The Fannie and Freddie Question

In a previous post, I mentioned that Fannie and Freddie were costing taxpayers about $7 billion dollars per month. Is it time for them to go? A good case can be made for it:

Say Goodbye to Fannie and Freddie

[...] Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies’ executives.

Fannie and Freddie’s risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.

On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new “Fan-Fred agency” that would continue to securitize and guarantee home mortgages. It’s true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.

Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. [...]

Read the whole thing for the nitty gritty details. There are many reasons why they should not continue, but this administration has been supporting a lot of things that should have died a natural death. We shall have to wait until Tuesday to see what they will do. Since Fannie and Freddie are government creations, and Big Government is growing not shrinking, I'm not confident that they will be retired. If they are kept, the question will be: "At what cost?"
     

Brand Names dissapear as the economy flounders; it's survival of the fittest. Or is it?

Many long established companies are going under, except of course for some who are favored by government, and kept going on taxpayer's money:

24/7 Wall St. Ten Brands That Will Disappear in 2011

24/7 Wall St. has created a new list of brands that will disappear, which includes Readers Digest, Kia Motors, Dollar Thrifty (NYSE: DTG), Zale (NYSE: ZLC), Blockbuster (NYSE: BBI), T-Mobile, BP plc (NYSE: BP), RadioShack (NYSE: RSH), Merrill Lynch, and Moody’s (NYSE: MCO).

[...]

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were on our earlier list. We were wrong about them closing. They have become “wards of the state,” kept open by the US government to help maintain an orderly mortgage market. It is estimated that keeping the two firms open costs taxpayers about $7 billion a month. The companies lost a combined $291 billion in 2009. Members of Congress are pushing to have the companies shuttered. It is almost certain that they will not be around, at least in their current forms, much longer. One estimate is that the cost of supporting the two companies will total $1 trillion, making it more likely that they will be closed in the favor of other alternatives to maintain the mortgage market. [...]

In a sensible world, Fannie and Freddie would be shuttered, but economic sensibleness seems nowhere in sight, so I'm not so sure. Fannie and Freddie are government created entities, and the government has their own reasons for maintaining them, at any cost, apparently.

Read the whole article for other companies that are about to disappear. Some of them, like Newsweek, I won't miss. But who knows, they may get a bail-out too? More money taken away from the productive people who earned it, and given to unproductive people who squander it? And the surviving, profitable companies who are paying their own way, are then forced to compete with the unprofitable, government subsidized ones? How fair is that?

Rewarding failure, and punishing success. Change You Can Believe In.
     

SACHS OF S#!T! Goldman-Sachs get's bailout?

That's what Neal Boortz says:

LOVIN' THE HEADLINE WRITERS

This headline from the N.Y. Daily Post today:

SACHS OF S#!T!

Actually, I enjoyed seeing the Goldman Sachs execs get hammered yesterday. Can't believe I was rooting for Carl Levin. Dogs and cats sleeping together. I don't really know if Goldman did anything fraudulent when they first created and sold the subject security ... but it doesn't take a lot of brain-power to figure out that once they clearly understood that the investment was a pile of s#!t they should have stopped selling it to investors. Then there's this ... Goldman is actually supporting The Community Organizer's so-called financial reform plan. Why? Because it's a bailout deal, that's why. If the financial regulators in Washington are ready to bail out Wall Street firms who screw up, doesn't that encourage these firms to take unrealistic financial risks? We will have a system that protects Wall Street while the investors are pretty much on their own!

No --- I'm not for unfettered free markets. There are laws against fraud, and those laws should be enforced vigorously. Let's see ... back to law school ... what constitutes fraudulent activity? When you make a misrepresentation of fact to some individual with a goal of causing that individual to act against their own self-interest, that would be fraud. If you sell an investment to someone, telling them that this investment is sound; and you know at the time that the investment is actually a pile of crap ... and the investor acts on your information to their detriment ... you've committed a fraud.

The problem here is that the power-hungry politicos in Washington will use this Goldman Sachs incident to further increase their power - to tighten their grip on Wall Street. This will be a major argument in favor of their regulatory make-over, all the while leaving Fannie and Freddie alone.

Warning: bad language in video. [...]

Follow the link to see the video.

And yes, Fannie and Freddie, Government created entities who are at the center of the financial crisis, remain untouched.

In 2005, John McCain sponsored a bill to reform Freddie Mac and Fannie Mae:

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain

If McCain's bill had passed, the financial crisis could have been averted. But the Democrats stopped the bill, and now they are using the resulting crisis to further their agenda: more government control, to solve a problem they created in the first place.

Today's Neosocialists, and their methods

Marx Would Be Impressed

[...] Today's neosocialists are smarter than their ancestors. Instead of outright takeovers, they are achieving much the same goal through rigid regulations. ObamaCare is a prime example. Health insurers will eventually be private in name only, as the details of their policies will be dictated by governmental decrees. About the only thing companies will have any autonomy over--perhaps--will be their corporate logo.

Entitlements go hand in hand with sweeping, overbearing regulations. President Obama wants higher education in this country to be free of charge, which is why his Administration is pushing for a government takeover of student lending. With such powers it will be but a wee stretch to intrude even further into the governance of the nation's colleges and universities--including, ultimately, admissions.

Senator Chris Dodd's (D--Conn.) recently unveiled package of financial regulatory reforms is a neosocialist's dream. It is also destructively stupid. The bill doesn't address the key causes of the recent economic crisis: the Fed's too loose monetary policy, the behavior of Fannie Mae and Freddie Mac in buying or guaranteeing almost $1.5 trillion in junk mortgages and the failure to properly regulate credit default swaps and other derivatives.

Dodd's punting on swaps is astonishing. Years ago Washington should have mandated that such instruments go through clearinghouses so there'd be full transparency and proper margin requirements. After all, classic derivatives such as soybeans and currency futures have had margin requirements and clearing mechanisms.

In the name of fighting Washington's too-big-to-fail doctrine for major financial institutions, Dodd's bill is a de facto institutionalization of them. Financial outfits that are deemed a threat to financial stability will actually be protected by the government. The bill establishes a $50 billion fund to deal with big failures, but the fact that such a fund exists tells the market that when trouble comes big banks will be saved. Thus these biggies, like Fannie and Freddie, will have lower costs of borrowing--debt is by far the biggest component of their capital--which will put their smaller competition at a crippling disadvantage. [...]

In a recent post I addressed how Fannie and Freddie are being protected while their competitors, who have already paid back money, are being unfairly penalized.

And where is this all leading us? The Big get Bigger, the small disappear:

Moreover, the bill doesn't address the problem small businesses have with the current credit system. Bank examiners are applying a mark-to-market mentality in evaluating bank loans. This is an unfair bias toward bigger-sized borrowers and, of course, the debt-hungry U.S. government. Thus the paradox of today: bargain-basement rates of interest for larger firms and higher costs--or no credit at all--for smaller borrowers.

With favored access to low-cost debt the big will get bigger--and they will be beholden to Washington.

Dodd's scheme would create a new regulatory bureaucracy, the Financial Stability Oversight Council (FSOC), with sweeping powers for itself (and the Fed). Chief among its tasks would be assessing risk of banks and their products and activities, yet Washington has demonstrated that it is incapable of judging risk. Washington would have vast sway over the operations of the U.S. financial system. In this new world banks would have to get permission from Washington for any innovation. If an institution incurred Washington's displeasure, bureaucrats could order divestitures of businesses or could even put a firm out of business. [...]

Read the whole thing for more details. Government is creating the problems, not solving them.
     

Bailout Plan and Partisan Politics

From economist Thomas Sowell:

Bailout Politics

Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.

Among the Congressional "leaders" invited to the White House to devise a bailout "solution" are the very people who have for years created the risks that have now come home to roost.

[...]

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush's watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac. [...]

Indeed. Many Republican's did. The proceedings were videotaped, it's a fact of public record, no matter how much Nancy Pelosi and others insist on lying about it.

Sowell connects the dots, but also knows that some sort of plan will have to be implemented to prevent worse consequences. But it's clear that many DID see this crisis coming:

[...] Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt."

Chairman Greenspan added his voice to those urging Congress to create a "regulator with authority on a par with that of banking regulators" to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

(bold emphasis mine) As usual Sowell gets to the point without wasting words, I recommend reading the whole thing.

This crisis was created and perpetuated by Democrats. While some sort of plan or loan to prevent the worsening of the crisis may be necessary, it's vital that we see and understand WHY it happened, who was responsible for allowing it, and prevent it from happening again.


Related Links:

"Bankruptcy, not bailout, is the right answer"

'Congress Lives Up To Its 10% Approval Rating'

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain
     

Democrats Defend Fannie/Freddie from Regulation - 2004 Video

The video is about 8 minutes and 37 seconds. It clearly shows how the Democrats blocked efforts by Republicans to regulate Freddie Mac and Fannie Mae, despite evidence of crooked bookkeeping and warnings of the impending financial crisis we are facing today. Note Frank Raines, Obama's campaign finance director, in the thick of it.

Nancy Pelosi is lying when she says the Democrats have no responsibility for the current financial crisis. They actually caused it to happen by preventing the Republicans from stopping it. As the video demonstrates, it's a matter of public record. For anyone who is paying attention.
     

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain

This financial crisis was preventable, but Democrats lead us into it by blocking a bill passed by the Senate Banking Committee that would have prevented it. From Nealz Nuze:

THE DEMOCRATS AND THE FINANCIAL CRISIS

[...] Out of all of the stories I brought you yesterday, this one was the most requested. An article on Bloomberg.com called How the Democrats Created the Financial Crisis by Kevin Hassett. Here's the set up ... back in 2005, Alan Greenspan warned that Fannie and Freddie were on the path to putting our entire financial system at substantial risk. For the first time, a Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill was co-sponsored, by the way, by none other than John McCain. The bill would have required Fannie and Freddie to eliminate their investments in "risky assets" and it would have given a regulator the power to say "no way."

Here's the rest of the story from Bloomberg ...

"If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter."

Now how does Barack Obama fit into this picture?
Do the words Community Reinvestment Act and ACORN come to mind? How about the fact that Obama worked as a community organizer for ACORN. Yesterday I read you some quotes from leaders of so-called community groups bragging about their harassment tactics on banks aimed at getting them to make more loans to unqualified buyers. I'm sitting here waiting for some reporter to ask Obama is he was ever a part of any effort to force a bank to make loans to marginal homebuyers. I'm going to be waiting a long time ... 'cause it ain't gonna happen. Such a question would be clearly anti-Obama. Maybe even racist!

(bold emphasis mine) Once again, hindsight has proven Mac to be right in his judgments. More proof that we need John McCain as POTUS.
     

The Mortgage Crisis Bailout: a Necessary Evil?

I've posted plenty about my opposition to the mortgage crisis bailout. But could it be unavoidable, because letting Fannie and Freddie fail could cause damage to stock markets world-wide, and push us all into a full-blown global recession? And will US taxpayers benefit, more than they would if the bailout did not occur? John McCain addressed this recently.

McCain: Aides may work for $1 a year
Never mind the headline (you can read the rest for that), but it was this particular part that was interesting to me:

[...] Schieffer also asked McCain about the administration’s plan for a takeover of the mortgage giants Fannie Mae and Freddie Mac, to be announced Sunday afternoon.

“I think it has to be done, Bob,” McCain replied. “I think that we’ve got to keep people in their homes. There’s got to be restructuring, there’s got to be reorganization, and there’s got to be some confidence that we’ve stopped this downward spiral. It’s hard, it’s tough, but it’s also the classic example of why we need change in Washington. It’s an example of cronyism, special interest, lobbyists, a quasi-governmental organization where the executives were making hundreds of — some, [a] billion dollars a year while things were going downhill, going to hell in a handbasket.

“This is the kind of cronyism, corruption, that‘s made people so justifiably angry. I did have a long conversation with [Treasury] Secretary [Henry] Paulson — a man I admire and respect — and he did say that when the housing market starts back up, and it will, it will in America — then the taxpayers are going to be the first to be paid off. They’re the ones that are going to be reimbursed when the values of their homes start, hit bottom and start back up, and they start getting more money back in. And that has to be in it, a vital part of it. And again, this is a system that cries out for reform.”

Of course, Fannie and Freddie are government entities that should never have been created in the first place. But the Democrats insisted on giving loans to people who were not qualified. Now we HAVE TO clean up their mess, the problem they created, to keep things from getting worse. Government should not be in the mortgage business. Why? Follow this link:

Fred Thompson on Freddie Mac and Fannie Mae

Pat gives us the most relevant quotes in the above link. I agree with Pat: Let's hope Mac has plans for Fred in his cabinet - as well as Phil Gramm.