Notes on the Fannie and Freddie unbelievable back-door bailout—
By Daniel at 28 December, 2009, 11:37 pm
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The proper interpretation of these events is succinctly laid out by Edward Harrison at the Credit Writedowns blog, to wit….Fannie Mae and Freddie Mac would be used as a nationalization of America’s mortgage problems via a back door bailout of banks. The evidence, therefore, tends to demonstrate that we have witnessed an orchestrated campaign by the Bush and Obama Administrations to recapitalize too big to fail institutions by hook or by crook, bypassing Congressional approval if necessary.
I’m open to a hearing of the argument that what the administration has done and is doing is justifiable, however Harrison further points out some really objectionable elements about this back door stealth bailout:
they do not eliminate the moral hazard that was complicit in creating the mess in the first place. His plan is also very political. It protects debt holders like China’s central bank, which holds $400 billion in GSE debt. It protects foreign central banks generally, as they hold $1 1/2 trillion in GSE debt. It protects the likes of Bill Gross, who took a calculated risk in feasting on GSE debt, betting that such a plan was likely to happen. The plan does not wipe out equity capital, nor does it wipe out preferred equity holders entirely. These capital classes should bear all of the initial risk to future capital losses, not U.S. taxpayers.
Obama talks a good game about not coming to Washington to enrich fat cat Wall Street bankers, but the Wall Street crowd is feasting, nay, absolutely gorging itself on taxpayer largesse dispensed by Bush and Obama underlings Paulson and now Geithner.
- JanB
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