Yesterday all three major financial indexes fell after an article in Barron’s reported the Bush Administration is planning to exercise the authority to recapitalize Fannie Mae and Freddie Mac. A Treasury spokeswoman denied the report, but FusionIQ CEO and equity-research director Barry Ritholtz told the AP: “You don’t pass that sort of legislation unless there’s some sort of intent to use it.” If Treasury does use taxpayer money to bail out Fannie and Freddie, the existing common shares would effectively be wiped out. This is why shares of Freddie and Fannie plunged 25% and 22% respectively yesterday. Both stocks are down more than 90% from a year ago.
To get a sense of the coming losses the U.S. taxpayer is on the hook for, consider that in the past four quarters alone, Fannie and Freddie have lost a combined $14 billion and those loses are expected to continues for at least a few more quarters, with some experts predicting losses through 2011. According to Barron’s, a more realistic appraisal of Freddie and Fannie’s exposure to subprime loans and investments shows that each company may have a negative $50 billion asset value. That would be a $100 billion price tag for taxpayers, all thanks to big government.
Apologists for massive government intervention in the economy have been spinning Freddie and Fannie’s failure for months. Paul Krugman wrote last month, “the storm over these particular lenders is overblown. … Furthermore, while Fannie and Freddie are problematic institutions, they aren’t responsible for the mess we’re in.” Krugman does acknowledge that the subprime mess is terrible for the economy, but he asserts: “Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.” Krugman is just factually wrong here as we have documented before. A new Washington Post report today further exposes just how terribly wrong he is.
According to internal documents obtained by the Post, “even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.” In other words, not only was Fannie neck deep in the subprime market, but it was its big government mission that put it there. The result? “At the end of June, Fannie Mae owned or guaranteed $388.3 billion of Alt-A and subprime mortgage investments. … Alt-A loans accounted for almost half of the red ink the company attributed to foreclosures and other bad loans during the quarter ended June 30.”
Conservatives had been warning about the systemic risk Freddie and Fannie posed for years. But responsible legislation to reform the government-sponsored entities was defeated by Freddie and Fannie liberal allies, especially former Walter Mondale and Barack Obama campaign adviser James Johnson. If Treasury does use taxpayer money to bail out Freddie and Fannie, it should then proceed to break up both GSEs and allow them to be replaced with a much larger number of genuine private-sector companies that will not have the ability to dominate the market.
Quick Hits:
- On what Moscow called Day One of a pullout from Georgia, Russian troops seized control of the economically vital Georgian port of Poti Tuesday morning.
- Russia’s brutal invasion of Georgia has sent waves of jitters through Poland and other Eastern European nations, once-occupied parts of a Soviet empire that some fear Russia may want to reconstruct.
- A team of suicide bombers tried to storm a U.S. military base near the border with Pakistan in a daring insurgent attack on a major American installation.
- A day after Iran declared that it had test-fired a new rocket capable of launching a satellite, the country said that it was prepared to help other Muslim countries send up satellites.
- San Francisco’s Immigrant Rights Commission approved a resolution urging the city to ignore federal law and let young immigrant felons remain in the city while taxpayers funded their housing, job placement services and immigration lawyers.
Is there any legal way that we can throw San Francisco out of the United States of America?
Let the lovers of illegal criminals start their own country.
A tax payer bailout is just too much to be expected! The people involved should have exhibited more responsibility.
this administration is somewhat responsible for courting the left,so is the republican party.we need to destroy the democrat party in the elections.our country is in grave danger,we must fight.sincerely
As early as 1991, Thomas H. Stanton, wrote an article for The Administrative Law Journal, The American University, Volume 5, Summer 1991, Number 2, pages 395-484, "Federal Supervision of Safety and Soundness of Government-Sponsored Enterprises."
During the late 80's and early 90's the Administrative Conference of the United States studied the question of the potential GSE libility, specifically Fannie and Freddie, to taxpayers. The problem was recognized by the Conference and the results seen today were predicted by Thomas Stanton long ago and could have been avoided. See Administrative Conference Report 91-6; 1 C.F.R Sec. 305.91-6 (1991).
We see that the Federal Reserve Chairman has taken the Federal Reserve's eye off the ball of inflation [it's core responsibility] while it runs around wall street assuming investment banks trading losses for the federal government. With a Democratic Senate and House, we will soon find full-blown Socialism within the United States with a Liberal Presidency and an exponential increase in all tax rates to pay for increase in 'exotic' new governmental responsibility of 'change'. The lack of Conservative Discipline of Financial Markets is endangering the 'Core Principals' of the United States and the 'Money' is now chasing Liberal Ideology in effort to increase Government Socialisation of Financial Markets Building Losses from unregulated Inflation. The Federal Reserve in this classical Catch 22, is displaying all the liberal errors of inexperience to maintain popularity with the governed, which in that case is the Finance Industry by excessive support.
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To bail out any financial institution for lack of business intellect and a taste for greed is insane. To place the burden upon the taxpayer is also insane. It is one more stab wound in the middle classes already hemorrhaging jugular, and another crushing but purposeful blow to destroy the dollar and speed us head long toward the North American Union and the Amero which I will fight against even if it costs me everything. The elitists are and have been working toward a centralized world government for generations in secret( Carol Quigley's Tragedy and Hope).The WTO, IMF CFR, Builderbergers, Rockefeller's Meyers, Hapsburgs, Club of Rome Royal Institute of Intl. Affairs and the Trilateral Commission all have been working for this in secret and it is no secret, now we are aware of it and will revolt just as our forefathers did. We will not be RFID chipped by Verichip or any other chip company. We will not have our freedoms removed any longer. We are not the weak minded and weak willed as some have alleged. We will not fall for the equation Problem+Reaction=Solution any longer. They are certainly poking a sharp stick into the hide of a sleeping lion. I would rather live one day as a lion than a thousand as a lamb. So beware! We are awake and organizing , alert and active, mobile and mighty. The world has seen the fearsome teeth of Americans before and we are not to be treaded upon like so much leaf litter. Fundamentally it is well known that when freedom is threatened humanity does fight with a ferocity that can only be compared with a sow grizzly bear protecting her cubs. Take a long look into the mirror and ask yourself where do your loyalties lie. I swore an oath to serve , protect and defend the Constitution of the United States of America against enemies foreign and DOMESTIC. From what I have seen it is becoming very difficult to discern between who the real enemy is. I have my doubts that this comment will even show on this page. Mainly due to the real record of this foundation. Does the record reflect the rhetoric, or are they what they seem to be just behind the curtain a giant think tank trying to offer a platform to sway public opinion? I thank God almighty for the 2nd amendment because it is the one thorn in the side of the banking cartels. They cannot deal with us until they have disarmed us and I can say without a doubt that it will never happen. So go make plans for the continuity of government with your REX-84 and false flag operations, Lusitania, Gulf of Tonkin (Northwoods),9/11 and send your agents provocateur and whatever you need. You will see the outcome is going to be far different than anticipated. We are knowledgeable , we know about G.H.W.Bush and his cocaine smuggling with Clinton its all on record now thanks to some real heroes speaking up. People will always fight for freedom always!
Patriot and defender of the Constitution
The executives of Fannie and Freddie should be held acoountable for their poor performance and the bonuses , which have been substantial , should be taken from them, in court , if necessary.