigger when he did. He insisted politics had nothing to do with it. Never mind that the news broke just after the Democratic and Republican conventions, but as far away as possible from the November election.
But as of last week, Fannie and Freddie, for all their troubles, seemed to be bumbling along O.K.
I'm a bit more well-disposed towards Paulson. Clearly, if you are going to intervene, it's better to do it sooner rather than later. Equally clearly, the management at both companies was something of a shambles, led by lobbying efforts rather than internal strength. And in any case the equity in Frannie was so tiny that it just didn't make sense any more to run the companies for the benefit of shareholders.
Sure, Paulson might have held off on intervening while the conventions were going on. But the neither-one-thing-nor-the-other status of the GSEs was untenable, and he ultimately simply did the necessary thing. What's more, I'm glad that it was Paulson doing it, rather than someone like John Snow, who would probably have let things deteriorate much further before pulling out his bazooka.
there is no question that paulson's original "plan" was to support private efforts to inject capital into these companies, but it was based on the greater fool theory. who in their right mind would be dumb enough to inject capital when paulson is out there telling the world that it's not the job of the federal government to bail out shareholders? answer: the american taxpayer, of course.
the handwriting was on the wall for these companies as soon as paulson opened his big mouth.
In addition, we know why he was concerned enough to have Morgan Stanley look hard at their books. Foreign central banks were begining to repudiate agency securities. In the two weeks prior, those banks have invested over $60 billion in dollar bonds, but were net sellers of agencies to the tune of about $5 billion. They were no longer willing to continue even their existing holdings in agencies, even at the widest spreads in their favor in history. The agencies cannot survive a creditor's strike. And Morgan Stanley's objective analysis showed that strike was rational and entirely justified.
Paulson did the right thing. Technocrats almost always do, and ideologies and flacks and journalists give them endless static for it. Because all those categories of people know whining.
All the questions as to the "whys" only have move up the food chain a little bit to become ultimately and catastrophically political. ONLY A FOOL would disagree that the last 8 years has been utterly inverse between what is said and done - a nation led by dishonest tyrants whom benefit the few at the expense of all. THAT IS 100% POLITICAL, and thus as a result, every single American lost freedom yesterday.
What is happening is far worse than a couple planes smashing into a couple of buildings - its the outright rot of our democracy backbone - money.
Keep believing that this has been going on only the last 8 years. And it will all be better with a different "current occupant". Right.
Wake up. They have been lying to you for 80 years, not 8. And the current turmoil is the work of decades. We will not get out of this without war, because we will either fight our creditors, or be reduced to seizing resources by force that we are no longer able to pay for legitimately.
I think people are so pissed off that those in agreement are restless!
One other thought. Is it a valid perspective to say that since the U.S. subsidizes everything from the farmers to oil industry to medical care to the poor to small business - there are thousands of subsidies in various forms in the 'budget' - what difference does it really make if the U.S. adds yet another taxpayer subsidy program by taking fannie and freddie 'public' - er that means with yours and my taxpayer dollars? No difference except each such brick sinks the country ever more deeply into financial oblivion?
In the case of FRE & FNM they spent $180,000,000 a year bribing politicians.
This had to grate on a lot of people, and now maybe our government will be a little bit cleaner.