Fannie Mae, Freddie Mac and the costs of laissez-faire
The Federal government took over Fannie Mae and Freddie Mac on Sunday, with the goal of preventing both entities from failing and taking the US and world economies with them. While Paul Krugman is right to describe this as a "de-privatization" rather than "nationalization," the effective difference is very little.
While Andrew Leonard over at "grown-up" Salon points out that Fannie Mae and Freddie Mac are suffering as much as anything because of the deflation of the values of the assets that they are guaranteeing, both organizations plunged into the riskier end of the mortgage and associated securities market in order to respond to Wall Street expectations for growth. The lack of adequate regulation that felled Bear Sterns and has led to enormous write-downs and a credit crunch in the private sector has just taken on a multiplier effect.
The Economist provides a succinct overview of the takeover package here. While the government could theoretically recoup bonds in the future, and has passed the cost of taking on 80% of Fannie Mae and Freddie Mac stock onto shareholders in the form of reduced value and no payment of dividends, the cost of the stock and of loans secured by both organizations' assets could easily hit $100 billion. Just by contrast, the Resolution Trust Corporation ended up spending $124 billion to resolve the fallout from the savings and loan debacle in the early 1990s.
Also remaining to be seen is the cost of bailing out banks such as Gateway Financial Holdings that are over-exposed to Fannie Mae and Freddie Mac stock.
There's a time, and this may be it, for a legitimate debate about whether Fannie Mae and Freddie Mac should have been allowed to have the neither-here-nor-there status of the two organizations as operating in a for-profit fashion without also letting go of the protection of taxpayer backing. These questions should have been asked when both organizations became more risk-acceptant and focused on growth.There are good answers from either a conservative or liberal standpoint about why Fannie Mae and Freddie Mac should have been forced to shit or get off the pot.
But now that the two organizations barely have a pot to piss in, in portfolio value terms, I think it's time that someone, perhaps someone whose name is Barack Obama, should ask why it is that the Republicans think it's a good idea to either deregulate or not adequately regulate financial institutions if they are still going to use taxpayer money to pick up the pieces. It would also be worth pointing out that John McCain was in the thick of deregulation that led to the savings and loan debacle. Taxpayers picked up the tab for that debacle, as noted above, to the tune of $124 billion. When is John McCain going to show his concern for American taxpayers by either regulating properly, or not bailing out the people and organizations which weren't regulated at their request?* Precisely how much taxpayer money will have to be spent for McCain and his ilk to admit that they are wrong?**
(Historical footnote: The S&L settlements included bailing out Neil Bush in Colorado, remember him? He was on the board of Silverado Savings and Loan, which got $1 billion in bailout money for a civil settlement of $26.5 million against the Board of Directors, of which Bush paid $50,000.)
* I'll answer my own question: Approximately never.
** See above.
*** Since we can't have non-Palin post on politics, hopefully the McCain campaign has assigned someone to work up a response who actually knows what they're talking about.