Not just another two scalps being counted: Fannie Mae and Freddie Mac, the huge USA mortgage lenders, are to be nationalised:
The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.
Well, what else can they do? Think about how huge this is: the two of them hold or back debts of around $5.3 trillion dollars . Failure is almost certain systemic collapse: first the US housing market, then the rest.
The theory of central banking has it that the CB is the lender of last resort. And after that last resort, it owns the bank. So the Fed now will own these mortgage lenders, as a consequence of its role. No change here.
But, the theory also has it that any lending brings on the most severe punishments. Collapse and rescue by the CB then means: all shareholders are set to zero. All directors are sacked. It is then welcome to see that, in contrast to earlier wimpy efforts by Bernanke's Fed, this:
The details of the deal have not fully emerged, but it appears that investors who own the companies’ common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, may also wind up with little. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.
will be pushed out? Pah! In Switzerland, it is apparently a crime to be an officer of a failed bank. Think hard here.... Who are their auditors? Who were the ratings agencies? Who were the regulators?
While others ponder the detail of rounding up the guilty, there is the wider question of how to act, systemically, and properly, if one were a CB. What caused this to happen?
Clearly, we don't know the full detailed story. We do know the US economy has been out of balance for the last many years, you pick the number. We do know that pay-up time is now. Further, it has been obvious for a long time that FM & FM have been structured on continually rising housing prices. How dumb is that?
Still, assuming a free-market, the government is wise not to tell bad investors (or companies) how to act properly. Even if it "knows" what is "right", the theory of free markets is that it knows much less than it would like to, and certainly less than how to run a business. (Otherwise it would be doing it, right?)
The mistake then is in allowing the mortgage backers to become too big to fail. That is, assuming a free-market, we must also respect the right to collapse. When there is no right to collapse, there is no free market. All else is subsidies, and the various other isms are just around the corner. Communism, nationalism, socialism, playing-fieldism:
Fannie Mae executives are likely to have resisted the proposed takeover because the company's financial condition isn't as dire as its sibling company, said Bert Ely, an Alexandria, Va.-based banking industry consultant.
But the government would still have to take over both companies, he said, to allow them to borrow money at the same rates. "In order to level the playing field between the two companies, you've got to take over both of them," said Ely, a longtime critic of the two companies.
The backing by the USG for the mortgage lenders' debt is the tactical error. Having got the systemic details off our chest, let's move to the witchhunt. Who started these monstrosities then? How did the shared guarantee from the US taxpayer come into being? Who fell for that old trick? The US taxpayer deserves to know who's stupidity she's paying for this time, no?
Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
Oops!Posted by iang at September 6, 2008 07:29 PM | TrackBack