image credit: dreamstime
It is official, the taxpayers are now on the hook for the two biggest losers in the sub-prime crisis.
The Federal Government has appointed conservators to run each company, with the current management.
Past Fannie Mae management has made tens of millions while costing the stockholders tens of billions in equity.
Short term, the companies continue to operate while the Federal Government underwrites their re-capitalization. Predictions for the bailout effects: Interest rates stabilize or go a little lower, the mortgage market retains or regains some liquidity.
That means business continues, with new mortgage securities being created, and the Fed buying the crap the companies already hold, although the longer term goal is reducing their portfolios by 10% per year.
For a summary of weblinks on reactions and predictions, click on Fannie Mae bailout.
Wouldn’t it be nice if you and I were too big to fail? Bankruptcy laws were reformed in 2005 because it was too easy for people to avid the consequences of their overborrowing.
“Moral Hazard” is the term for the risk of encouraging risky behavior by bailing out people or companies who put their money into an investment of some sort. Obviously, if someone is going to get you off the hook, provide a safety net, you will do things you otherwise would not.
So Fannie and Freddie bought so many bad mortgages, they became too big to fail, and the taxpayer has to bail them out. Marvelous.
The Fed bail out of Bear-Stearns already violated this principle.
Worse, it is being done with our money, No limit on our Fannie Mae bailout commitment now. I see good money after bad.
Just as should have been done with Bear-Stearns, they should have been allowed to fail, so that we can start to come out of this crisis, rather than prolong it.
Wendell Sherk and I and others have been blogging against taxpayer funded government bailouts for a while.
This one is simply the worst to date.