[Mormon Red Death]

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.

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I'll post my thoughts later.. as I am busy at work.