Monday, July 28, 2008

Taxpayers On Hook To Bail Out Fannie, Freddie

by John McCain

Americans should be outraged at the latest sweetheart deal in Washington. Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It's a tribute to what these two institutions -- which most Americans have never heard of -- have bought with more than $170-million worth of lobbyists in the past decade.

With combined obligations of roughly $5-trillion, the rapid failure of Fannie and Freddie would be a threat to mortgage markets and financial markets as a whole. Because of that threat, I support taking the unfortunate but necessary steps needed to keep the financial troubles at these two companies from further squeezing American families. But let us not forget that the threat that Fannie Mae and Freddie Mac pose to financial markets is a tribute to crony capitalism that reflects the power of the Washington establishment.

Fannie and Freddie buy home loans from lending institutions and reissue them as marketable securities -- creating a liquid market for mortgage debt that lowers borrowing costs for prospective homeowners. The two institutions have easy access to borrow at low interest rates because they were originally government agencies and continue to be viewed as being backed by the government. The irony is that by bailing them out, Congress is about to make that perception a reality, even though government backing is no longer needed for their original mission. There are lots of banks, savings and loans, and other financial institutions that can do this job.

Fannie and Freddie are the poster children for a lack of transparency and accountability. Fannie Mae employees deliberately manipulated financial reports to trigger bonuses for senior executives. Freddie Mac manipulated its earnings by $5-billion. They've misled us about their accounting, and now they are endangering financial markets. More than two years ago, I said: "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose." Fannie and Freddie's lobbyists succeeded; Congress failed to act. They've stayed in business, grown, and profited mightily by showering money on lobbyists and favors on the Washington establishment. Now the bill has come due.

What should be done? We are stuck with the reality that they have grown so large that we must support Fannie Mae and Freddie Mac through the current rough spell. But if a dime of taxpayer money ends up being directly invested, the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists. And taxpayers should be first in line for any repayments.

Even with those terms, sticking Main Street Americans with Wall Street's bill is a shame on Washington. If elected, I'll continue my crusade for the right reform of the institutions: making them go away. I will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.

It's time to get America on the right track by creating the jobs that will build a strong foundation under our housing markets. We need to address the high cost of gasoline and other energy sources, and transform health care to be cheaper, higher quality and built around the needs of patients. But most of all, we need to reform Washington and wrest control from the special interests that have created this problem.

I have wrestled with trying to come to terms with my position on the question of the bailouts. As a housing counselor, I see first-hand the problems in the mortgage industry. The fact that lenders were making loans that should never have been made was not a surprise to anyone who works in the field. I saw it coming and knew it was lunacy.

I see very few pundits who support the bailouts. Many progressives oppose it as a bailout for the rich. However, in truth, there is no way to bail out the homeowners with bad loans that does not also bail out the lenders, unless the government assumes extraordinary power and essentially nationalized the financial sector of the economy. Such action would destroy our economy and result in untold misery. Only the most radical of socialist and the most financially illiterate would advocate such a move.

Many conservatives oppose the bailouts because they believe that in a market economy the government should not protect companies against failure. If the tax payers bail-out these financial giants, they argue, the prospect of failure will be removed and the evaluation of risk will be skewed in making future, financial decisions. In theory, I agree with the free market absolutist, however, as a pragmatist I believe we cannot allow these financial giants to fail. A failure of these giants could lead to a meltdown in the economy and a depression on the magnitude of the Great Depression. The responsible thing to do is stop the economy from a slide into chaos.

I agree with John McCain. We should go ahead and grant these investments and make loans available, should they become necessary. However, strings should come attached; their influence should be curtailed, and a policy should be pursed that, overtime, privatizes these financial giants.

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  1. I don't know, Rod. When I heard on Friday this was passed, I just shook my head. I don't feel my taxes should go to bail out those individuals who made stupid decisions and bought in to mortgages they knew they couldn't afford. If they are going to bail out Fannie Mae and Freddy Mac - those CEO's better damned well lose their $11 Million a year jobs and any future CEO's better have their pay cut back severely. Essentially, my tax dollars are also going to pay for their exorbitant salaries as well.

  2. I have very mixed feelings on the matter as well. I have made my house a priority, and I have good credit. Thing is, now that I'm blogging full time, I'm below the poverty level in income. But, since I have a house and pay my bills, I'm not eligible for any kind of help from the state while I'm gaining my footing. Makes me wonder if defaulting and refinancing under the new housing bill is going to let the people that were irresponsible escape any big consequences.

    On a slightly different topic, didn't Freddie and Fannie get in trouble a few years ago - 2004? - for overstating their earnings?