Bailout Bingo

Technocrat

Bailout Bingo

zogger

Fri Sep 05 18:20:00 -0700 2008

Jobs.

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On this opinion piece, the author makes the case for a forced bankruptcy of the top private people involved in the mortgage mess now at Fannie and Freddie, no bailout in other words, they eat the losses-as sometimes happens with speculation and is necessary to maintain market integrity- and the institution becomes nationalized and restructured as a pure public trust, based on a previous successful example, the Home Owners' Loan Corporation from the 30s.

How did the HOLC manage to reverse a far worse foreclosure crisis than we have today and still turn a profit, when Fannie and Freddie- which also raise their loan money by selling securities to investors- have become hopelessly bankrupt in that pursuit? The difference seems to be that the HOLC was a public institution operated as a public service. Fannie and Freddie are private, profit-making ventures designed to make money for their investors and political exploiters. As Professor Roubini observes, "These GSEs were designed to make losses. They are expected to make losses. If they don't make losses they are not serving their political purpose." When the profiteering is taken out and the business is run as a public service, the math works. ed.z.: Well, can't say if that method would work, but the method they are using now *doesn't work*, and just handing over some x-billions of dollars in loans to the same guys who ran it into the ground will *not* work either. A little higher level "tough love" is in order.

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Charles E Hill

Fri Sep 05 20:30:19 -0700 2008
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Except this is what is being reported:

The government has formulated a plan to put troubled mortgage giants Fannie MaeFreddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations. and

Under the plan, which could prompt one of the most sweeping government interventions in the workings of financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out; while the holdings of other securities, including company debt and preferred shares might be protected by the government.

The scariest part?

In July, with the companies reeling for losses and as fears grew that they wouldn't eb able to raise new cash privately, (Treasury Secretary) Paulson gained the power to invest government money in Fannie Mae and Freddie Mac through loans or buying company stock if he concludes it is necessary. In approving the authority, Congress gave Paulson power to invest an unlimited sum.

To be clear, that is an unlimited sum of taxpayer money.

Want more fun?

China's central bank has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.

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Matt Fulkerson

Fri Sep 05 20:53:28 -0700 2008
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Is it just me, or is China's "business model" a bit strange. That is, their strategy is to grow their economy by keeping Chinese goods cheap for Americans, in part by pegging their currency to the dollar. Doesn't that just guarantee that they receive less and less for their efforts as the dollar falls? Surely they must have some exit strategy.

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Uncle Entity

Sat Sep 06 14:36:22 -0700 2008
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From what I understand they kept the yuan low by buying up foreign debt to depress it's value on the world currency exchange market.

Basically they've been subsidizing American consumerism and European socialism by allowing the various governments to do more with less taxation.

As to their business model, who knows. They have been exporting something they have an excess of, cheap labor, and getting both advanced technology and now natural resources in return. It isn't like they are in any risk of running out of cheap labor in the short term or anything.

The winds of change are definitely starting up so we'll have to see how it turn out when they quit buying up foreign debt and start investing in their domestic economy. One thing's for certain, it will be very bad for both the EU and US as the market for their debt shrinks.

If I were a youth I'd think seriously about learning Chinese.

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Anthony Sorace

Sun Sep 07 09:04:42 -0700 2008
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Basically they've been subsidizing American consumerism and European socialism by allowing the various governments to do more with less taxation.

i think it's misleading to equate these two. for one thing, the scale is vastly different: even on a per-capita basis (to say nothing of raw dollar amounts), China has bought way more of the US than any European country. and Europe isn't anything resembling monolithic here: Germany has the third highest current account balance, while the UK and Spain come in just behind the US for lowest (and the UK, at third lowest, has about 2.5x as much debt as the fourth lowest and over 3x the next european country). the Scandinavian countries all have positive current accounts. i think the "socialism" part is almost entirely a red herring.

i think the per capita numbers get overlooked a lot, either by people assuming they don't matter or assuming they make things better than they do (for the US, particularly). Wikipedia's graphic on the subject is illuminating.

what i'd really like to see, but haven't been able to find, is a comparison of current account figures over time. anyone got a pointer?

of course, i think your summary statement about the future for the US and EU debt markets generally is right on. we're kinda screwed.

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Uncle Entity

Sun Sep 07 13:13:47 -0700 2008
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OK, US socialism and EU consumerism then.

Either way the point was that the government gets to provide 'essential' services without the current consumers of said services paying the full price through taxation.

The basic trend is for the US to provide the same amount of services while cutting taxes while the Europeans tend to increase government services while keeping the tax levels the same, ceteris paribus.

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Uncle Entity

Sat Sep 06 14:55:15 -0700 2008
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I do wonder why they don't consider the $1 trillion in their capital base when there are many central banks that prop up their funny money on the backs of their holdings of US debt including our own.

Maybe that's why they were whining about not letting the mortgage giants fail a couple weeks ago, they need it to convert over to their own balance sheets.

Think I need to seriously start thinking about converting my pitifull holdings of greenbacks over to something tangible...already gave up on the banking system other than my pre-paid wallyworld visa card to pay my bills. Slump in silver coin, huh?

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rubycodez

Sun Sep 07 11:18:29 -0700 2008
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saw your post after I submitted the part ii article, you covered the stuff much better. latest details I read at bloomberg has Treasury saying taxpayers could even make a profit under this new management, making new mortgages and keeping the institutions solvent.

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Charles E Hill

Sun Sep 07 11:52:25 -0700 2008
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No problem. I was debating making it an article, but Zogger's initial post was still fresh. Anyway, it became official today.

Make a profit? Taxpayers? I don't think so. I'd love to see the convoluted "logic" that backs that statement up.