Taxpayer Bailout and No Lesson Learned
The bailout of Fannie Mae and Freddie Mac by American taxpayers is at best a knee-jerk reaction to panic. The notion that every time the ‘bigs’ get themselves in trouble the government bails them out is not lost on most citizens. It is not a surprise that most of those on Wall Street embrace the move to rescue the two GSE’s that hold about 5 trillion in mortgage debt. It is also not a surprise that billions in losses at both mortgage buying corporations, the foreclosure situation, falling real estate prices, a struggling economy and the fear of higher unemployment raises the issue of more bank failures and a recession. Even China is reducing its position in US debt.
The golden parachutes for the two CEO’s largely responsible for the failures at Fannie and Freddie is another bone to pick with those in charge. The boost given the financial markets after announcement of the bailout does little to boost confidence about the future of bad loans. All the talk of liquidity and the expectation of lowering mortgage rates does little to improve the chances of a speedy fix represented by the move defended by Treasury Secretary Paulson and supported by the White House. Congress will do its part to appear concerned as Dodd expresses an interest in knowing more about the takeover
Allowing the foreclosure process to continue naturally on the large stock of those properties in trouble can place downward pressure on home prices as well as cause homeowners near foreclosed properties to suffer as well. Allowing foreclosure fixes to those viewed as speculators and the risky moves by the lenders associated with the distressed properties annoys those not involved in the problem. But restructuring bad loans with altered payment arrangements on a case by case basis seems a more prudent solution even though it is not risk-free either. That along with improved banking regulation to avoid similar problems in the future may follow the scant wisdom of financial history where tightening and loosening the rules of the game has been known to sway market action before a major disaster could strike.
The blind attraction of the pursuit of profit or easy money is not a new phenomenon. Not unlike the tech bubble in the late nineties, many go crazy following the money and everyone should know that as the risk builds prudent action should be the guide. Why as a nation we cannot seem to learn from these mistakes and return to a more reasoned society able to use the scrutiny necessary to be successful long term is baffling even if mostly understandable. It may explain why we are so debt ridden and refuse to maintain saving and plan for the future as well as some other countries. Hard work and discipline may be alive and well in the United States but the lures of modern living and the marketing driven culture we live in give the devil his due.
A phrase borrowed from a popular television series may be relevant. ‘We are all guilty so no one’s to blame’. The zero interest, long term, no payments til next year sales approach for everything from cars to furniture to appliances and the no down, low interest, no docs availability of easy real estate credit is a pattern that needs to go away. The Norman Rockwell picture of America or the feats of the ‘Greatest Generation’ may never come again. But to not try to rekindle the principles that were the core of America then will only serve to allow the problems we see now to become the norm. And how much of that trouble can this country take and survive?
Stanford Matthews
MoreWhat.com
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Analysts: US Takeover of Big Mortgage Firms Likely to Boost Depressed Housing Sector
Washington
Reaction to Sunday’s takeover of the Federal National Mortgage Corporation, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, has been positive with stock markets on Monday closing higher and experts saying mortgage interest rates will likely come down. VOA’s Barry Wood takes a closer look at what it means for the U.S. government-sponsored mortgage giants and the economy.
Bert Ely, based in suburban Washington, is an expert on mortgage finance. He says that the government takeover of Fannie Mae and Freddie Mac will be good for some U.S. consumers. “From the standpoint of homeowners and prospective homeowners, the expectation is that this will help to bring down mortgage interest rates,” he said.
Ely says that if rates fall below 6.5 percent nationally, that could give a much-needed boost to the depressed real estate market.
Home prices in the United States have fallen about 15 percent during the past year. The mortgage market has not functioned properly this year as financial institutions tightened their lending standards and sought to preserve their capital in the face of the credit squeeze that has escalated since August 2007. Several investment banks have gotten into trouble and the stock prices of financial institutions have plummeted.
Jeffrey Palma, an equity strategist at UBS Securities in New York, says financial markets are applauding the government takeover of the two government-sponsored enterprises, or GSEs — Fannie Mae and Freddie Mac. “There’s no question that the takeover of the GSEs is being regarded very positively. It certainly reduces an uncertainty that was out there. I think it probably does limit the possibility of our having a very deep economic downturn here in the United States,” he said.
Both Ely and Palma spoke on Bloomberg Television Monday.
What is not clear is how much taxpayer money will be spent. Under the takeover, the U.S. government will buy preferred stock in Fannie Mae and Freddie Mac. The dividends paid to common stock shareholders are being eliminated as is the current top management. Once the housing market recovers, both institutions will be diminished in size and presumably, several years from now, sold back to private investors. Fannie and Freddie hold mortgage securities valued at several trillion dollars and their own securities are held by major institutional investors worldwide.
Famed investor Warren Buffett, applauds the government takeover of the two mortgage institutions. He says there was no alternative, given their huge participation in the U.S. housing market.
However, some critics say the action represents a massive intrusion by the government into the private sector that is likely to have unanticipated, long-term consequences.
For 40 years, Fannie Mae and Freddie Mac have operated under an implicit government guarantee that is now explicit.
Asian Stocks Surge as US Government Rescues Troubled Mortgage Lenders
Sydney
08 September 2008
Stock prices in Asia and Australia have soared in response to a United States government plan to rescue mortgage giants Freddie Mac and Fannie Mae. Economists think the decision to take control of the troubled companies will ease global financial market worries by stabilizing the U.S. housing market. From Sydney, Phil Mercer reports.
Investors were heartened by the U.S. government’s decision to take over ailing mortgage companies Freddie Mac and Fannie Mae and to inject billions of dollars into them.
Australia’s benchmark ASX 200 index finished nearly four percent higher Monday, with banks leading the way as the market enjoyed its biggest one day gain in six months.
Other markets around Asia soared even higher, with the main indexes in Seoul and Taipei both up more than five percent and the Hang Seng in Hong Kong gaining more than four percent. Japan’s Nikkei index rose over three percent.
The announcement from the United States particularly boosted the previously depressed banking stocks, with Commonwealth Bank of Australia up around six percent while National Australia Bank was almost eight percent higher.
Economist Savanth Sebastian says the share market is benefiting from some rare good news.
“A sharp turn around, similar to what we saw with Bear Stearns earlier on in this year when JP Morgan took them over,” said Sebastian. “We’re seeing significant gains for the banking sector, diversified financial stocks also seeing strong gains. If you just have a look across the board there’s a sea of green: ANZ is up 6.5 percent; you’ve got Westpac up four percent. So a sharp turn around for stocks and it’s really a reprieve from the fear-driven environment that we have seen over the last couple of months.”
Monday’s gains in Asia follow a gloomy trading session Friday when concerns about the U.S. economy and its effects on global growth sent markets tumbling across the region.
Despite the optimism, some Australian economists sound a note of caution and say the worst of the international credit crisis is far from over.