Obama, McCain back Fannie-Freddie bailout; Palin calls them "too big"

Developments today in the government's weekend bailout of Freddie Mac and Fannie Mae:

The New York Times reports that "both presidential nominees expressed support for the government’s plans to take over the companies." John McCain, the Times reports, "considered it an unfortunate but necessary step," while Barack Obama said "not acting could place the housing market in further distress."

In the same article, the Times drops a bit of a bomb, reporting the plan to take over the two mortgage giants "came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion..."

Before you get too worked up over that headline, note this from Calculated Risk: "I'm skeptical of the accusation of accounting issues causing the deal to be rushed. Notice the phrase 'not necessarily in violation of accounting rules' - I doubt Freddie violated any accounting rules this time."

The Wall Street Journal reports the plan will be announced Sunday afternoon, that it won't necessarily involve an injection of government money up front, and that the companies will be put under (into?) conservatorship by their regulator. The Journal also quotes McCain's running mate, Alaska Gov. Sarah Palin:

Alaska Governor Sarah Palin, the Republican nominee for vice president, said during a rally Saturday afternoon in Colorado Springs, Colo., that Fannie and Freddie have "gotten too big and too expensive to the taxpayers." She added: "A McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

As I bloviated yesterday, I'm interested in hearing either candidate articulate a strategy for dealing with the credit crunch.  Waiting for the Bush administration's treasury secretary to take historic action, and then saying it's probably the right thing to do, is not a strategy.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo Credit: L.A. Times

Comments

[Cal]

OT: Anyone watch "Hope for your home" on TLC? The lady from Property Ladder now is pitching that with $10,000 in improvements they can get people either refi'd into a affordble loan or allow them to sell. At the end of the show they have a mortgage broker and a RE agent to come in to "appraise" the property. Every time I have watched they claim the house now appraises for their Original purchase price or more (all purchased during the boom) AND says they can lower their monthly payment to keep their home.

I've watched 4 of the 5 shows (Northidge, Simi, Oxnard, Lynwood shows) and pulled the public records for the properties, not a single one has sold, been listed, or refinanced since the airings. And it is clear just looking at neighboring solds and listing that none of them would sell for anywhere close to their original purchase price. It is sickening that they continually lie to people (both the shows subjects and their audience) and nobody calls them on it.

[Charles MacKay]

Trasury is going to bail out Fannie Mae and Freddie Mac. Who's going to bail out Treasury?

[Tom Lindmark]

Be careful what you wish for. Politicians grand cures to problems often are worse than the disease. Maybe we should let the markets heal organically with as little help as necessary.

[Stan2008]

While Palin reads from a prepared statement, she and everyone else need to read the history of how we get here.

Why not ask McCain's financial adviser, Phil Gramm?

When Gramm was a Senator he was Chairman of the Banking Committee. He pushed through the legislation known as the "Enron Loophole." This loophole allowed US investment banks to bypass Federal regulations governing futures trading, and is the reason why investment banks were able to falsely inflate the prices of oil, wheat, corn and other commodities through massive futures trading, causing your costs of gas, heating oil and food to go through the roof.

Gramm also created the Gramm-Leach-Biley Act, which got rid of the laws that separate banking, insurance and brokerage activities in America. The Gramm Act was touted as a new way to protect consumer privacy, but the real meat on the Act's bones was banking deregulation.

Essentially, this Act did away with laws written after the Great Depression to protect us from another Wall Street/Banking Industry collapse. Gramm stripped the system of it's safe guards nine years ago, and guess what? The value of the dollar has nose-dived, major economic institutions have failed, Wall Street is unstable, and many future generations will be paying for this mess.

To expect either candidate to wave a magic wand is living in a fantasy world.

Just a few months ago, McCain said Gramm was the smartest economist ever. He also said Gramm had the highest integrity. Gramm does have pockets filled with money from Enron, UBS, and other investment banks.

McCain and Gramm do not have to be concerned about their retirement, buying a house, or even having a job.

[Jack]

Is the fact that Sarah Palin reads from a flack-prepared script really any kind of news? The woman was named as the VP candidate eight days ago but she's yet to speak to a single reporter or answer a single question off script. Why is the McCain campaign shielding this woman? If she didn't know what a vice-president does, as has been revealed in her public groaner made during an interview several weeks back, she could hardly be expected to formulate any kind of cogent answer about Fannie and Freddie. So why even bother reporting about her until she actually has an original thought which she can utter in public?

[anonymous]

Sorry, but Palin is an uninformed @ss!!!!!!

Try selling an owner occupied property in NV, CA or FL. She can have mine, the ignorant little (repeat LITTLE @ss)

Cast your own rafter out of your eye then tell me how to pluck my splinter. Jerk!!!!

Obama.

[amir]

Peter, I respectfully disagree.

To ask a candidate to come up with a strategy means they need to know how bad the crisis is. The problem is nobody knows.

One has to be careful to overestimate the crisis and to ask for dramatic remedies - as Democrats tend to do - because they might create moral hazard. On the other hand, a laissez faire approach - that Republicans usually favor - is dangerous and could lead into a great depression.

The road ahead is unpredictable and Paulson and the Fed are trying to navigate as best they can. They will make mistakes, and although it's easy to complain, we'll only know if they pursued the right moves in retrospect.

To call for an overall strategy from either candidates is to ask for simplistic populist solutions. Supporting Paulson and the Fed was the only sensible thing Obama and McCain could have done.

[NevadaGal]

Amir,

I am confident that Paulson and the Feds have a great understanding of the losses. True, they don't know the EXACT amount of losses that are coming, but they had the data to know that Fannie and Freddie were going down.

The fact Paulson would request authorization from Congress for 5 billion "only in case of emergency" was a clear tip off that this was coming. Some say this emergency aurthorization was to "talk" the market and the politicos into a bailout or it was a tip to get out (banks, insurers, etc). I feel it was it was both.

As for Obama/McCain they are part of the system...and are toeing the line, IMHO.

Peter is just whistling in the wind, unfortunately, and will never get what he is requesting.

[NevadaGal]

Too big to fail...heck with that as they are too big too bail.

I'm voting for Barr in 08

I can't take this B.S. anymore.

Oh, Silver State Bank (Nev) R.I.P

[Nancy]

'that Fannie and Freddie have "gotten too big and too expensive to the taxpayers."'

WTF does that mean? Palin's full of a lot of hot air if she thinks she can say that while her Republican running mate backs the bailout.

Unbelievable how much these people lie to our faces.

[Laker]

anonymous wrote: "... Jerk!!!!
Obama...."

anonymous, I understand that you think Obama is a Jerk..., but what does it have to do with the fact that Freddie and Fannie are to big...
No single corporation should hold/be in charge of 70% of the mortgages, as there is a law that prohibits any bank from holding more than 10% of the cash in US.
Palin is correct to say that, and that is one of the reasons I vote for McCain / Palin.
and btw: all of them read from paper/prepared speeches.

[E]

Whew...Praise Be to Ganesha (AKA the remover of obstacles) that we've got Palin on top of the situation!

Oh and Obama...yeah...I feel comfortable with his...well...what does he say the solution is?

Amir...I think that's the point Peter is trying to make.

They're not articulating a strategy because there really isn't one.

Perhaps if they went back on a world wide gold standard and valued gold at whatever it should be compared to the increase in fiat currency now in existence, people could pay off their mortgages with a couple wedding bands, necklaces and a bracelet or two.

Imagine what a gold tooth would fetch!

WRT Cal's comment...

Have you seen the latest Lowes (Or is it Home Depot?) commercial where the wife continually "evil eyes" the husband for continuous home improvements? First for roof, then the fence and finally, the daughter and the wife both give him the "evil eye" for the backyard set.

It kind of reminds me of the "Suzanne" commercial.

[SurferNate]

the cure will be acute monetary hyperinflation, our taxation is too high as it is. we could be going zimbabwe in the near future. this problem will always occur with gov't meddling in preventing asset deflation. with astonishing similarities to japan in '90s, our dictators show the refusal to follow the advice we gave them....

[plankbob]

Which Sunday talk shows will Palin be on to expound further on her deep understanding of Freddie and Fannie? None. Maybe her handlers fear she'll start speaking in tongues, forked ones or Pentacostalist ones.
The GOP picked the her for the latter F, not the former.

[Steve]

It is thissimple Bush got us in to this, and McCain is just an extension of Bush no matter what he states. I am a Republican and has McCain or he running mate ever heard of birth control, between two families they have 12 kids.

[latinovoter]

Palin says "Too Big", is this woman crazy? The answer is yes!

[dilbert dogbert]

amir = concern troll

[Michael Snyder]

Anyone so ignorant or delusional as to support the teaching of "Creationism" in public schools or so self righteous as to force their offspring to bear an unwanted child simply lacks a basic grasp of reality. Palin's seventeen year old daughter is the predictable result of such a "head in the sand" position. Now if a parent wants to steep their children in 2nd century superstitions that fly in the face of science and social responsibility, that's their choice. But such choices must call to question their judgment on all other matters. As I've said before; where you're going depends on where you're coming from.

Clearly this is a bailout for foreign investors who've vested themselves in the mortgage market through Freddie & Fanny. Every commentary I've read from Bloomberg, the NTY to the Huff Post all take a moment to emphasize this point. Also noteworthy thorough the analysis is the reoccurring realization that this will do nothing to improve the housing market or reduce the number of foreclosures. What this is is simply the Bush administration's last gasp attempt to placate it's corporate base. Or as another blogger noted, a nifty way to cover a whole lot of "naked shorts". Please note both institution's stock took nosedives in after hours trading Friday.

Neither candidate has an extensive financial background and their commentary on this matter shows their lack of understanding on the issue. Freddie & Fanny are not too big to let fail! Actually one might make an argument for a much healthier housing market after the dust settles. Please note we haven't seen anyone lose their home because their loan was assumed by another investor.

It's uncertainty that's holding the market in stasis. Many bloggers have pointed out the difficulties in assessing both risk & value. I would suggest both issues can only be dealt with in a transparent market. "Creative accounting" procedures is a euphemism for cooking the books and if you're trading in a "derivative market" you're dancing on a bubble.

It's all about accountability and transparency. Sadly both of these concepts are eschewed at the highest levels of management & government. When they return so will our financial health.

[SMRR]

The election approaches are clearning not about their economic acumen. And at the moment, there is no single person or body that has the acumen to deal with this unprecendented situation. They don't have these type of folks in the back of the campaign bus. I suppose they could recruit advisors - but talking intelligently about the economy is not a strategy either party would ever take. The reps are using Palin to say dems are hoity toity. Barack is trying to sell dissatisfaction with washington and the status quo. Neither is going to take a left turn and start talking about macroeconomic systems. And like Amir says. They'd have to dumb down the vision to campaign level so much that it would be way dangerous. Look at the responses I get from Boxer, Feinstein and Waxman whenever I write them no bailout letters. They confidently email me back form letters which say they are supporting this bailout legislation or that bailout legislation. I'd rather Mr. Maverick & Mr. Hope just stay out of it for now.

[Tombstone Realty]

I actually laughed during Paulson's press conference this morning.

He actually said Fannie/Freddie were *victims* of the market, and not co-conspirators. If the CEOs were "not responsible" for the current financial conditions - why'd ya fire them?

Paulson was probably hoping they would hang on until after the election, but when the auditor found out they were not reporting bad loans for *two* years after they went bad - they had to act now.

Hence the panic move this weekend.

People's retirement plans are going to take a bad hit since their 'securities' portion are probably all GSE.

And god forbid if your bank uses those for investment/liquidity thinking it was safer than dallying in weirder things. This is just a mess.

And I betcha the stock market will go up Monday, anyway. It's no better than spinning the wheel at the Nugget.

[Valley Observer]

"Waiting for the Bush administration's treasury secretary to take historic action, and then saying it's probably the right thing to do, is not a strategy."

The next President and Congress will have to deal with things as they are next January, not as they are now. Since it looks like Fannie and Freddie will be taken over, then the next policy will have to work with that fact.

[Lou]

Stan2008, I don't remember Phill Gramm being President 9 years ago? Was he? Why didn't Clinton veto the bill?

Don't get me wrong I'm not defending the idiotic Bush Administration. This bailout makes me sick. But the fact is that Fannie and Freddie should never have existed in the first place. I don't think Thomas Jefferson and John Adams fought the British so Americans can get a mortgage (actually, it's so some Saudis or Russians can get a return on all the dollars they have saved up from our trade deficit). This is what happens when the government gets into things they shouldn't. Fannie and Freddie were unconstitutional entities from the start tof their existence that now the taxpayer on the hook for. I'm totally disgusted.

Obama and McCain are both corporate tools and won't change (ironic) anything.

[Zia]

I hate to say it, god help me, but I agree with "E" when he said "They're not articulating a strategy because there really isn't one."

Seriously, trying to be bi-partisan about this, what solution is there for a President Obama or McCain other than letting this play out and looking into new bank regulations to avoid another housing bubble or any other speculative bubbles that might be avoidable.

NevadaGal, while I appreciate your sentiment about the major parties, Barr will never win so why even bother going to the voting booth if you are going to cast a vote for him?

[I hate sarah palin]

"...that is one of the reasons I vote for McCain / Palin."
Laker, I'm sure that the other reasons you're voting for McCain/Palin include that you're happy with endless war, don't believe in choice, like book bannings, like government pork, want to constitutionally ban same sex marriage, like the fact that Republican deregulation got us in to the economic mess that we're in, don't need affordable health care and don't think anybody else should have it either, don't believe in public education, and are a racist. Oh, and you like killing other sentinent creatures for sport. And cheating on your spouse is a good thing, in your opinion. Wave that gun, er flag high, Laker!

[NevadaGal]

Zia,

I do realize that Barr will not win in '08. I just can't see voting on the Dem/Rep candidates...its like saying you like them and they are your friends, eventhough, they just threatened you and took your lunch money.