by Frank James
Once again, the federal government is riding to the rescue of the U.S. financial system with the statement of Treasury Secretary Henry Paulson Sunday that the government would make taxpayer funds available to mortgage giants Fannie Mae and Freddie Mac to meet their capital requirements.
It's an effort to dampen the panic among global investors over the possibility that the two goverment-sponsored entities or GSEs which own or support millions of U.S. mortgages, could essentially implode, resulting in the government having to takeover the two companies.
In his statement, Paulson said:
First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.
Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.
The steps Treasury is taking is reminiscent of what the Federal Reserve did after a panic driven by rumors caused the investment bank Bear Stearns to experience what was essentially a bank run, leading to its takeover by JPMorgan Chase.
Something to watch today will be investor-reaction to Treasury's announced plan as well as the response to an auction of $3 billion in debt by Freddie Mac. If the response to the auction is weak, it's likely investor panic would flare up once again.
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Comments
Lets review the list of people who got us into this trouble:
(1) Republicans who believe the best kind of government is the one that interferes with the affaires of hard working citizens the least and burdens them with unnecessary regulations.
(2) Crooks who believe the best kind of government is the one that interferes with the affaires of hard working crooks the least and burdens them with unnecessary regulations.
(3) Crooked Republicans who believe the best kind of government is the one that interferes with the affaires of hard working crooked Republicans the least and burdens them with unnecessary regulations.
Posted by: Ivan | July 14, 2008 8:46 AM
Greedy CEOS caused this mess and should be fired.
Instead they are cruising on yachts and eating fine food.
Laws were broken here and someone besides the little guy should be held responsible.
Posted by: thomas | July 14, 2008 9:01 AM
WE are a nation of whiners-Phil Gramm is correct!
Let's connect the dots-
I want to buy a house
I go looking
The houses I want I cannot afford
I ask my realtor what can we do?
He says to buy what I can afford.
I say oh, no the neighborhood is too bad.
The realtor asks if I have any other income?
I say "Oh, I forgot I have $100,000, I forget to mention in my loan profile"
He says now you are able to buy the home you want.
When I move in I find I cannot locate the elusive $100,000 and cannot afford the nice home.
That realtor is the problem, isn't She.
Posted by: James Poulsen | July 14, 2008 9:23 AM
We shore up corporations, and we give generously to other countries, but no-one ever gives to the USA! Here's a unique idea how about bailing out the hard working citizens of this fine country.
Posted by: paul | July 14, 2008 9:41 AM
"Government of the corporation, by the corporation, for the corporation."
Posted by: Marcus | July 14, 2008 9:56 AM
Let's all take a close look at the role of Chuck Schumer (D) from New York in this mortgage mess. Schumer, in his effort to get publicity, makes a letter public about lending issues with IndyMac Bank....causing a run on the bank! 1.3 billion dollars is withdrawn from the bank in a matter of days!! Message to the politicians...keep your publicity seeking rear ends out of the market place!!! I know the Democrats have done everything possible to undermine our military...now they are trying to undermine the economy. All for political gain!!!!
Posted by: joe | July 14, 2008 10:29 AM
The head of John Mccain's VP search, Arthur Culvahouse is a lobbyist for Fannie Mae. Will McCain fire him as he demanded Obama fire James Johnson for his ties to the same company? No, of course not. McCain is too big a hypocrite for that. He talks tthe talk, but doesn't walk the walk. McCain is the lobbying community's candidate, and he will protect their interests at the expense of the American people.
Posted by: K-street | July 14, 2008 11:01 AM
From yesterday's New York Times, an editorial on the bailout.
"Among [the critics] is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.
They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses. […]
In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years."
Episode 350,000 in how federal programs are a joke. With DC insiders such as Obama's staffer Jim Johnson and Dem Senator Chris Dodd using the programs to line their pockets
Democrats--and some Republicans, too---should be ashamed of themselves.
Posted by: Gaia | July 14, 2008 11:03 AM
Hey K-street!.....James Johnson was associated with Country Wide...NOT Fannie Mae!!!! Obama....during his populist campaign..criticized the lending practices of Country Wide. He forgot to have David Axelrod check Johnson's resume. More likely...he thought he could slip one by us!!!!!!!
Posted by: joe | July 14, 2008 11:12 AM
Actually Joe, James Johnson was the Chairman of Fannie Mae. I guess McCain forgot to check Culvahouse's resume? Or he is just a blatant hypocrite, doing what ever his lobbyist aides tell him to do.
Posted by: K-Street | July 14, 2008 11:48 AM
I got GOOD news and I have BAD news.
First the good news -- our generals have declared that even though our armed forces are over-stretched, they can still defend the economic security of this nation (which is a vital component of our national defense) by bombing into submission any country in this world that won't lend us money to clean up this mess.
Now the bad news -- eight out of ten Americans didn't understand that what I just now said was intended to be bitterly sarcastic.
Posted by: Ivan | July 14, 2008 11:58 AM
It looks like the Bush/McCain economic policy of "screw the poor and the middle class" is working great.......NOT!!!
Posted by: John E | July 14, 2008 2:02 PM
Well, now that JP Morgan is a surrogate caretaker for Bear Stearns, and the rest of the financials are sitting on the edge, has anybody seen a regulator in the news? Or have they become a bunch of whore's for the Bush administration. WE SURE ARE FORTUNATE THE FINANCIAL INSTITUTIONS WERE NOT "TAKING CARE" OF OUR SOCIAL SECURITY MONIES!!!!!!!! whiteagle38
Posted by: Whiteagle38 | July 14, 2008 11:03 PM
FANNIE MAE AND FREDDI MAC SWINDLERS TO ESCAPE JUSTICE
It is notoriously suspect that the Subprime Lending and Stock Trading Scam on the American People was shrewdly pulled off by crooked lobbies working in collusion with Bush, Reid, and Pelosi Government, who systematically allowed control to be taken away from the strict oversight by the historically trustworthy government lenders, Fannie Mae and Freddie Mac.
Criminal investigations leading to heavy fines, long prison sentences, and a full recovery of the assets stolen from the America People are imperative, to sustain honest government; rather that the proposed ruinous inflationary government bail-outs so desperately proposed by Podhoretz Neo-Con Bush.
Posted by: Jeugenen | July 17, 2008 8:02 PM
This is the opinion of Robert Sheridan, CEO of Sheridan & Partners, a Chicago real estate & development company. Their site is www.sheridanpartners.com/market.php
Not All Financial Woes Are Created Equal
The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.
The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.
In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.
If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.
We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.
Posted by: Phil Collins | July 25, 2008 12:18 PM