Fannie and Freddie
I'm surprised that the financial geniuses in these parts have left this story alone so far today. I was waiting to read what they had to say.
http://www.economist.com/finance/dis...ry_id=12078933 This is a pretty huge development, IMO. While it's clear that the feds had to do something to keep Freddie and Fannie afloat, I'm a little sick when I think of how much it might cost taxpayers in the long run. Meanwhile, their executives have been extremely well paid (e.g. http://www.msnbc.msn.com/id/25740405/) I don't know how all the ramifications will play out. PS - maybe I should have put this in current events. Sorry if it's misplaced. |
Per Today's TMQ:
Next Government Press Release: "Deficit Spending Good for Your Children": Perhaps Washington had no choice but to take over Fannie Mae and Freddie Mac, considering what we now know about years of self-serving lying by the management of both institutions. But taxpayers have been put on the hook for at least $200 billion in loan guarantees. Buried in the conservatorship declaration is word Congress may add extra subsidies to Fannie and Freddie to keep mortgage interest rates low. Washington has been involved in many loan guarantees, but never in mortgage rates. This all-new subsidy will make mortgage markets political on a permanent basis -- any time rates rise, borrowers seeking mortgages will demand taxpayers subsidize them. By shifting to taxpayers (and to our children, via still more deficit spending) some of the cost of borrowing, this may only further distort the mortgage market, encouraging buyers and brokers to generate imprudent loans and then passing costs along to taxpayers. Note another aspect of the Fannie-Freddie takeover that politicians don't want to talk about. On paper, the takeover looks like a bankruptcy. In a bankruptcy, creditors receive preference (because they hold a promise of payment) while shareholders are wiped out (because equity positions are speculative and known to buyers to guarantee nothing). The Fannie-Freddie takeover preserves the companies' bondholders, while making shareholders appear to get clobbered -- the government receives a warrant to claim up to 80 percent of shares, which would slash a share in Fannie or Freddie to 20 percent of current value. But the government must exercise that warrant. If not, shareholders are bailed out too. As soon as attention shifts to the next screw-up, lobbyists for the rich quietly will twist White House and Congressional arms for assurances the warrants are never exercised. If this happens, average people will be taxed to protect the wealth of Fannie and Freddie shareholders. "We only wish [Treasury Secretary Henry] Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure … [share]holders deserve to lose everything." Who said this, some left-wing fanatic? The editorial page of the Wall Street Journal. <<<<<<<<<<<<<< I'll post my thoughts later.. as I am busy at work. |
It seems to be pretty clear that we have "progressed" from an economy that understands the invisible hand and business cycles to one where the governement feels like they have to do whatever it takes to keep it growing.
Paulson's comments sickened me. The basic rationale was that because the economy can't recover until the housing market turns around, we (the gov't) are going to artificially "fix" the housing market. Disgusting. |
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The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under. |
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Market fall out of love fast. Have you seen today. How about Lehman down to about $7. The greedy SOB's on wall st have totally messed up the financial structure. Before you blame Bush, why don't you check out the party ID's of some of the biggest Wall St. players. Especially the ones that come up with these f'ed up schemes every so often. |
I learned something important in the past several months. The hard way.
Never have most of your retirement in a bank stock. :) |
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I'm glad things are looking up for CJ. BYU71, I am not investing too much concern. He filched on a hot dog.
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ok here are my thoughts.
In the short term (1-2 years) this will help mortgage industry. In the long term this will be an albatross on our society. As my quote from TMQ says above the standards for giving out loans which have tightened over the last year or so now get thrown out the window because the government owns it. Not to mention the debt future taxpayers will need to pay. The really bad thing about this is the precedent it sets. We've become a nation standing in line for bailouts. |
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I recently read somewhere (was it on this board?) that a major difference between this economic downturn and ones past is the amount of consumer debt Americans (and Brits, and other Europeans) are carrying. They have little wiggle room to handle the painful economic adjustments that are going on. When things finally finish re-setting, with higher fuel, food, and credit prices, they're going to have a really hard time making it work. While it's obvious the gov't. had to do something with Freddie and Fannie, this mentality is killing me. From Bear Stearns to this, the Feds may be trading short-term stability for long-term suffering. Once they start trying to control and regulate risk, we're all screwed. But it's not like I have a better idea. Just 20-20 hindsight. What a mess. |
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