Monday, September 08, 2008

Why The Fannie-Freddie Bailout Will Fail

The federal government buys a pig in a poke

By: Martin D. Weiss, Ph.D.
Money and Markets

With yesterday's announcement of the most massive federal bailout of all time, it's now official: Fannie Mae and Freddie Mac, the two largest mortgage lenders on Earth, are bankrupt.

Some Washington bigwigs and bureaucrats will inevitably try to spin it. They'll avoid the "b" word with vengeance. They'll push the "c" word (conservatorship) with passion. And in the newspeak of 21st century bailouts, they'll tell you "it all depends on what the definition of solvency is."

The truth: Without their accounting smoke and mirrors, Fannie and Freddie have no capital. The government is seizing control of their operations. Their chief executives are getting fired. Common shareholders will be virtually wiped out. Preferred shareholders will get pennies. If that's not wholesale bankruptcy, what is?

Some Wall Street pundits and pros will also try to twist the facts to their own liking. They'll treat the bailout like long-awaited manna from heaven. They'll declare that the "credit crisis is now behind us." They may even jump in to buy select financial stocks. And then they'll try to persuade you to do the same.

The reality: This was the same pitch we heard in August of last year when the world's central banks made a coordinated attempt to rescue credit markets with massive injections of fresh cash. It was also the same pitch we heard in March when the Fed bailed out Bear Stearns. But each time, the crisis got progressively worse. Each time, investors lost fortunes.

Together, both Washington and Wall Street are trying to persuade you that, "no matter what, the government will save us from financial disaster." But the real lessons already learned from these events are another matter entirely...

Read the rest of Dr. Weiss's article here. (It's a mite slow loading, but well worth the wait.)

Comments are invited, as always.


JEFF said...

This is by the same folks who want less government and let the chips fall where they may, remember the savings and loan bailout that McCane helped to cause.

The current administaration has bankrupt the US, worn our voluntary military that they have to let felons enlist to keep the numbers up.

We need to vote for change and come November maybe we can get back to being a super power again, with ethics, no torture and fiscal conservatives in the Democratic Party. The Republicians have worn out their mean spirited sound bits with no real solutions.

Curmudgeon said...

Paul Krugman, in today's NYT, has a column arguing that while the bailout was necessary and inevitable, it will not "work" to stabilize either the mortgage and credit markets, or the economy as a whole. Krugman's essay can be found here.

The NYT also has an article noting that while ordinary investors in Fannie and Freddy stand to see their investments in the bankrupt companies wiped out, the CEOs who have just been removed stand to profit handsomely from their incompetence. From the story [link

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

Need I add that both gentlemen [you should excuse the expression] have been strong supporters of the Bush administration's economic and fiscal policies? No. I guess not.

looking for a revolution said...

Rudi! You'll never alert the folks to the economic crisis in America until masses of Americans feel the bite of economic reality.

It's going to take a lot more economic and political pain, before American citizens rise up.

And NO, Barack Obama isn't the savior here. Obama knows nothing about economics either.

Neither does John McCain. Unlike Obama, John McCain acknowledges he, at least, doesn't know crap about economics.

arab banker guy said...

HAHAHA. We gotcha, citizens of America.

We World Bamkers own the government of the United States.

And we won't let up until we have complete GLOBALISM, and you're all our serfs.

WE have the oil; and you ain't shitS

Curmudgeon said...

Looking For:

No, Obama is not "the savior" on economics either. We agree on that. But Americans are not likely to elected anyone, either party, who will speak honestly about the metastasizing of the national debt under Bush and neo-con government for the last eight years, and what it's going to mean to every last one of us over the next decades. And beyond. So the practical question then becomes, which of the two is likely to do the least damage over the next four years?

Since McCain has endorsed the Bush tax cuts [and so the resultant ballooning debt] and promised to increase them, and has so far offered no plan to cut spending that could come within screaming distance of the new lost tax revenues, and since Obama's tax plan involves increasing taxes on those who earn $200K a year and decreasing taxes on those earning lest, off setting at least some of the revenue loss, it seems to me the lesser of the two evils on this issue is Sen. Obama.

Let us recall that Sen. McCain has neo-con Phil Gramm as his chief economic adviser. The same Phil Gramm who dedicated his political career to, successfully, dismantling the New Deal financial regulatory system... which dismantling made possible the S and L crisis [multi billion dollar bill to the tax payers], the Enron energy crisis, and now the mortgage loan metltdown and resulting credit crisis, and the mega billion dollar taxpayer bailouts of Fannie Mae and Freddie Mae, Indy Mac and other failing banking and lending institutions. The full cost to the taxpayers we can, at this point, only guess at.

Permit me to suggest that however little you think of Obama on fiscal matters, the prospect of putting another Phil Gramm acolyte into the WH is sufficiently frightening to make Sen. Obama seem benign by comparison.

laughing my ass off said...

Comment moved to the top shelf

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