Monday, September 8, 2008

Freddie And Fannie - Government Takeover Of Failing Business

Freddie Mac and Fannie Mae, which are reported as holding half of the nation's mortgage debt, are now in the hands of the federal government via a conservatorship agreement; federal control. One report said this:
The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.
Is this bailout a good idea?
Some say yes, because Freddie and Fannie "are too big to fail" and if they did fail it would cripple our economy.

I say no. So do others. (see here, here, and here)
I think that they should fail and that our government should stop bailing out failing enterprises. Furthermore, the federal government should not be getting itself into "quasi-public" businesses either. The federal government doesn't belong in the housing industry like this.

The people running the two mortgage giants should be nailed and jailed. They operated their business in a risky and fraudulent manner. Why should millions of responsible hard working American taxpayers pay for their mistakes and questionable tactics?? The New York Times reported that after advisers went over the companies’ books for the Treasury Department, they concluded that accounting methods had overstated what the actual capital backing behind those mortgages were. That sounds like jail time to me. Anyone recall ENRON and their antics?

They offered (and backed) mortgages that should not have been granted in the first place! Poor business practices cause business failure. The executives of those mortgage giants surely must have realized that. You can surely believe that they did.

If Freddie and Fannie fail, those holding stock in Freddie and Fannie would essentially be wiped out - but hey - that's the risk you take in investing in companies in the stock market in the first place - isn't it? With regard to the stock and this government bail out, this is what one report said:
Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.
If these companies are allowed to fail then perhaps it might teach investors a very important lesson in being careful in who you invest in; government backed or not. It might just teach people not to do business with companies (and governments) who have less than ethical business behavior. It might also teach these company executives not to run their business like greedy and reckless morons.

If business executives of large corporations have nothing to lose and know that the company will be rescued in the end, what incentive do they have to be responsible?

Expensive lesson? You bet - but how many more times must the taxpayers in this country bail out failing business? (especially to the tunes of multi billions - even trillions of dollars) And why should government step in to control private business or even "quasi-private" or "quasi public" business? That is the hallmark of Socialism.

This housing bubble was created by the Federal Reserve and these investment houses in the first place. And now the Feds are just going to print up a whole lot more fiat money to "fix this" problem. It is outrageous and will further wreck the US dollar. Inflationary times are surely on the horizon.

As for the homeowners who hold the bad mortgages - they were sold a bill of goods and were swindled, and now they have a choice: they can either refinance or sell their homes. A federal takeover is not going to help those unfortunate people who cannot pay the mortgages they were granted. Their plight is the real tragedy in this mess, but apparently we are supposed to be more concerned with the people who hold stock in Freddie and Fannie as well as the lenders. Make no mistake, that is really who the government is trying to protect here (including foreign investors like China and those in the EU)

It's all strong medicine, but the only way for businesses to be made to act responsibly is not necessarily through regulation... but by being made to accept the consequences of their actions, and if that means failure of their business ... and well that happens everyday to the small businessman. No one is bailing them out.

You and I are being taxed more to bail out the financial institutions in this country that have operated in a less than ethical and proper manner, while government begins to control more. The Federal Reserve, a private bank, is controlling our economy. Our money is being made worth less and less every day. Congressman Ron Paul warned us about this.
For several years, followers of the Austrian school of economics have warned that unless Congress moved to end the implicit government guarantee of Fannie Mae and Freddie Mac, and took other steps to disengage the US Government from the housing market, America would face a crisis in housing. This crisis would force Congress to chose between authorizing a taxpayer bailout of Fannie and Freddie, and other measures increasing government’s involvement in housing, or restoring a free-market in housing by ending government support for Fannie and Freddie and repealing all laws that interfere in housing. The bursting of the housing bubble, and the recent near-collapse in investor support for Fannie and Freddie has proven my fellow Austrians correct. Unfortunately, but not surprisingly, instead of ending the prior interventions in the housing market that are responsible for the current crisis, Congress is increasing the level of government intervention in the housing market. This is the equivalent of giving a drug addict another fix, which will only make the necessary withdrawal more painful.

The provision giving the Treasury Secretary a blank check to purchase Fannie and Freddie stock not only makes the implicit government guarantee of Fannie and Freddie explicit, it represents another unconstitutional delegation of Congress’ Constitutional authority to control the allocation of taxpayer dollars. While the Treasury Secretary has to file a report with Congress, the lack of any effective standards for the expenditure of funds makes it impossible for Congress to perform effective oversight on Treasury’s expenditures.
A word to the wise: You see what's going on in these financial markets...the Feds are not looking out for you - and so the best thing to do is to look at your assets and figure out how best to protect them from the further erosion of the dollar (inflation) and a downturn in this economy.

"What you do politically is bail everybody out. If you want to do good economics you let people who made mistakes fail and cleanse the system."
-- Ron Paul

Ron Paul comments to Federal Reserve Chairman, Ben Bernanke.

Other good related articles:
A History of Public Aid Druing Crisis

US Rescue Seen At Hand For 2 Mortgage Giants

(Hat Tip: Susan K.)