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Capitalism For The Poor, Socialism For The Rich - Fannie Mae/Freddie Mac Government Intervention

What happened to the idea of the free market - letting the market decide what the market thinks is best for all players? Haven't we been hearing that the era of big government is long over - at least that's one of the tickets that the Republicans have been running on for some time - laissez-faire capitalism... socioeconomic Darwinism... etc, etc, etc.

Of course, these are all rhetorical questions.

But, alas, here we are once again, with the government's take-over of two failing mortgage finance giants - Fannie Mae and Freddie Mac - ailing from a mortgage crisis which they helped create - which is what's fascinating about all this, if I can call it that. It's like when you're a child and you knowingly fuck up and get yourself into trouble; and despite their previous warnings to you, your parents, doing what most parents will do, come to your rescue, albeit grudgingly. The difference here is that, eventually you grow up... you become an adult, and your fuck-ups are yours and yours only for you to dig yourself out of, otherwise you deal with whatever the consequences are. 

So, maybe the Fannie/Freddie dilemma isn't so easily explained, but I'm not that far off.

What I still don't understand is why the government lets public companies like Fannie Mae and Freddie Mac get so large in the first place - so large that when faced with financial difficulties, the rippling effect of their imminent failure could be disastrous for the economy, with people like you and I feeling the effects most. And then the government steps in to bail these companies out, whether taking them over, or approving billions of dollars in loan packages like they did with auto manufacturing behemoth Chrysler in the late 70s/early 80s, when it too was faced with bankruptcy.

If only they could act just as intently and swiftly in helping those average men, women and families in dire need of assistance, instead of preaching responsibility and accountability and all those other like phrases for that bottom half of Americans, while bailing out failing mega corporations that they shouldn't have allowed to get so large in the first place.

And, of course, when the federal government does ride in like an errant knight on his white horse to save the day for the Fannies and the Freddies, shelling out what will likely be billions of dollars to help pay for the damage, guess whose pockets the money will eventually come from? Yours and mine, in the form of the tax dollars we pay them every year to perform at their highest levels, with our best interests as a priority.

I'm sure the recently ousted CEOs of both corporations won't go wanting, as they'll likely be leaving with healthy severance packages!

Over the weekend, The New York Times published an article titled, "Fannie, Freddie and You: What It Means to the Public." It's not all-encompassing, but it gives you some idea of just how major this situation really is, and what the government take-over could give birth to.

Here's the link to it:
Fannie, Freddie and You: What It Means to the Public


  1. The Sujewa said...

    Some companies are too big or too valuable to the national economy for the gov. to allow them to fail.

    Also, Fannie Mae & Freddie Mac both started off as government initiated projects, and stayed that way for a couple of decades before they became publicly traded/partially governmnet owned businesse (so I hear); and now they are once more mostly owned & fully controlled by the gov.

    The restructuring is supposed to help people get housing loans; so if all goes according to plan, this new change will be a good thing for home buyers, and the economy in general.

    - Sujewa

  2. The Sujewa said...

    Also, re: "If only they could act just as intently and swiftly in helping those average men, women and families in dire need of assistance,..."

    The two companies do assist ordinary people by making housing loans possible. I believe they work with banks to lessen the risk the banks take when giving out housing loans.

    "...instead of preaching responsibility and accountability and all those other like phrases for that bottom half of Americans, while bailing out failing mega corporations that they shouldn't have allowed to get so large in the first place."

    As far as I know the goverment cannot control how large a company gets, as long as there are no monopolistic type or any other illegal practices, companies get as big as they want. And that's a good thing, gov. control of how big a business can get will be an unnecessary barrier for entrepenuers.

    The US Gov has always played a role in the economy; including giant projects like the WPA - which helped Americans get out of the depression. Also the GI Bill - which created a new class/layer/very large number of college educated people post-WWII; which grew the size of the middle class & made the US wealthier & more stable - as far as I can see.

  3. The Sujewa said...

    I just found this exchange at the Washington Post site, between a reader and columnist/post writer Steven Pearlstein, clarifies benfits of the gov takeover:

    "Riverton, Utah: Please explain the difference between the Feds role with Bear Stearns, Fannie Mae, and Freddy Mac and fascist corporatism?

    And the benefit to each and every American whose hard earned cash funds these bailouts?

    How will this effect the lives of our children and grandchildren?

    Steven Pearlstein: Ah, someone with a practical bent writing in from a practical western state!

    Look, there are differences between Bear Stearns and Fred and Fan rescues, but I suspect that's not what you are looking at. And there are differences between all of these rescues and state socialism that are pretty obvious on their face, putting aside the fascist swipe.

    The benefit to each and every American is that (1) they probably will get back any cash they put in, and then some, when all this is over, because the Treasury has been pretty tough in setting considitions for government intervention and (2) each and every American will get the benefit of having a financial system that doesn't collapse and the continued availability of mortgages at a time when banks and investors don't want to hold them (and can't be forced to hold them except in fascist states!).

    Your problem is that you are forgetting to consider what would happen if nothing were done. You think you'll be fine because you have your mortgage. But if you or your children needed to move and wanted a mortgage, that would be an issue. And it would be an issue if your pension money was invested in stuff that suddenly cratered because the financial system froze up as a result of a Fannie and Freddie bankruptcy. And the company you work for might suddenly have its lines of credit pulled and have to close down some operations, which wouldn't be exactly the best thing for your household, or the Greater Riverton economy.

    So please, let's get beyond the simplistic slogans and bring some western practicality to this conversation and we'll all be better off."

    The Wash Post coverage of the situation seems more gov-friendly than the NYT articel I read.

    - Sujewa

  4. The Sujewa said...

    Link to the Pearlstein conversation that I quoted from above, good reading:

    - Sujewa

  5. The Obenson Report said...

    I did some digging on this before posting the blog entry earlier on today. I spoke to clients of mine who are actively involved in the industry itself. And from what I found out and what they told me, the picture isn't as pretty as the Washington Post fellow might make it appear.

    I'm aware that both Fannie and Freddie were arms of government initially, but they clearly became autonomous entities, publicly traded with public and institutional investors holding shares.

    One of my clients, who is a financial adviser, with clients of her own, whose money she manages, said she sold any interests that her clients had in either company a few years ago, because she saw something like this coming, due to the lack of transparency both corporations showed during those latter years.

    In short, they were created to alleviate some of the risk banks were exposed to; but banks and their mortgage brokers essentially got greedier and started making riskier and riskier bets, and off-loading those, in some cases entirely, on Freddie and Fannie, ensuring that they got their money completely, while Freddie and Fannie carried all the risk. And in turn, in order to balance some of their risk, as well as ensure regular profits (since they're both publicly traded companies), Freddie and Fannie sold bonds to foreign investors, passing some of the risk onto them as well. And these foreign investors, thinking that their investments were backed by one of the most stable, richest governments in the world, weren't afraid to take on the risk, because they felt that their investments were safe, and that, no matter what happened, even if both companies suddenly experienced problems (as they are now), they believed that the government wouldn't let them fail. Of course, they bet correctly.

    So, those foreign investors will benefit first and foremost from a government take-over, because of the nature of their investments, since the government's intervention isn't a complete take-over as we're thinking, but rather an assumption of each company's debt - specifically the debt they owe these foreign investors who now want their money returned, and hopefully with a profit. And of course, the government doesn't want to lose its international credibility by not paying its supposed debts, which, from what I've read in this case, are in the billions of dollars, which is were you and I come in.

    All of this could have been avoided, and the government could have intervened previously, monopoly or not. They had an obligation to do so, in this case, knowing what the ramifications could be if they didn't. But, as is often the case, when members of government - specifically members of congress - have their hands in the pockets of corporate execs and their bank accounts, or are sitting on the boards of some of these corporations, a conflict of interest arises.

    I was told that both Freddie and Fannie became increasingly opaque in the last decade or so, and members of congress who were aware of potential pitfalls, looked the other way, for reasons I just gave; and as the housing market bubble began to burst a few years ago, foreign investors started to "call in" their investments in a slight panic, but Fannie and Freddie couldn't quite pay up, because essentially, what they were running was equivalent to a Ponzi Scheme. They apparently did fraudulent things like understate their earnings to their shareholders, and, as one client said, she got concerned about the goings-on within each company, given their lack of transparency, and thus decided to get all her investments out before the value of each company's stock tumbled as they have done recently, causing individual shareholders especially, to lose tremendous value in the investments. In the last 12 months alone, Fannie Mae's stock price has plummeted from a high of $68 a share to a low of 73 cents a share, as of today's market close. That's a virtual 100% drop! Freddie's chart is very similar. And each company's fired CEO is getting a severance package in the millions of dollars - as much as $10 million for Fannie's ousted CEO and $15 million for Freddie's. How is that fair, especially when the average shareholder has suffered mega hits in the value of their investments? So, not only do the companies and their CEOs get bailed out by the rest of us, even though they screwed up, and did so fraudulently and clandestinely, they also get nice big checks on their way out the door, while the little guy gets shafted.

    Banks will tighten up from here on, something they should have done awhile ago, and it will be extremely difficult for consumers to get mortgage loans from here on... especially those with less than perfect credit.

    I'm not implying that the government shouldn't do anything. Certainly, we can all agree that not doing so would likely be even more disastrous. I just think, based on the information that I have, that this is could have been avoided, and the government-aided solution isn't revealing everything that's transpired, and what it all really means for the rest of us little people, now and in the near future.

    Corporations like these, specifically created by the government for specific purposes, shouldn't be allowed to engage in illegal activity, while the government looks the other way, until something very bad happens, and then they rush in to save them, and cover up the mess.

    If they're going to intervene anyway, as they've done currently and in the past, do it beforehand, when all signs are telling them that something is clearly afoot; seal the crack before it bursts. My point in all this is that everything isn't as clear as it seems, or as the Washington Post columnist might make it.

    I looked him up (Pearlstein), and even he previously warned of the bursting bubble, and the hidden mischief going on in the home mortgage market early, so, he likely was aware of much I said above, stating, "the best thing that could happen to our economy is for a dozen high-profile hedge funds to collapse; for investment banking to enter a long, deep freeze; for a major bank to fail; and for the price of a typical Park Avenue duplex to fall by 30 percent... for only then might we finally stop genuflecting before the altar of unregulated financial markets..."

    Yes, the government has played a role in our economy, but more often than not, they create the problems that they eventually find solutions for. Why not just avoid creating the problems in the first place, or do what they can to ensure that they don't problems don't occur? The great depression started with the stock market crash of 1929, which obviously scared off individual investors from borrowing and spending, since they lost a lot of their investment funds in the crash, and that began the downward spiral. And from what I remember about that those lean years, the Federal Reserve - a government created entity (just like Fannie and Freddie) - was chiefly to blame for not properly regulating the markets, as they should have been doing. And all that led to Roosevelt's New Deal, which was meant to stimulate the economy via increased government spending (essentially tax dollars).

    It seems to me that we don't learn from previous errors, and continue repeating them over and over. Or, if you're a Naomi Klein, for example, you'd say that it's all done intentionally by that powerful, influential minority pulling the invisible strings - essentially, a shock to our system, in order to introduce new laws that give that powerful minority even more control.

    But conspiracy theories aside, it's clear to me that there's a lot more going on here than I think we've been led to believe.

  6. The Sujewa said...

    Lots of info. to absorb re: this issue. Also, this seems relatively unprecedented - the kind of companies the 2 were & the gov stepping in & taking control the way that they have done. I am sure I'll read a lot more about this thing in the coming days - various perspectives.

    Re: :So, those foreign investors will benefit first and foremost from a government take-over,..."
    I read in the Post today (article needs log in, so no link) that the first people to get pay back from the new set up are the tax payers & that investors lost 80% of their investment/money when the gov. took over the companies. Meaning, it does not sound like the foreign investors will benefit.

    Also, investors, foreign or otherwise, are essential for growing & maintaining a huge economy like ours - so, hopefully investors will not get burned too bad from this deal; it may cause them not to invest in US housing in the future.

    Looks like things went bad, & the gov. stepped in to keep it from getting worse. But, like I said, a lot to read re: this. Thanks for the insights into the issue.

    - Sujewa

  7. UK Black Chick aka Wendy said...

    What happened to the idea of the free maket, indeed? There's nothing free about the current global economy and there never has been.

    Many western countries, particularly the US and the UK, carry the illusion of wealth whilst, in fact, it's debt that keeps their economies ticking over.

    Letting Fannie and Freddie fail would have been a cataclysmic blow to the world economy and totally shatered any illusions of just how wealthy they really are. But these bail outs are really just putting a few sandbags against the door when a force 5 hurricane is on the way.

    This current bail out is, pretty much, the US government trying to save face. Whilst this will certainly give the government a reason to raise taxes, the US government already has a huge deficit. Will this new tax income really just go to propping up Fannie and Freddie? The US government is in as bad a state as most of it's citizens facing foreclosure - it's just that their creditors aren't calling in their debts... yet.

    Asian and Middle Eastern soveriegn wealth funds and corporations are jumping in to bail out western governments and corporations and they're buying up interests in western concerns all the time.

    It seems that we're witnessing a huge turn in the global economic wheel. Europe and the US have had many so-called developed nations indebted to them for years. Now they're finding themselves heavily in debt to Asia and the Middle East.

    Yes, it's the little people who will pay heavily for all this fraud and mismanagement, just like the ordinary citizens of many a developed country suffer for the fraud and mismanagement of their governments but, make no mistake, foreign investors stand a lot to gain from this whole unweildy mess...

    And even if, as Sujewa read somewhere, these investors lose 80% of their investments initially, this isn't their main concern at present. These are wealthy nations sitting on oil money or, in the case of China, with large reserves of US dollar reserves to invest. They're constantly looking for ways to invest this money - which is real money, by the way, not debt - and losing some of it in the short term isn't too much of a concern when you consider the amount of control that it gives these investors in European and US concerns in the long run.

    This, it seems is what free markets are really about.

  8. James Pence said...

    Socialized Banking

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