Via Memeorandum, the bailouts are beginning:
US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.
…
Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.
Can someone explain to me why the industry that refuses to be regulated appropriately always is the first one requiring a bailout? And shouldn’t any bailout be contingent upon structural changes to the industry? Why can’t we demand more openness and regulation (not something I really am a fan of- I think the less regulation the better, generally, but clearly the pendulum has swung way too far in the deregulation direction)?
I am tired of people enjoying years of vast riches based on Ponzi schemes and then having the government have to bail their stupid asses out. And really, as I do not understand many of these business practices, that is how I see it. A big Ponzi scheme, and the taxpayer is the last investor before the whole fraud is exposed.
Svensker
Srsly?
Regulation = socialism = bad
Bailing out the rich people = capitalism = good
THBANEOSATSQ
Seanly
Frist!1!eleventy!
John, you might as well ask why the earth revolves around the Sun. It’s Chinatown.
It’s a a feature, not a bug. In fact, it ain’t just a feature, it is the entire point of the dirty enterprise.
I am not only convinced that laissez-faire economics don’t work, but am also more & more convinced that capitalism is a deeply, deeply flawed system.
jon
What this proves is not that capitalism works or doesn’t work, but that there are some things only government agencies that are not after a buck can do. Freddie Mac and Fannie Mae did an okay job of fulfilling their purpose before they were put in the private realm. Once out there with government backing and investor pushing, the mix was toxic to the overall economy. Why should an institution that the government had to create (in other words: the private sector couldn’t see a plan for it to work on their terms) succeed in the “real” world of Wall Street?
The lesson here is that regulation is important, being financially sound matters, speculation using the US economy is a bad idea, the private sector doesn’t always do it better, not all government programs will make a buck, not all government programs can be spun off (ask a vet if Blackwater should replace the USMC or Army,) and people still shouldn’t buy more home than they have the money for.
JR
The “free” market myth is as much of a lie as claiming a “liberal” media. They are intending to tie this boat anchor around the American public and watching US sink. And are giggling and snorting as they do it.
America was a nation born in liberty and a symbol of the liberation of mankind. But America has decided it no longer wants to be Liberal.
Scott H
I think Paulson is proposing that the shareholders take the hit if there is a bailout. That would be the small shareholders, I imagine. Still, if the taxpayers foot the bill for a bailout, the taxpayers should own the company.
I can’t say as I support a bailout. I would be more inclined if I thought Congress would replace the IOUs in the Social Security trust, f’rinstance, with the capital, but they’d just wank it away.
I don’t fault capitalism. There’s too much anti-capitalism afoot. My problem is with amok mutant mercantilism and, mostly, bald-faced fraud.
Karmakin
The entire investment market is a ponzi scheme right now. That’s how we got into this mess in the first place.
Most investments don’t have any direct dividends, or the dividends are extremely small. What investors are hoping for is someone to come along and offer to buy their share at a higher price. And this attitude is even going towards mortgages and the like! (Where they’re being bundled and being sold off to investors)
The solution is pretty simple. Raise capital gain tax rates to punitive levels, and keep them there. There will be a lot of imaginary value lost. So be it. You rolls your dice and takes your chances. (It might be worth it to wait for the eventual boomer retirement “crash” in the first place….nah.)
It’ll be painful, that’s for sure. But I don’t see any other option to this problem. I don’t see any other way to refocus investment for direct returns and not potential future market value, which leads to craziness.
Gay Veteran
regulation? from E. coli conservatives?
Libby Spencer
Heh. I’ve been calling Bushenomics a Ponzi scheme for years. That’s exactly what it looked like to me. Didn’t they used to arrest people for that?
scarshapedstar
I must admit I used to utter bromides like this, but anytime I hear anything vaguely free-market-boosting these days, I have one word: Iraq.
Iraq is your free market paradise.
No taxes.
No regulation.
No schools without raw sewage leaking from the ceiling.
Yes, things are generally better there!
cleek
privatize the profits, socialize the losses
it’s the best business model out there !
tiny flags for all
if you like bailouts for deregulated industries, you’ll love Free Lunch. it details the many, many ways one business after another has used back-room deals, docile, greedy, dumb legislators, and shady courtroom tactics to re-regulate in their favor and tell everyone it’s deregulation.
it was obviously written in a hurry and rushed to press, but if you want to be 100% sure you can decapitate a deregulation fundamentalist in an argument, it can’t hurt.
RSA
Well, I have only a naive understanding of economics, but I think that in some areas, like banking, regulations requiring openness are a good thing. Free market types might say that, given some number of companies to choose from for a service, customers will go to the company that provides the best combination of information and quality of the service, and you don’t need to regulate openness, because customers will tend to avoid companies that are opaque about what they’re doing, leading to high uncertainty about the value of their service. But in some areas it seems to be impossible for the average person to figure any of this out–all the companies doing such complicated stuff that they’re all incomprehensible. That’s not good for a market.
jrg
So mortgage brokers get rich selling mortgages, then wall street investment types get rich re-packaging the mortgages into securities, then taxpayers bail out the mortgages. Smells like the “free market” to me: everyone gets screwed except the crooks that put together the deal, made the commission, and got the fuck out.
Dug Jay
Liberal professor and economist, Brad DeLong, thinks John is a big fat idiot for this post, and feeels he should stop posting on matters about which he knows less than nothing:
El Cid
Haven’t we been taught for the last 30 years that business does best when it is least restrained by liberal regulations?
Dare you spit on Ronald Reagan’s hallowed grave, where he and Bush Sr. proved with such success the result of these philosophies on our Savings & Loan banking institutions?
And didn’t our U.S. automakers make the right choice when lobbying Congress and the President to avoid raising the CAFE (fuel economy) standards and to get SUV’s the same tax breaks as work pickups, because aren’t our automakers now stronger than ever versus those evil socialized Yurpeens and them Japs with their little bitty cars with little bitty engines?
jrg
What makes you think he knows what he’s talking about, if he’s a “liberal”?
Because John is mentioned so many times in that post.
From the linked article: “Bernanke and Paulson have asked for additional regulatory authority: They should get it.” One of DeLong’s many points is the same one that John is making.
b-psycho
Bernanke should be shit-canned.
The problem here has never been one of deregulation, but of propping up people who obviously do not need the help — thus ensuring they construct these stupid scams. People just call it deregulation because the result sucks.
Darkness
Somalia is an even better example of a libertarian paradise. Good way to close down that kind of argument too by suggesting a move there. 17 years, they have been without government intervention in the daily lives of their citizens. Look how fanfuktastic that works out.
4tehlulz
If this is a bailout of the F&F, then I’m not impressed. $15 billion is considered a minor accounting error at Fannie Mae.
Rome Again
15 Billion is not enough. This is only a bandaid being applied to hold off a collapse until Obama is elected.
You want regulation from the “deregulation” advocates? You’re not serious, are you?
gopher2b
If you are going to insist on calling this a bailout then you need to explain to me who is getting bailed out? Fannie Mae (its corporation and has no feelings). Its shareholders? See you own post:
A bailout (in my mind) means you are getting something from the government for nothing. That is not the case here. Billions of dollar of shareholder equity has been wiped out and the rest will be gone if they go forward. This is not a bailout…its a new shareholder coming in, infusing it with cash, and buying the company. The new shareholder happens to be a the U.S. government.
Rome Again
Actually, Alan Greenspan is the one who should have been shit-canned. Bernanke’s just stepping on old footprints, somtimes missing the mark.
Rome Again
Do not panic because nobody is in default? Where does he get his crystal ball from, I’m curious? I’ll be sure not to patronize the supplier.
Dennis - SGMM
Is anything being done to mitigate the possibility of this happening again? Seems to me that the quid pro quos (So far, there aren’t any) in these bailouts should at least include requirements for more transparent accounting practices and increased capitalization. Absent that, we’re just waiting for the next bubble. My guess is that it will be in Green Energy.
Rome Again
What makes you think they want to do that? Did Grover Norquist not say they wanted to sink government into a bathtub? This is the reality they’ve been after. It’s designed to fail.
Phil Gramm says all this hand wringing over the economy is just in our heads, how can it be any clearer than that?
Rome Again
My guess is that it will be commercial banks.
Dreggas
Welcome to the reason why many believe gov’t regulation is not a bad thing John. Someone has to watch over these fuckers because they’re human and can become just as freaking crooked as the rest of us, only they take the rest of us with them. For people who want law and order (so-called republicans) you’d think the repukes would want it to apply to everyone. Then again any regulation of industry affects their pocketbooks. When it goes bad they aren’t hit, we are.
Fwiffo
Goverment bailouts are part of their business model. These industries count on them as part of their revenue stream. The airline industry is another that uses this sort of business model.
erghammer
Let’s at least get the story straight here. Fannie and Freddie are creatures of the Democratic Party. Some Republicans (at least the ones who care about economics, which admittedly isn’t many) have wanted to reign Fannie and Freddie in for a long time, but were unable to because of the clout these entities carried among Dems on the Hill. The fact that Fannie and Freddie are now on the verge of collapse is not a sin that can be laid at the feet of the Republicans.
Dreggas
Fannie and Freddie were asked to help bail out big shit pile which was a result, partially of de-regulation by republicans (see Phil gramm) and partially by the policies of the past 8 years. Sorry but Fannie and Freddie are part of the mess created by the republicans. See Alan Greenspan pushing Option ARM mortgages at the behest of the admin. See also George bush meeting with some of the big whigs in the sub-prime and alt-a industry back in 01. Never heard of it? Not surprising it wasn’t big news but the President of the mortgage co. I worked for bragged about it.
chopper
fannie was created by a democratic administration. fannie was later deregulated, and freddie came about, under a republican administration. the current crisis in the mortgage market, like the S&L scandal of the 80’s, is based mostly on an indifferent regulatory establishment.
cfpete
Just to clarify, Fannie went private under Johnson to take them out of the Federal budget. Freddie was created under Nixon. Democrats controlled both Houses of Congress during this time.
dbrown
nteresting that the debt (mortgages held by Fannie, et. al.) is THE hot thing going now like a fire sale – the pricks on wall street are going nuts buying what will be “As good treasury notes” securities. Big profit IS being had for those with the money now that TAXPAYERS are backing the debt. THAT IS something for nothing – if you exclude the taxpayer getting screwed. Try reading about the issue in the NYT where this gem was located (and I posted in another tread here).
TenguPhule
Better dumbass trolls please.
TenguPhule
Simplified.
gopher2b
It was a rhetorical question; I don’t need the NYT to understand what is going on.
First, TAXPAYERS ARE NOT BACKING THE DEBT. Jesus, someone show me a single fucking article where the government has agreed to gaurantee these loans. One article then you can bitch to your heart’s content.
Second, even if you were right (and your not) then your second premise undercuts your conclusion. If the “pricks on wall street” make money on these notes because the price goes up then the TAXPAYERS won’t have to pay for anything. They’re kind of mutually exlusive.
Third, the richest 1% pays 40% of the taxes and the top 10% pays 70% in this country. We can continue this illusion that the “middle class” carries this government but its a lie. Under your theory, anyway, the Wallstreet pricks are screwing themselves.
Fourth, this debt is so undervalued its ridiculous. I was speaking with a mortgage broker and he said that HELOC loans that were 30 days past due once in the last 30 days are selling for $.05 on the dollar. That is insane. So, yes, the smart people with money are buying up assets that are dramatically undervalued. This undervaluing, by the way, is what is causing the capital problem Fannie Mae and Freddie are experiencing. Its a liquidity problem caused by changes in accounting rules. If you don’t understand this, then maybe you should put NYT down and pick up a WSJ; that or shelve your humanties degree and go back to school and study some economics.
Rome Again
El Cid says that with a completely straight face. Too funny!
liberal
gopher2b wrote,
dbrown wrote,
As dbrown points out, the real people getting bailed out are the debtholders (or people holding non-Fannie/Freddie debt which Fannie/Freddie guarantee).
Rome Again
Alt-A loans are still just as worthless as they were before they were repackaged. There is not money to be made in them. That’s a fantasy. The only thing the repackaging does is drive down the prices of the other ingredients in the recipe they used to mix these things up.
liberal
gopher2b wrote,
LOL! You’re kidding, right?
There’s no statutory or similar guarantee of the debt, but everyone (well, everyone who understands the history, that is) knows that because of their government charters and the “too big to fail” principle, there’s a high likelihood that Uncle Sam would back up the debt.
Rome Again
Shorter me: half of nothing is still nothing.
liberal
gopher2b wrote,
(a) Are you alluding to Federal income taxes? If so, Federal income taxes are only a part of Federal taxes, and Federal taxes are only a part of all taxation.
(b) The usual figures for the richest n% paying x% of taxes are flawed. The correct way to decide if someone is “rich” is to look at his assets, not his income. But the “…richest n%…” figures look at income, not wealth.
(c) The rich get far more benefit from government than everyone else, hence should pay more. Principle among these benefits are economic rents, the most important being land rent. As Adam Smith wrote in The Wealth of Nations,
liberal
gopher2b wrote,
Are you sure it’s insane?
My impression is that if the house is worth less than the first mortgage, and the house goes belly up, the HELOC is worth zero, zip, nada.
Perhaps based on some statistical model, the average such HELOC should be worth more than 0.05 cents on the dollar. But you have to worry about the model, and worry even more about the quality of the data.
liberal
erghammer wrote,
This is true, contrary to those who differ.
It’s part of a bigger phenomenon: Democrats (especially Barney Frank) trying to “boost home ownership” in good times, and trying to “help out hurting homeowner” now.
The point being that the real recipients of Frank’s bailout plans are not the homeowners, but the banks and investors holding the debt. And that much of the effort to “boost homeownership” by getting more liquidity to prospective home buyers just ends up with the price of homes being bid up.
That effect is stronger in places where land is a larger part of the price of a home (mainly urban areas with high pop density and little free land).
Looks to me a like either people like Frank don’t understand land rent, or the folks who give them campaign contributions (banks? real estate moguls?) definitely do.
gopher2b
Oh, the “everyone just knows” theory. Right, very convincing.
And by history, you must be referring to the ZERO number of times the govenrment has bailed out these entities.
In reality (where I live) the only thing on the table is the option to infuse companies that are short on capital but long on undervalued assets with cash while becoming a preferred shareholder. Oh, and a tiny wittle benefit is preventing the national real estate market and the global economy from really going down the tubes.
PS I’m super glad you read and can quote from a freshman issued book but it doesn’t help you. We can get into a tax debate if you want to, but you really don’t.
J. Michael Neal
Everyone needs to keep in mind that the mortgages that Fannie and Freddie are holding are of much higher quality than the subprime or Alt-A loans that are going tits up. They required down payments (although there have been some sneaky workarounds on this), documentation, and other features that made them less risky. Of course, this higher quality was precisely due to the regulations imposed on what sorts of mortgages they were allowed. In addition, they are cash flow positive, making liquidity problems unlikely, as is insolvency. The shareholders may end up taking a huge hit, but the debt holders are probably fine, and there’s no reason to think that the companies aren’t going concerns.
The problem, as Brad DeLong points out, is not the survival of the GSEs in the long term. It’s their ability to continue to make loans in the short term. While the cash flow is there to keep them alive, the capital may not be there to keep them functioning as they are supposed to. This is a serious problem, because non-GSE lending has cratered. If Fannie and Freddie were to stop making loans, the housing market would all but disappear, as opposed to just being highly impaired.
There are very good reasons for the government to think that this would be a Bad Thing. Given that, throwing in some money to recapitalize Fannie and Freddie is easily justifiable, and is not a bailout of the bondholders. If you want to think of it as a bailout of anyone, consider it a bailout of people who are going to want to buy or sell houses and the mortgage companies that are still going concerns. I think that house prices will, and need to, fall considerably even from where they are now, but this is a support I don’t object to.
The government isn’t likely to lose money on this. Hell, my question is whether $15 billion will get the job done. What everyone needs to be alert for is pressure for OFHEO to allow the GSEs to lower the standards of the mortgages they’ll accept. This has already been a problem, with the conforming limits being raised, and it is prone to being pushed by both sides of the aisle. If there’s going to be a fatal problem, that’s what it’s going to be. save your ammo to fight it.
gopher2b
I meant late in last 360 days (my bad). That, by definition, means its wasn’t past 60 days due which means that the person caught up.
Rome Again
Fannie Mae and Freddie Mac have no Alt-A problem?
Half of what others have on Alt-A is not “no problem”, moron!
http://www.forbes.com/2008/05/06/fannie-mae-closer2-markets-equity-cx_md_0506markets50.html
J. Michael Neal
See this part?
Even their Alt-A stuff is of better quality than other people’s. Further, as your cite says, Fannie has about $342 billion of Alt-A exposure, compared to $5 trillion in overall loans. That means it constitutes a vastly smaller percentage of its portfolio than the dead or near dead mortgage lenders. It’s going to drag down what the shares are worth. It may even get the dividend cut. It isn’t going to sink the company.
Rome Again
When you compare the book value of Fannie Mae and Freddie Mac to other lending entities, you don’t have a real comparison. Alt-A accounts for about 12% of Fannie Mae, considering it’s the largest buyer of mortgage paper, that accounts for a lot more risk than you are leading us to believe. Yes the default rate is lower, but it’s not non-existent as you were suggesting, and as more people are willing to turn in their keys, it WILL create more problems. The housing bubble isn’t over.
Rome Again
I suppose you’re one of those who is purchasing Fannie Mae stock in hopes of a bumper profit, JMN?
Rome Again
Another thing that you’re not even considering JMN, not everyone who is turning in keys has an Alt-A loan.
Groceries are becoming unaffordable, gas is becoming unaffordable (it takes over $40.00 to fill my ten gallon tank now?) and people are losing jobs. The keys being turned in will not only be from Alt-A mortgages but, will also be from conventional home loan purchases as well. Alt-A is only the tip of the iceberg.
JustAnUdderRatfuckTroll
This is called the Bush-McCain Prosperity.
J. Michael Neal
You’re imagining things. I never said that the GSE’s Alt-A holdings aren’t going to cause problems. In fact, I said that the shareholders may suffer huge losses, and the dividends may get slashed. Hence, your comment:
is dumb. As I have suggested, I’d stay away from the stocks. What I have also said is that I don’t think that the Alt-A problems are threatening the existence of the companies, particularly since they have the option of going into runoff mode until their capital situation improves. For that question, the absolute amount of their Alt-A exposure is pretty much irrelevant. That exposure relative to the more solid loans is what is important.
You are wrong that I am not considering this. It’s happening all over. What I am considering is that the nature of the mortgages that the GSEs were allowed to make by regulation are going to see a lot fewer defaults, and produce higher recovery rates in the cases of defaults do occur, than will be true of the industry in general. Thus, judging Fannie and Freddie by the standards that you use to evaluate, say, Washington Mutual (near the top of the list of failures I expect in the near future), is pointless. They are substantially more stable.
Look, I think that Fannie and Freddie have some real problems. My interest in the stocks is zero, and my only comment is that they have already tumbled enough that I don’t think that they make worthwhile shorts. I just don’t think that their existence is threatened by their problems. The crisis the system faces isn’t their insolvency, but their ability to keep the mortgage market alive in some form.
Rome Again
Not exactly, you stated the following:
What you suggested is that F&F don’t have any Alt-A risk at all.
Rome Again
Mike Shedlock (Mish) disagrees with you.
TenguPhule
See S&L bailout.
See the gopher just get plucked out of his hole by a hungry eagle.
TenguPhule
And if you believe that one, I have a nice bridge to Alaska to sell you.
When you figure out how much is owned by the top and how much they pay on it compared to everyone else, come back and apologize for being a dumbass.
gopher2b
You stupid fuck. Read history.
In the S&L crisis the government paid off the loans of people and companies who could not pay them. Nothing like that is happening or even being proposed.
Because you are so fucking stupid, I will give you an example. When people stop paying for their houses, and the banks start going apeshit, and the government uses taxpayer money to pay the banks and let the people stay in there homes….then you have a bailout.
Enlightened Layperson
The free market does not keep people from making dumb mistakes; it merely penalizes the ones who do (usually the majority). In any unregulated industries, vast numbers of participants will end up going belly-up. That is perfectly acceptable in most industries. It is not acceptable in banking or insurance. If banks and insurance companies failed at the rate other businesses fail it would wreck our whole system of finance. Hence the need for tight regulations.
J. Michael Neal
I’m a pessimist, and even I think that Mish is a ridiculous alarmist. I also disagree profoundly with his ultra-Austrian way of analyzing things. Ron Paul nuts are not who I listen to to evaluate things.
Rome Again
That may be true, but he’s developed quite a following, where’s yours?
John Spragge
If you run a trade deficit for 30+ years, you have to figure out how to put off paying the bills. You can have a financial collapse and convert investmments into government securities (S&L crisis), then you can have a stock market bubble (tech wreck/Enron), then you can have a residential real estate bubble (oops). Eventually, though, you have to pay the bills…
TenguPhule
Shorter gopher2b: I contradict myself in the same paragraph.
The government is talking buying equity in the two companies, diluting the current public shares of stock and essentially BUYING INTO the debts that both Freddie and Fannie owe.
The only difference now is that instead of writing the money off, Bushco is giving us all a big piece of big shitpile in return.
TenguPhule
And yet, they are still more accurate then the Wall Street pundits….
J. Michael Neal
The question isn’t whether you can get over that bar. The question is whether it’s possible to limbo under it. It’s a challenge, particularly if you let CNBC place it.
liberal
gopher2b wrote,
LOL!
I forget more about the economics of taxation in a day than you’ll ever know in your lifetime.
liberal
gopher2b wrote,
No. By “history,” I meant the circumstances of the GSEs creation, the public perception of them, etc.
And the fact that the government has bailed them out zero times doesn’t mean it won’t have to bail them out in the future.
It’s quite possible the GSEs will be completely insolvent, particularly if home prices continue to go south. In which case it’s not merely a liquidity problem.
There are ways to do that short of completely bailing out all the debtholders.
liberal
J. Michael Neal wrote,
“More stable than WashMu” =/= stable.
With declining home prices, presumably the default rate for the more solid loans is going to rise.
Furthermore, there’s all sorts of chicanery these days. AFAICT it’s SOP to get around the downpayment by taking out a second mortgage.
As far as income requirements, when people didn’t out-and-out lie about them, you can qualify for much more than you can really afford.
So while it’s certainly plausible that the GSEs won’t become insolvent, it’s hardly guaranteed.
liberal
Enlightened Layperson wrote,
Absolutely correct.
But bear in mind another reason: banks are granted extreme powers by the government. In return for that privilege, they ought to consent to being regulated.
liberal
gopher2b wrote,
The Wealth of Nations is merely a “freshman issued book”?
LOL!
Do you enjoy making a fool of yourself in public like this?
w vincentz
It might be too late in this thread to post this, but Buzzflash reports that the leading bond holder of Fannie and Freddie is the Chinese government.
Follow the $$$.
gopher2b
liberal wrote:
That’s when I read it. Perhaps you didn’t find it until graduate school.
Look, I see some of your points but you are going into hysterics over something that (1) has not happened, (2)isn’t being proposed. I know Krugman and the NYT has said a bailout is inevitable. That does not mean that the next act the government takes to help these companies is a bailout. Look at what they are doing, and think about critically.
Now, I totally agree with you that if the FMs are actually insolvent and the govenrment steps in and pays the debtholders then you have a bailout which would be horrible for all the reasons bailouts are fundamentally terrible ideas. But, that is not what is being proposed. In fact, they are trying to prevent that situation because the FMs are too big to fail. In other words, if you don’t fix their liquidity problem now, they can’t buy, package and sell mortgages securities. If they can’t buy mortgages then little banks all over the country are stuck with 30 year notes and no cash. No cash = no loans = falling real estate prices = FMs’ assets are worth even less = catastrophic death spiral.
By the way, I’m not engaging you on whether we pay economic rents to the federal government because I think you and I are so far apart on that issue it wouldn’t be worth our time (I don’t think the government owns any of the means of production and thus we don’t pay for the right to use it. That may have been true of feudal Europe but not here or now). Moreover, just because Mr. Smith was for the progressive tax system in 1730 doesn’t make it right; that’s not an argument. Its the way high schoolers start term papers.
PS TenguPhule – you’re an idiot. I’m not bothering with your nonsense anymore. At least liberal as a vague idea what he is talking about.