Congratulations, Bagholders...
July 13, 2008
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Pay taxes in the U.S.?
Congratulations, you are now the undeniable bagholder for the entire housing bubble. Paulson made it happen over the weekend. As Congress rushes legistlation through to enable Fannie and Freddie to buy even more, even larger loans on rapidly-depreciating McMansions in bubble economies, investors got nervous...
They were nervous that all those deadbeats out there who paid more than they could afford would welch on their payments, making Fannie and Freddi paper worth less than it ought to be.
As the stocks tanked, Paulson claimed that he would not pursue a solution that would reward current equity holders, but in the end, he didn't have the guts to let his Wall Street buddies take the losses, at least not yet.
Instead, we get a plan where the U.S. taxpayer will be stuck with an explicit guarantee on Fannie and Freddie. Get that? The wink-wink, nudge-nudge guarantee that allowed these profiteers to load their pockets with money at taxpayer expense is no more. Intead, the taxpayer ripoff is even worse: The taxpayer-backed guarantee is worth a great deal, and getting that for a cost of zero amounts to one of the biggest taxpayer ripoffs around.
The Treasury also said it would seek temporary authority so that it could buy equity in either company "if needed" to ensure they have "sufficient capital to continue to serve their mission" of providing a steady flow of money into home mortgages. The plan, which requires congressional approval, also calls for a provision to give the Federal Reserve a "consultative role" in the process of setting capital requirements and other "prudential standards" for Fannie and Freddie.
The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.
I'm sorry I expected better of Paulson. Apparently he's not willing to let.
If he's got any shame left, he'll organize a major equity purchase by the government of preferreds, make the bondholders take a haircut, and make the government the majority owner, installing some decent controls and throwing out current management.
But don't hold your breath. Instead, hold the bag. One of the biggest Ponzi schemes ever perpetrated in the history of the entire world is ending, and taxpayers who did all he right things are going to have to pay dearly for all their greedy neighbors.
The Feds have to do something to hold these two entities up, but doing it in a way that lets all the risk takers off the hook is an insult to capitalism, and an insult to hardworking, bill-paying Americans.
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