tag:blogger.com,1999:blog-8586513.post1033310978014416130..comments2024-03-03T22:01:12.376-06:00Comments on Pensacola Beach Blog: New Rule for Big Bail OutsBeach Bloggerhttp://www.blogger.com/profile/16153908891922140526noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-8586513.post-10129130511277541202008-09-09T08:56:00.000-05:002008-09-09T08:56:00.000-05:00You should've read the Post story a little more ca...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. <BR/><BR/>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.<BR/><BR/>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.Anonymousnoreply@blogger.com