Conservative Hypocrisy: Fannie, Freddie, And Faux-Free-Markets

17 07 2008

Gore Vidal once observed that “what we have in America is socialism for the rich and capitalism for the poor”.

This weekend Treasury Secretary Henry Paulson gave us the perfect proof of this truism.

Fannie Mae and Freddie Mac are government created but privately owned for-profit housing finance companies.  These two companies alone hold or guarantee some $5 trillion in debt, or nearly half of the U.S. mortgage market.  Paulson announced that the Bush administration would seek congressional approval to bail out Freddie and Fannie by offering an unlimited line of credit to guarantee their debt, as well as authority to purchase their shares to supplement their capital base.

These are important pillars that our economy is built upon, so ensuring their continued stability is clearly necessary.  However Paulson said the new subsidies were designed to sustain the two institutions in “their current form.”  It’s worth mentioning here that in their current form the Chair of Freddie Mac last year “earned” $18.2 million dollars.  Meanwhile in 2007 Fannie Mae CEO Daniel Mudd apparently deserved a 7% raise to bring his take home to $13.4 million…all while the company lost $2.1 billion and its shares fell 33 percent.

Now with foreclosures soaring and both institutions sustaining billions in losses both would likely be bankrupt if their assets were marked down to their current market value.  The effect of these institutions failing would be utterly catastrophic to the economy so I can’t fault the Bush administration for using taxpayer money to prop up and recapitalize these two banks.  However I can be outraged that the collapse of proper regulations and oversights illustrates that the Republicans have once again nationalized corporate risk while making sure that the profits and the pay scales of the bank’s executives remain private.

Conservatives fall over themselves talking about the powers of capitalism and how regulations aren’t needed in a “free-market” because it will self correct and adjust.  And yet here we see in all its glory yet another example where you and I get to shoulder the burden of Wall Street socialism and pay for corporate losses while the regulations that would have prevented such reckless behavior are abandoned like so many Republicans’ first wives.

Since these corporations are so critical to the American economy and since the American public is already assuming the debt and risk these enterprises have taken on, why do we not nationalize them completely?  We’ve already added the $5 trillion dollars of debt to the federal balance sheet, so once nationalized we could fairly mitigate some of risk assumed by the public with the associated assets.  Add in the benefits of bringing executive salaries to sane levels, removing the risk inducing demand for unmaintainable profits, and adhering to some reasonable regulations we might just be able to bring some much needed confidence back to this sector of the economy.

The bailout of these critical institutions exposes the illusion that they are private corporations separate from the federal government, so we should drop the pretense of separation and stop funding this egregious example of conservative corporate welfare now.

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8 responses

17 07 2008
Barbara

I was listening to NPR and they were talking about this. Not sure who was on there, but the gentleman talking said that basically the government has to do this, but they are doing too much. That Fanny Mae and Freddy Mac should have to feel the hurt and not receive as much assistance from the taxpayers as they are probably going to. He said it was basically unheard of and that it could set both companies up to make more poor choices in the future at the taxpayers expense. If they aren’t penalized what will stop them from acting as recklessly in the future?

After having read this it really pisses me off further that you have CEO;s raking in millions of dollars for the poor choices they made. In the meantime Fanny Mae was laying off regular employees last March and Freddy Mac has had two layoff’s this year. So now they’ve not only nosedived their companies, they’ve also given the market a double whammy by adding to the unemployment ranks. Nice job those guys are doing. Worth every penny aren’t they? Aren’t they…..

22 07 2008
DaveS

I’d also point out that the two companies are failing because so many people are losing their homes. Where’s the help to those people? Aren’t the middle-class folks who earn a paycheck actually the bread-and-butter of the economy?

22 07 2008
DanDan

If people lose their homes, they no longer have their $3,000 – to $5000 mortgages to pay, right? They find relief and face reality. Then they rent within their means and will instead pay maybe half the amount they paid for their mortgage. AND maybe they will have more cash flow! Think positive man!

22 07 2008
Barbara

@DanDan…
“If people lose their homes, they no longer have their $3,000 – to $5000 mortgages to pay, right? They find relief and face reality.”

The problem is that most of these people are facing economic hardship because of the economy overall. At the time they purchased their homes their incomes were probably more than sufficient to cover their costs. And it’s not a relief to loose something you’ve worked so hard to obtain.

The other problem was that the all these companies allowed the industry to raise market values on homes that the market couldn’t sustain. These homes were given values that far exceeded what they should have been. Now these people have very little alternative to re-financing mortgages because there homes are worth less than they paid for them.

One good thing that has happened though is that finance companies are losing such huge sums on foreclosures that most are starting to renegotiate mortgages. However, bailouts for companies like those above should come with a high price tag of losses in the pocket for the CEO’s who’ve made such dismal choices in over financing and deep concessions for future lending practices.

24 07 2008
cobbmic

I think part of your problem is that you identify free market thought with Republicans, when they have never truly supported that (despite their rhetoric). Cutting taxes and regulations isn’t a move to the free market as long as government spending increases (which it has) and government-back safety nets are in place.

The government shouldn’t help Fannie Mae or Freddie Mac, just like the Fed shouldn’t be helping the large financial institutes. These institutions make stupid decisions, let them suffer the consequences…the government is letting individuals suffer the consequences of taking on more debt than they can handle, let the companies suffer the consequences of lending to people they shouldn’t have.

7 09 2008
The Great American Economy | Blogging on Meds

[…] Conservatives fall over themselves talking about the powers of capitalism and how regulations aren’t needed in a “free-market” because it will self correct and adjust.  And yet here we see in all its glory yet another example where you and I get to shoulder the burden of Wall Street socialism and pay for corporate losses while the regulations that would have prevented such reckless behavior are abandoned…  More. […]

9 09 2008
Chuck

No-Brainers come and go, and frankly, SJ, I have a problem figuring out why you haven’t seen through this one; you’re smarter than that.

In 2004, I picked up a 5%, 15-year fixed mortgage, on a 45 year old house that, frankly, needed a bunch of cash infusion, just to be a house, for chrissakes. I bought the place with 5% down.

Five fucking percent?!? At a five percent rate?!?

Yup.

Anybody out there reading this want to try to get such a deal today, on a sterling property priced 20% under market? Maybe even 30% under market?

I didn’t think so.

Now, four years later, after investing about four hundred big ones in the property, it is appraised at around four times what I paid for it. This is not because I was particularly smart about the investment, but rather because almost anyone, qualified or not, able to cover the future ARM spread they got, or not, could have done what I did in 2004.

This had nothing to do with Democrats, Republicans, or Fannie Mae and Freddie Mac CEO’s. It had everything to do with crooked mortgage brokers taking advantage of a government-mandated archaic checks-and-balances system, put in place by Democratic Congresses during the sixties and seventies, which system made it easier for Mr. and Mrs. America to get a mortgage with very little down, and shaky qualifications. Their laudable goal was to ensure that every American had the opportunity, qualified or not, to own a garage into which to put the mandated car, and a place to store the pot into which to place the mandated chicken.

Oh, and any Republican who dared raise the issue faced the Democratic “we’ll filibuster” response to demands for a bill to change the requirements in the Senate.

As I have no doubt you are aware, VA, FHA and other government-mandated mortgages had tinkertoys qualification requirements — qualifications that FM and FM were not allowed to change, and that many fifteen-year-olds with daddy’s allowance could have met. Many of those who were “qualified” for ARM’s dangerous to their fiscal health (and that of FM and FM) were not qualified to rent, much less buy, a home.

That the requirements for qualifying weren’t as shaky as the dishonest mortgage brokers made them appear to be is not the fault of Fannie Mae and Freddie Mac. It is the dishonest mortgage brokers who took advantage of an already overloaded qualification system, put in place by sixties liberals, that are responsible.

If the “super intelligent” liberals, who put the system in place to begin with, had accompanied their insistent largesse for the people with sensible qualification requirements, and had backed up the requirements with a requirement for one hell of a tough credit check, AND had also put in place safeguards to prevent the abuse that took place, FM and FM would be healthily solvent. That they are not, is a legacy of The Great Society — and the aforementioned abusive mortgage brokers.

And frankly, the CEO’s of both organizations, whose qualifications include both understanding what was happening, and vociferously screaming their objections to a Congress mostly concerned with keeping itself in office and filibustering any attempt by Republicans to fix the system, earned their keep. As a person who has hired many executives, and understand what it takes to be one, I would have hired either of them for their current positions in a heartbeat. I would do so again.

Get real, SJ.

Best,
Chuck

PS — I didn’t buy the house as an ‘investment.’ I bought the house to live in. And I remember well suffering through living in one of the bedrooms, and eating biscotti washed down with coffee made in the one operating bathroom, while we renovated.

12 09 2008
SuperJesus

Chuck, I’m glad you did well on your home renovation there but I fear you should have opened a window and let more of the paint fumes out. Are you seriously looking back forty to fifty years ago to blame Democrats? Really? I wasn’t alive then but I don’t remember any point when my grandparents were discussing how absurd NINJA loans were or how the new option ARM loans were going to destroy the housing market. That might be because those vehicles didn’t exist then. You did however conveniently ignore the banking deregulation that did happen during the Clinton administration in 1999 at the hands of Republican Phil Gramm when the Gramm-Leach-Bliley Act repealed the old regulations you mentioned. Alas, only nine years later the graft and corruption has brought the once stable market to its knees and our whole economy with it. I wonder if McCain read that part of Phil’s resume when he was consulting with him on economic issues.

I’m all for a competitive market place but I would think you would be outraged when the rules that demand some sanity and a measure of rational behavior are removed resulting in a rash of people gaming and taking unfair advantage of the system (and I’m talking about unscrupulous lenders and deceptive borrowers alike here). You have conceded that Bush is a failure, but I find it hard to understand how you consistently defend everything else Republicans have done wrong. Is there anything they have done that you would admit is wrong or outrageous?

PS: Mmmmmm…biscotti.

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