Freddie
Treasury Secretary Henry M. Paulson Jr. said Sunday that managers of the companies were not responsible for the main causes of the government’s action, which he identified as conditions in the housing market and an inherent conflict in the companies’ business model. As federally chartered but shareholder-owned firms, they were required to balance a profit motive and a public-service mission.
Arthur, likewise, opined that Freddie and Fannie are
“neither fish nor fowl.” He said the country had long put off discussions about the implicit government backing of the companies, which Congress made explicit last month by empowering the Treasury to infuse billions of dollars into them.
“The fabric of those companies was so intertwined with its political patrimony that ordinary considerations were put aside for what was or wasn’t politically acceptable,” Mr. Levitt said in a telephone interview. “As a result of that, the way one would operate a business according to business standards gave way to operating a business in a way that was palatable to a political system.”
Wait a second. Wasn’t… Countrywide a private company operating in a way that was palatable in private markets? Didn’t Countrywide go belly up? Didn’t Bernanke have to rush hundreds of billions of dollars worth of credit to private companies?
The problem wasn’t that Fannie and Freddie weren’t run as private companies, the problem is they weren’t run as government controlled companies with rigid risk rules and rigid underwriting requirements. Since in private companies such rules limit share price run ups, completely private Fannie’s and Freddie’s would have done the same thing, just with a higher borrowing cost and even less controls.
It’s not the balancing act, the "public service component" did nothing to cause Freddie and Fannie to go under.
The lesson is not that Fannie and Freddie got into problems because they had a public component. It is that they had a private component, on the public’s dime. It’s known as "head I win, tails the public loses" (or, more formally, as moral hazard.)
Demonstrated once more by the fact that severance packages will be worth as much as 14.9 for Freddie’s ex-CEO Syron, and 9.8 million for Fannie’s ex-CEO, Mudd. Good work if you can get it. Drive the company into bankruptcy, be rewarded by becoming filthy rich.
Once more: Privatize the Profits. Socialize the Losses.
Rinse. Repeat.
Related posts:
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- Only the Insurance Companies Want a Level Playing Field
- CMS: Public Option Much Cheaper Than Private Insurance, and Would Make Private Plans Cheaper, Too
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Hi, Ian. I saw this today, which was a link from Eschaton, and Googled and found this. Any idea what’s really happening here? (I’ve all of a sudden become interested in stories like this because the ex-husband still has a job (!) at Bear Stearns…
This is so debilitating. I have a fiscal depression.
Crony capitalism in its finest hour. As you say, rinse, repeat.
The spin is that this is not a bailout because “only the shareholders are suffering losses, not the taxpayers” is malarky. Evidently, the major shareholders in Fannie Mae and Freddie Mac are mutual fund managers like Fidelity, Vanguard, and the like. So, if you’ve got a 401k, 403b, IRA, etc run by one of these companies, be prepared for a whack.
Privatize the Profits. Socialize the Losses.
Yes. Nice work if you can get it.
Digg this post
I may laugh myself right off this chair.
Will the contracts be made public, since the taxpayers are bailing them out, or will Cheney add them to the document shredding project?????
Ding.
Called “slavery”.
Respect for “markets” is not engendered by working on Wall St. After more than a quarter of a century, I have seem my share of irrationalities.
I’m feeling very good that we pulled ALL of our son’s money out of the College Choice mutual fund a few weeks ago. It had been losing money all year, but one of Ian’s posts made me think it was time to bail out.
Thanks to Ian and FDL.
Dugg it
This is just all disgusting, Ian. And the deregulation of these lenders was like playing a Ponzi game with more and more “investors”. Eventually you get so massive, and the impacts and letting them sink, is impossible.
I wonder whether there has been any impact on Alaskans of this crisis. Palin’s idea that Freddie and Fannie were government-run and controlled entities that simply show how inefficient BIG Government is either such a level of ignorance that she shouldn’t even have been elected mayor…or a dark malevolance that she’d toss millions out onto the sidewalks in order to support her “Anti-Socialist” ideology.
Ironically the pitbull with lipstick is the chief executive of a resource rich Norwegian-style economy (Alaska Permanent Fund) that soaks most of us at the gas pump in order that they don’t have to pay income and sales taxes (plus getting several thousand back in residuals).
I think that the Feds need to start collecting a lot of these abandoned houses and start putting people who will put a little sweat equity into maintaining them. Or maybe offer them up to college students that are going into the teaching profession, or college instructors. Or many of the same folks that legitimately faced foreclosures (minus the speculators who used the equity repeatedly to obtain several houses).
Ian, how tied up into Fannie and Freddy are the 401K’s investments, and how vulnerable are people with this? If so, what should people do…or not?
Sounds like Lehman has realized they have some capitalization or cash flow issues (or both).
or will Cheney add them to the document shredding project?????
“Gone in Sixty Seconds”.
http://en.wikipedia.org/wiki/Gone_in_60_seconds
No one could have predicted…
The people who’ve reaped the rewards from secondary mortgage markets these entities enabled on the pretense of making housing affordable were indeed the sole winners at the end of the day (or end times). There’s certainly nothing cheap about housing in the major metro stat areas. All the toxic waste generated by the housing bubble is now being written off by the government, so that the preferred stockholders can walk away with their winnings from yet another highly speculative enterprise where only the high-fliers and insiders win. They win, you lose. It doesn’t have to be that way, but our banking system doesn’t allow for anything else, but. And that’s a big butt.
Too late to do anything now. The common shares are damn near wiped out. If your mutual fund/401K owned shares, you’re screwed. If it owned bonds, otoh, you’re happy.
Ian? Was it you that had the “hurricane” post up last week.
Just caught this article in Time about research that’s going to be in this weeks NATURE It’s the first strong evidence of a relationship between global warming and hurricane intensity over the last half century. Climate models had certainly suggested it…but there wasn’t such tangible evidence from actual hurricane studies until this.
The bailout is going to be huge. The choice to spend money on the bailout of speculators means money won’t be available for other things. Neither Obama nor McCain’s economic programs take into account just how much money is going to have to go all the various bailouts. There may be a bit of an Obama bounce (if he wins) but it will quickly die under the cost of all this BS. A lot of these people needed to be wiped out – they are stupid money and keeping them afloat is bad for the economy, because every dollar being spent to do so is not doing other, more productive, things.
Wasn’t me, but makes total sense.
Shameless. Without honest diagnosis, cure isn’t possible. Are these guys anticipating their rapture?
So did Lehman have things that were structurally worse than the other houses, or did they just get caught when the Musical Chairs game ended abruptly?
Washington Mutual stakeholders having a migraine today as well.
Sounds like what we heard at the start of the Bear Stearns debacle. Is Lehman big enough now to have a similar impact if it fails too?
some more McInsanity
McCain Backed Abolishing The Department Of Education
Barack Obama’s campaign is reminding voters today that John McCain, during the heady days of the “Republican Revolution,” once declared that he favored abolishing the Department of Education.
“I would certainly favor doing away with the Department of Energy and I think that given the origins of the Department of Education,” the Senator said on CNN’s Late Edition in December 1994. “I would favor doing away with it as well.”
Last year staying in Athens watching European TeeVee…. lots of commercials for investments which stated clearly…. “WE do not have any investments in the US Mortgage market”…….. lots of different companies……
This year….. you could feel the sheer terror in the financial markets where the cluster f*ck that is our financial situation was going to tank the whole world….
Well, good thing lots of small and medium sized regional banks, credit unions, pension funds, and insurance company investments didn’t have much Fannie or Freddie stock. Oh, what?
well looks like the haves and the HAVE mores….will get just a wee bit more
again MISSION ACCOMPLISHED…………
Actually, holders of preferred stock are also faring poorly. Bonds=good. Stock=goodbye money.
How many pension funds are going to go belly up?
How many Public Employees Retirement funds are going to go belly up?
Do you think they are going to downgrade the rating of some of these securities?
What will happen when some of these loose their AAA rating….
Lehman article in WSJ.
http://online.wsj.com/article/…..whats_news
Too kind. Lehman has been keenly aware of their impending train wreck for a couple of years now. They’ve covered it up bravely, but at length, word has gotten out to a large number of institutions who have something to lose as it’s going down.
Wish I could remember which CR commenter said this, “at least the people who panic first get SOME of their money.”
Makes perfect sense coming from the genius that he is…
He is so eaten up with REVENGE…
Not that I’m thinking of hedge funds/ cough.
Something is really bad is happening at Fidelity. I cannot access one account, the other has gone down by 6K.
I was wondering about Fidelity…yikes.
How many insurance companies are going to blow?
EEKKKK better check mine…..
the more we know him,the more we need to fit him for a straightJacket,
Well, I suppose we’re all in this together. Wish to hell I had sold a couple of months ago when Ian warned…
they are crimminals anywho,all invested in lousy realestate deals
they need to hall shrub,and chub out of the whitehouse on a rail and ready the tar and feathers
I moved every one of my 401K’s to what they consider a stable option == money market type investment….. so my only loss is the value of the dollar except it isn’t FDIC insured…. OF course…..
I’m not hearing anything bad about Fidelity. Your account could go down if it’s a money market account. I’ll ask around, but my sense is that the largest places like Fidelity and Vanguard are still relatively safe.
Really safe is owning things, and not having mortgages that allow other people to come take your assets away. Time to pay down your debts and own your cars and homes outright.
Downey in California = time to get your money out.
that is a major problem also if one wants to relocate to another country
We are staring at the economic abyss…but we are not lemmings…let them jump…don’t follow them.
You can be sure that even Bushco’s investments are not secure…
how many Merkins you think have that option…and McDummy sits with 12 homes
and Cindy Lou parades around in 300,000 dollar get ups,aqnd charges 750,000.00 PER MONTH on her AMEX………..unbelievable
Well we can go with the meme of the American Union (Canada, US & Mexico) single nation where the currency will be the Amero….. which means we wipe out all of BushCo & Reagan debt and start all over with a fresh slate….. Ya right….
I don’t have credit card debt, fortunately. I do have rental properties. Fortunately, one I’m about to get on line is in Panama.
Differentiate between owning stock in an insurance company versus being a policy holder.
Stocks in all companies that have played in this ponzi mortgage scheme are going to be worth less as reasonable dollar values for real estate replace fantasy, especially in places like FL, AZ, NV, CA.
If you hold a life insurance policy in a really large company, I wouldn’t be worried. otoh a very small life insurance company that took big risks investing their funds? Hmm.
Mexico looks attractive to me right about now
Can’t imagine Cindy living in a dump like the White House. and practically in the middle of the ghetto! how do you think she’d manage that? let’s hope we never find out.
Irony abounds.
Escaping across the southern border to escape crushing economic conditions.
Tancredo’s head explodes again.
Could be there in after a 2 hour drive…… they were advertising property at Rocky Point which is on the Mexico side of the Baja gulf…… haven’t heard that in a while but you could buy property in Mexico and not be a citizen….. You can also buy in Greece….. they are seeking immigrants who are professionals and productive to Italy…….
she has designer MEDICATIONS to go with the designer clothing and house furnishings,shes in another world with the likes of Rushbo
teddy has fresh threadiness upstairs
I imagine she will do what she has always done….. stay here in Snottsdale in that fancy double condo high rise……
oh, I don’t think there are enough, um, medications in the world for that situation.
i adore Greece.but like Calif,too many earthquakes for me.ive been through 30 hurricanes and storms i need peace and tranquility if possible
far above the unpleasentness “g”
Isn’t that about it. Immigration in the opposite direction.
Elderly who live on those “super-safe conservative insurance annuities” have no way to bail out.
My state has a fund to cover a percentage of losses due to insurance co failure; however, when the fund is exhausted, that’s it.
Is anyone online analyzing the health of these state funds?
Pension funds going belly up: there will be a lot more corporations that will declare bankruptcy so that they can shed their pension obligations. Boards of directors are being told it is their fiduciary responsibility to keep up with their competitors by taking this action.
Public employees funds..different animal. But you do face the spectre of cities themselves going bankrupt. This is coming in places that depend on the mortgage bubble for tax revenues. I think municipalities will try very hard to honor their obligations to retired employees at some level. Perhaps they will snip away at the edges, requiring a larger copay every year for health care for example. My mother lives in a steel town where there really isnt enough money for the retirees, so I see how this works.
Are they going to downgrade the securities? Yes, it’s a matter of trying to let the air out of the entire balloon slowly. We must hope and pray that the people who are managing this know what the hell they’re doing.
When they lose their AAA rating… well, they will be riskier and will have to pay more to raise funds. To lose a high rating means that certain institutions are not permitted to invest in them. Just means that others will if the return is high enough.
Thanks Bush/Cheney! Please work for the Democrats even if you think they’re terrible…we have to all pile onto the other end of the seesaw this election and try to change the balance of power.
All of these situations are not going to be helped by the fact that OPEC has announced that it will cut production to keep prices from going lower. Nice, huh?
the suffering is amazing and yet many will turn out and vote for the repukes again,and again………….shitty media
Thanks eg. Actually, I was thinking about annuity holders. (I’m not one)
One of the conditions of the Fannie/Freddie bailout is that the lobbyists get fired. I imagine a bunch of them were working overtime on the legislation that passed earlier this year. The lobbyists talked Congress into using Fannie and Freddie as solutions to the problem, increasing the amount of mortgages they could guarantee, and other steps I cannot remember. This effectively meant that no one saw the risks these entities presented to the entire system. The entities continued to sell bonds, not just refinancing but new money, which they needed to buy the bigger mortgages.
Everyone was riding the gravy train, and no one wanted to see the foreseeable problem.
please tell selise this,and anybody else,thinks there is no diff
well lets sayy all the insiders were riding the gravy train…everyone else…not so much
Masaccio–glad to hear you chime in on this. Help me out here :)
99% of the people voting for McSame and co do not understand how all this affects them. 99% of the men voting for McSame and Co ARE voting because they’d like to boink SP Moosehunter. 99% of the people voting for McSame and Co are voting cuz he was a POW. The rest of the people that are voting for McSame are RICH. No other reason necessary.
egregious, I’m feeling some economic gloom and doom from you tonight, and while I try to maintain some optimism, I’m having trouble disagreeing.
These things happen because we allow corporations and in this case financial institutions to grow to enormous size, merging and so forth. And when they make a mistake they can take down a huge amount of people with them.
We need to set limits to growth and mergers and monopolies. In the end small investors whose savings retirement is invested in “funds” get trashed, while the deal makers, management and so forth make out like bandits.’
Who will stop this? America worships at the alter of wealth and so many aspire to it. We pay idjits who read the news 10s of millions of dollars a year, sports “stars” hundreds of millions and idjit entertainers 10s of millions. Everyone else works for the equivalent of a wage to support these millionaires.
This is capitalism at work. And that is the problem. It will always result in impoverishment of the masses and effectively slavery. They told us we would all work less, earn more, do “high paid service” jobs while manufacturing was moved to (slave) markets. hahaha.
Now they take your tax dollars to support their corrupt gambling system and pass the bigger bill to your children will turning your dollars into usless toilet paper. We are the Wiemar republic again. Excellent work by the corporatists and the finance “sector” (the people who get paid the most and do nothing at all).
Perhaps when this system collapses and the thieves are run off the continent, a more equitable socially conscious economic system will rise up. I’ll be dead by that time. But the next 3 years are going to be hell. More and more failures and the “economy” shrinks to 1/2 it’s size or less.
Well, have you looked at this page?
On the plus side, very capable people are managing the slowdown. It can go too fast, and so far it hasn’t. I am watching carefully, being über careful with my small savings account, and am rather more cheerful than I thought I could be at this point. We may yet be able to do this on an even keel, though it will be a terrible result at the end. Our currency is being destroyed. How conservatives can vote for yet another Republican administration after this one — in the name of a Strong Dollar policy — can devaluate our currency forty percent. Words fail.
But I find myself feeling cautiously optimistic that gradual decline need not become precipitous.
As for your Canada link, if we go down, Canada goes down. I don’t see how that can be avoided. Need to work together to avoid calamity.
That’s a great summary of insider delusion for the last 8 years.
I agree that Henry Paulsen and Ben Bernanke are smart and are doing a good job of managing this mess. The problem is uncertainty: we don’t know what other misery is out there. WaMu? Lehman? The credit swaps? How much more of this crap can we absorb? That is what is worrying me.
Lehman and WaMu will be absorbed by other entities. Medium size chess pieces.
Credit swaps have all players mutually held hostage, that’s why they are calling it the Great Unwinding. Done carefully, with a proper gyroscope, it will hold.
We are looking now at the longer game, and whether someone will decide to throw the board and pieces into the air. So far, so good.
If it gets thrown in the air it gets thrown by outsiders – probably the Chinese. That’s why Fannie and Freddie were done the way they were, to keep the Chinese happy, because they can end the game.
it sounds like i have no options to save my 401k from greater injury. that’s a bummer. i have been interested in emigrating to either cuba or argentina for years but have not acted and now it feels like it is too late.
Some have moved into money market funds, and gotten some foreign money market exposure. (Free advice on the internet is worth what you pay for. I am not a financial advisor, I do not know your circumstances.)