AIG, Fannie, Freddie, free markets and frustration

By Mac McKerral
09/17/08
4 comments

Get out your checkbooks America.

The U.S. government decided to get into the mortgage-lending business and now holds an 80-percent stake in a major insurance company, and that means you and I must pay.

Fannie May and Freddie Mac, the only “private” lending institutions in the country with every penny of their loans backed by the U.S. government, have seen their default rates climb faster than a cat chasing a canary up a tree.

And their holdings have melted away like the Wicked Witch of the West hit with a bucket of water.

The Federal Reserve is giving a two-year, $85-billion loan to American International Group Inc., AIG, in exchange for a nearly 80 percent stake in the insurer, after it lost billions in the risky business of insuring against bond defaults.

Now taxpayers hold the bag for poor management and reckless fiduciary behavior.

You young folks out there, heed my warning. The longer you stick around in this country, the more you will find yourself mumbling, “Hasn’t this happened before?”

Yes, numerous times, most notably in the early 1990s with the savings and loan industry.

When I hear people crowing about the merits of capitalism, I ask, “If it is so great, why does the U.S. government always step in and bail out multibillion dollar corporations which have run themselves into the ground via mismanagement, have failed to act expediently to head off problems, have failed to reinvest in technology to keep themselves competitive and have been sucked dry by CEOs who take huge bonuses for losing the shareholder’s money?”

Rather, why doesn’t government let free-market principles take their course, prosecute the thieves and let the companies go the way of most companies that cannot compete — out of business.

I always get the same answer, “Things would be worse without a bail out.”

My response: Let’s try no bailout. I believe capitalism and free-market principles work.

I always cite these lines from the movie “The Big Chill.”

Sam Weber: “Nothing’s more important than sex!”

Michael: “Oh yeah, have you ever gone a week without a rationalization?”

When it comes to bailing out their corporate pals, politicians know rationalizing is better than sex.

And so for the past several decades, automakers, airlines, steel producers, savings and loan institutions and now the government-created and government-backed mortgage lenders, Freddie and Fannie, have all turned up in the halls of Congress with their pockets empty and their hands out. And nothing happens to the “mis-managers” who always seem to deftly land on their feet as a golden parachute slides down around them.

How bad might taxpayers get hit?

I share this from a Q & A done by the Associated Press:
Q.“How does the Freddie and Fannie bailout compare to the (savings and loan) bailout in the early 1990s?”

A. “The exact cost will depend on how far U.S. home prices fall. But some economists believe it could be more costly than the savings and loan crisis, which took six years and $125 billion in taxpayer money to resolve. That’s nearly $200 billion in today’s dollars.”

Cha-ching.

Resources:

Bookmark/Search this post with:

Filed Under: stock market, mortgage lending, government bailout, Freddie Mac, Fannie Mae, AIG

4 comments so far. Add a Comment

15 weeks ago an anonymous user commented:

According to the New York Times, Democrats blocked Bush’s Fannie Mae and Freddie Mac reforms so low income people with bad credit could buy houses. ”These two entities -Fannie Mae and Freddie Mac - are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, and the less we will see in terms of affordable housing.” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. http://strategicthought-charles77.blogspot.com/2008/09/democrats-blocked…

reply

15 weeks ago mmckerral commented:

Thanks for sharing the links. As is usually the case, both parties are talking out of both sides of their mouths on this. However, neither party is denying that the government now runs Fannie and Freddie, and holds responsibility for its debts. The view of Rep. Barney, D-Mass., is akin to the view of Sen. John McCain, R-Ariz., who stated that economy’s fundamentals are strong. Both seem to be out of touch with reality, usually the product of political posturing. I want to be clear: I do not want to make dire economic trends that have led to the decisions made in the past few days to be some kind of political Ping-Pong ball. I stick to my point. You can defend free markets or not. But you cannot defend them until they don’t work and then place the burden for the malfunciton on taxpayers. Best- Mac McKerral

reply

15 weeks ago mmckerral commented:

You raise an interesting question. In the case of AGI, the Federal Reserve did it, a federal agency that serves as the banker for the U.S. government. The Fed filled the president and congress in. Nice. I also find it interesting that private companies wanted no part of AGI’s troubled bank account. So again, we have bureaucrats and politicians who think government should stay out of the free market process because the private sector knows better. Yet, when the private sector said “Now way” to AGI, the public sector knows better. Go figure.
Mac McKerral

reply

15 weeks ago an anonymous user commented:

Who authorized the “government” to bail out these companies? What is even debated in Congress?

The millions of Americans who have lost their homes or are in danger of losing their homes would surely have a different opinion about what those blank checks should be used for.