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September 7, 2008
The Facts
Today Henry Paulson announced plans for the federal government to take over Fannie Mae and Freddie Mac. Paulson exercised this option based on a bill that was passed by Congress in early July of this year, which “leaves investors and shareholders unaffected” according to Lawrence Lindsey. However, initial reports today say only common stock will likely loose with preferred stock protected. The official “un-official” report says the take over will cost taxpayers “tens of billions” of dollars, but goes on to say “the range of potential losses is wider”.
My View
Since early July I have written exactly six posts on this subject. My first post suggested that the portion of debt the government would ultimately be responsible for is $6 trillion, based on reports that their total debt was $12 trillion. That post was in response to so many “experts” in the press and television saying us taxpayers would not be held responsible for the debt. Well, here we are. Today’s article by CNN says the total debt is $5 trillion, but suggests taxpayers would not be responsible for all of it “because the vast majority of the loans would not default”. We’ll have to wait a see if that turns out to be true. I’m taking long-range bets that it’s not true.
Why did Paulson take so long (nearly two months) to exercise his option to bailout Fannie & Freddie after the bill was passed? Yes, I’m very aware that “details” had to be worked out, but I have to question if that was the only reason. In August I wrote this post in which I suggested there was probably some posturing and deal-making going on to protect personal fortunes. In that same post I also suggest that the trick was to structure the bailout so it didn’t look too bad to us taxpayers in order to give time for the “crooks” to get out of town, and maybe accomplish some other self-serving interest. Well, one of the things Paulson is expected to do is institute a “gradual” influx of funds to Fannie & Freddie. The question here is how long this “gradual” influx will last.
In the latest articles announcing Paulson’s intent today, many are saying the two companies should not be both public and private, meaning “socialized looses and privatized profits”. It’s my opinion this is the very first thing that should happen. If not, then taxpayer money is going to be used to make the two companies healthy again, then sold to the public most likely at basement bargain price making a lot of individuals instantly richer than they already are.
As for current management of Fannie & Freddie, what price should they pay for costing the taxpayers billions, maybe trillions? Some say none, even though one was warned years in advance of impending disaster, which I also wrote about. In fact, some are defending them as I pointed out in my August post linked above. One defender was even saying back then that a bailout was only a “rumor”, which was, in his words, “causing the stock meltdown”. But I doubt they will pay a price other than loosing their job. Their contract is most likely typical of CEO contracts today, in that the only thing they can loose money for is to be fired for “cause”, which has been completely redefined to exclude anything except committing a felony. So running a company in the ground and bankrupting them is not “cause” for penalty. According to this Washington Post article, both CEO’s showed up today at a meeting requested by Paulson with their lawyers.
It will be interesting to see if Paulson makes the details of the bailout public. I rather doubt he will. How else can he and others keep the public from knowing the facts? Just remember we will have to borrow the money from some foreign country to bail out these two companies, something that has been established as an unwritten policy.
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