Monday, September 08, 2008

New Rule for Big Bail Outs

We're all in favor of Uncle Sam taking back Fannie Mae and Freddie Mac and their $5.2 trillion worth of mortgages. Uncle Sam never should have privatized them, anyway.

As award-winning business journalist Robert Kuttner explains over at Huffington Post, both corporations "began life as a government invention... and it worked beautifully until it was privatized." They should have stayed the way they were born.

Who screwed things up? Those geniuses on Wall Street who are always caterwauling about privatizing public functions, the superiority of the free enterprise system, and why they should be free of government regulation.

Now, Tuesday's WaPo is reporting that the bailout of Fannie Mae and Freddie Mac "threatens the financial health of several dozen of the banks that bought shares in the two companies... ." More whining from the overpaid captains of American capitalism:
Executives at some of those banks say they felt encouraged to invest in the companies because a federal agency, the Office of the Comptroller of the Currency, had classified shares in Fannie Mae and Freddie Mac as extremely low-risk investments.
So, are the taxpayers now expected to bailout the banks that got hurt? If so, what about all the others who gambled by buying Fannie Mae or Freddie Mac stock and lost? The brokerage houses... the insurance companies... the day traders... individual investors?

At least the Treasury Department had the grace to fire the CEOs at Freddie Mac and Fannie Mae for their bad judgment and book-cooking. We should embrace that as precedent for all future corporate bailouts using taxpayer funds.

Here's the new rule:
"You can't even ask for a handout unless, first, you fire all the executive bozos who drove you to disaster -- and get a full refund of the grotesque salaries and perks you paid them while they were doing it. Then, give us a call."

1 comment:

Anonymous said...

You should've read the Post story a little more carefully. It works like this. The Feds require banks to have a bunch of assets sitting around. In essence, by rating Fannie/Freddie shares as incredibly reliable, they made these shares the most attractive option for many banks. That was a deliberate choice - Fannie and Freddie were always much riskier than the ratings implied, but by assigning them a better-than-deserved rating, the Feds ensured that their shares would be purchased, thereby giving the GSEs an extra boost. The idea was to use bank capital to support GSEs, thereby using the assets that would otherwise be sitting around to lower mortgage rates.

Big, profitable banks had the most assets sitting around, and will take the biggest hit. But it doesn't matter to them - they have ample reserves, and since banking tends to be extremely lucrative, can quickly make up for the losses. The institutions whose very existence is now threatened tend to be small community banks, particularly those with a social mission. They deliberately keep their profits low to reinvest in their communities. Since their profits are low, they have a tougher time raising new capital from profit-minded investors. And since they don't earn a huge amount, even a modest reduction in capital that happens overnight can be devastating.

So if the government told them to purchase and hold GSE shares, and if most of the affected institutions are the sort of banks that we'd like to keep around, because they do good things for local communities, why aren't they getting the kind of bailout that the GSEs are receiving? Well, it's simple. Paulson has ticked a lot of people off by stepping in to bail out first BearStearns, and now Fannie/Freddie. It looks, to a lot of people, like businesses aren't being made to suffer the consequences of their actions. So he's actually delighted that a few dozen banks are going to fail. Nevermind that they perform valuable missions. Nevermind that they were doing as they were told. Nevermind that it's the community-oriented banks that will suffer, and the profit-driven banks that will survive. Paulson needs to shed some blood to satisfy the cries of the angry crowd. So he's going to let a bunch of smalltime banks fail, to preserve his ability to protect the Wall Street big boys. Great.