The Fannie-Freddie bailout: As much as they need

The government has announced its historic bailout of Fannie Mae and Freddie Mac, and it is breathtaking in its scope: The sweeping takeover fires top management at the for-profit companies, bans the companies from lobbying Congress, forces them to shrink in coming years, and in the meantime offers them just about every possible kind of government financial aid under the sun.

Treasury Secretary Henry Paulson (pictured) announced the government will lend Fannie and Freddie money, will purchase their mortgage-backed securities, and will buy up to $200 billion (yes, "b" billion) in preferred stock to keep the companies afloat. Although the price tag to taxpayers may ultimately be just a fraction of the $200 billion in new stock purchase contracts between the government and the two companies, the bailout is clearly, as The New York Times reported Saturday, "among the most expensive rescues ever financed by taxpayers."

The Los Angeles Times

The government today announced it was taking control of mortgage finance giants Fannie Mae and Freddie Mac, saying the companies' weakened finances had made it impossible for them to carry out their missions of supporting the housing market.

The New York Times

The Treasury Department seized control of Fannie Mae and Freddie Mac, the nation’s giant quasi-public mortgage finance companies, and announced a four-part rescue plan that includes an open-ended guarantee from the Treasury Department to provide as much capital as they need stave off insolvency.

Owners of Fannie and Freddie stock could be wiped out, depending on how much of that $200 billion the government spends, as Tom Petruno reports.

Analysis/Bloviation: Much will be made of the specifics of Paulson's plan to save Fannie and Freddie -- putting them into a conservatorship, under their new regulator, rather than receivership. True indeed, Hank Paulson is a clever investment banker; it's quite possible he has put together the best possible rescue plan given the various risks. And because shareholders will suffer, many in Washington will argue -- as U.S. Rep. Barney Frank already has -- that this is "not a bailout."  Bull. It is a massive bailout, a historic lifeline to two failing for-profit companies that bullied Congress for decades, had their way with generations of politicians, and routinely handed out million-dollar paychecks to executives who were running these giants into the ground.

The stakes go far beyond Fannie and Freddie -- Paulson is trying to steady the entire financial system by demonstrating that there is a lifeguard on duty and that the federal government is not going to allow huge, chaotic financial failures. It seems likely his life-saving skills -- and the limits of taxpayer generosity -- will be tested again.

-- Peter Viles

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Photo: Associated Press

Comments

[John Ryskamp]

This is not an important step. The important step would be for the U.S. government to state that it will not allow evictions from the housing, under ANY circumstances.

That is where we are going on this. We are leaving behind the scrutiny regime of West Coast Hotel v. Parrish (1937). Under that regime, housing enjoys only minimum scrutiny.

We are moving to a new era of strict scrutiny for housing (under scrutiny regime terms). And more: we're simply leaving the scrutiny behind. The new Constitutional regime, which has already begun taking power, is the maintenance regime.

The doctrine of the scrutiny regime is that law is "rationally related to a legitimate government purpose." That is over. The doctrine of the maintenance regime is that law maintains important facts--important facts being, according to the Court, facts of human experience which do not change in spite of attempts to change them.

Housing is one of those things. The only question is whether we will require a revolution in order to bring the maintenance regime into full enforcement.

By the way, it's suburbia--with its elephantine, massively expensive plan--which is pushing for the new regime, albeit in a clumsy inconsistent fashion. I studied it in my book The Eminent Domain Revolt (New York: Algora, 2006).

[Theron]

Now isn't this the predictable result of the earlier bailout? I've been trying to find the correct info. Here's the link to an earlier story from May about how Freddie/Fannie were going to be used to suppor t the private lenders. Did that in fact happen? If so isn't that part of the reason why they need bailing now?

http://latimesblogs.latimes.com/laland/2008/05/
senates-mortgag.html

[eternal summer]

Of course, we all saw this coming....jeez...Does anyone in Washington read these blogs? They would have seen the bubble too.

[Joseph]

I lost my house no one gave me any help. Why are the banks so special? Because they own this country. 200 billion is a fraction of the money we will dish out to bailout these GSE's. I will say with confidence that the true number of our bailout will be closer to $2.5 trillion. How did I come up with this number? It's real easy just adjust the price of houses according to the earning power of it's owners, and then calculate the debt based on the federal guidelines for debt versus income ratio which is set at 38%, and you will get closer to true value. If the homeowner can't pay his mortgage then the paper Fanny and Freddie hold is worthless.

I clearly understand the significance of this collapse and why this bailout is being done. I want to know how are they going to prosecute the culprits, are they going to reveal all the lobbyist names and the politicians they bought, are they going to take any assets these thieves own including the past thieves, I want to see them go bankrupt like I was forced to. I demand a deep FBI probe into any possible criminal activity that may have happened. I as a citizen would like to personally put them under citizens arrest for the biggest white collar crime in the history of this hypocritical country.

[Cal]

Spreads on mortgages will drop, the only issue I am worried about is that somewhere in all those press release they talked about how they thought the GSE guideliness were tightened for profitability reasons and I'm wondering if they they will loosen them back up.

As for conservatorship itself, if they really go through with the portfolio run off scenario then we will have eliminated a major risk to our financial system in 10 years. I have some serious doubts about if that will happen, Barney Frank will find a way to mess it up & it will most probably have to be done in a democrat administration. I am guessing there is a plan for funding the debt for new mortgage companies allowing the creation of a bunch of new privately backed mini-GSE's.

[DAVE]

Well...USA is DONE!

WELCOME to SUSA - SOCIALIST USA!

[DAVE]

Well...USA is DONE!

WELCOME to SUSA - SOCIALIST USA!

[E]

200 Billion?

Wanna Bet?

Just think back to Katrina and the original estimates.

It will be the T word.

[CaliforniaDreamin]

Unbelievable! Fannie and Freddie should be allowed to be subjected to regular market forces. If they survive, fine. If not, also fine. I would really like to see the US Gov't get out of the mortgage business. Leave it up to banks and other non-government lending institutions who can then decide to make loans based on the merits of the borrower, and thus prosper or fail as a result.

[Nick]

It's doubtful the limits of taxpayer generosity will truly be tested: I doubt many taxpayers would have approved of spending $30 billion to pay off the Bear Sterns shareholders, much less $200 billion (for a start) to pay off the GSE bond holder and executives. Congress already screwed the taxpayers when they gave Paulson a blank check, this is just the inevitable aftermath.

That said, the only part that really bothers me about this massive unprecedented bailout is that Treasury will buy GSE MBS's. Why in the world, after everything that has happened, would you intentionally increase the amount of government interference in the free market pricing of MBS's? That's asinine, idiotic, and irresponsible beyond comprehension. You would think that one person in the financial regulation part of the government, somewhere, as a result of this entire mess, would have LEARNED that underpricing risk with artificially low lending rates (eg: Treasury buying MBS's below market to support the GSE's) was BAD! It caused the whole fricken meltdown, and you're DOING IT AGAIN!!!

Am I just that naive to want the government, after spending half a TRILLION dollars of my money [so far] to clean up this disaster, to just not repeat the exact same behavior which caused the meltdown? How many half trillion dollar economic heart attacks until we get someone in government who will just let the free market work? How much more can the country spend giving out money they don't have to subsidize everyone with their hands out? Who is John Galt?

[Not Your Father's America]

Republican definition of a free market: Privatize profits, socialize losses. (Clarification: Heads the rich get paid, tails the poor pay the rich.)

USA, land of the free, home of the brave. Oo-uh!

[puckhead]

Foreign countries own much of the Fannie and Freddie debt. You want to try to tell China that they are SOL and that the US gov't will allow Fannie and Freddie to go belly up and that they will not stand behind Fannie and Freddie's debts? Who will buy US Treasuries? How many countries will start dumping US Treasuries if the gov't does not stand behind them? What do you think will happen to the Dollar? Regardless of how we got into this mess, it is a mess and this was the only way out.

[sheila]

how is Henry Paulson, who is a Bush appointee, Barney Frank's fault? this is ALL BUSH, this is not congress, even though the media is being all coy by calling it "the government" instead of The Bush Administration.

sorry, truth hurts. your boys are bailing out their boys again and leaving you to eat their dust. how many times will you let that happen before you realize you will NEVER be in their club of the "haves and the have mores?" they use the chumps to gain power, then they use that power to rip you off (and the rest of us, too, thanks a lot!), and enrich the Connected Few.

this is NOT socialism. this is corporate welfare. socialism would have a benefit for the people, like the government simply resetting all loans at 5%, period, without any new processes or paperwork. a lot of people would still lost their houses, but a lot who can afford them would not.

i'm not suggesting we undertake a socialist solution, which has it's own big problems, merely distinguishing one from this, another demented "supply side solution" that insulates the rich and corrupt from the consequences of their actions and impoverishes all of us in the process. it's the reverse of socialism.

heckuva job, Paulie.

[LA]

$200 billion is the tip of the iceberg. These two entities hold $5 trillion of debt. Could any failing enterprise be saved by infusing a mere 4% percent of capital? This isn't just a temporary cash flow problem.

I'm looking forward to reading the book Bob Woodward will write about this administration in about ten years, after the dust has settled and the true extent of its debacle is known.

Hmm...I wonder how many Presidential pardons will be issued in coming months?

[Theron]

"Who will buy US Treasuries?"

Actually China has to buy them just to keep their currency low so we keep buying their products. Otherwise their products would become more expensive and we'd stop buying them and then their economic expansion would slow, leading to civil unrest. At least this is what I read keeps their leaders awake at night.

[Katterine]

Correction:

""Republican definition of a free market: Privatize profits, socialize losses. (Clarification: Heads the rich get paid, tails the poor pay the rich.)""

That would be the definition of "neocons" or new-conservatives, as opposed to true constitutional republican conservatives.

Unfortunately, for now, neocons rule. Ron Paul and his http://campaignforliberty.com oppose them.

[JO]

So the Bazooka has been used despite statements by the Captain he didn't think they would need to fire it only a month ago. What a deception. And a lot of what this "bailout" is is all deception: It will do nothing to fix the economy or housing, it will worsen the condition of many "smaller" banks and increase the burden on FDIC which itself will require more money from the Treasury. It will earn nice fees for the asset managers chosen to "manage" th egarbage the Treasury will own. And it provides no limit on tax payer liability. It will, at least for now and if carried out as stated, increase the DEFLATIONARY phase and extend it out as the book / credit outstanding at the GSE is paid down in 2010 onward, and all this comes to the same end point as almost all government intervention does in markets: It will have the opposite effect of it's intended goal. No one in their right mind believes the nonsense being written and said by government officials about how this is supposedly positive for the American public. A sad day for most American taxpayers indeed. A revolt is in order from American taxpayers as this will only get worse.

[Laker]

I agree with puckhead.
US gov had no choice but to bail out Fannie and Freddie. There was a reason to guarantee all major foreign investor in GSE debt from losing a dime. Otherwise all these major countries would dump all their holdings and dollars. The result would be 1 Euro = 5 US Dollars. The US economy would die, unemployment would jump sky high, dollars will flood the streets and inflation would be crazy.
this way, dollars should retain their value, tax payers would eat the loses, take away 20-30% of social security would cover most GSE losses.
But at the end of the day, it will not stop house prices from dropping to mean, as it does nothing to increase incomes...

[jb]

I hate my country. It is so rotten and crooked.

[Vile Man]

Gimme a break another Bail out !

Why don't the lawmakers simply pass a law for equitable adjustment to recover the money stolen by the banks and fat cat investors who profited. With the magnitude of financial distaster hovering and the human tragedies and suffering put upon hard working families and children how can there be no crime and have taken no prisoners?

It would be complicity to let these thieves keep the money, never mind TAKE OVER THEIR BAD DEBTS PAY THEM BUYOUTS and LEND THEM MORE, now theirs a real bad plan.........so....how about our government makes those other dirty rotten scoundrels pay up....or is it time for another Boston Tea Party because "we the people" have no representation.

[Tiki]

Bush regime has opened the door for his NeoCon buddies, and boy have they conned US ! All part of their terrorize, rape and pillage agenda. God help us Help Ourselves. Justice to the Crooks!