WSJ editorial: Behind the Christmas Eve taxpayer massacre at Fannie and Freddie

Posted by Kendall Harmon

Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.

Read it all and there is more from John Huffman here.


Filed under: * Economics, Politics • Economy • Corporations/Corporate Life • Housing/Real Estate Market • The Credit Freeze Crisis of Fall 2008/The Recession of 2007-- • The September 2008 Proposed Henry Paulson 700 Billion Bailout Package • The U.S. Government • Budget • Treasury Secretary Timothy Geithner

4 Comments
Posted January 5, 2010 at 11:14 am [Printer Friendly] [Print w/ comments]



1. evan miller wrote:

Insanity.  this is the same sort of maddness that caused the mortgage crisis in the first place.

January 5, 12:21 pm | [comment link]
2. Bart Hall (Kansas, USA) wrote:

They are attempting to re-inflate a burst bubble. If they succeed it will be the first time in 4,000 years. We are in a balance-sheet adjustment precipitated by rampant over-indebtedness, and you most absolutely cannot solve that problem by creating additional debt.

Every balance-sheet adjustment in American history has come to be called a depression, and they continue until all the bad debt is washed away. All of it. Recent government actions are making things worse for the economy, but better for select groups of Democrat voters, at our common expense.

We’ll be able to begin rebuilding a solid and sustainable economy only when everyone in the bottom three income quintiles is terrified of debt, when banks in any case would laugh anyone in the bottom two quintiles out the door if they asked for credit, and when outside of certain highly urban districts any politician who proposes extending additional credit to unworthy borrowers is defeated by 4:1 margins.

Until then—my best guess would be about 2022—the trend will be downward. Manage your financial affairs accordingly.

January 5, 5:28 pm | [comment link]
3. Brien wrote:

Bart, what you write is nothing more than the good sense that has prevailed until the recent generation.  I am the child of a post-Great Depression era bank officer (my mother) who at age 91 simply shakes her head and says “whatever happened to loan committees?”  One of my best pre-college jobs was working odd jobs in banks, where I saw how it worked at its best.  I remember what it took for my wife and me to buy our first house, and how even with the bank president in the parish I served it still was a close call.  Times have changed.  By 2022 when you predict things will have settled, I’ll probably be buried in the Nashotah House cemetery, where there are no mortgages.

Brien

January 5, 7:41 pm | [comment link]
4. Brien wrote:

Bart, please don’t misunderstand me…I appreciate your position and understand it to be absolutely right!  I wish more people did.

January 5, 9:16 pm | [comment link]
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