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Coming Soon: Government Bailouts

Published 08/18/08 Craig Harrington - Print Article
E-mail - editor@economyincisis.org

The United States Treasury Department may soon be forced to broker a recapitalization package for mortgage giants Fannie Mae and Freddie Mac. Not only will this move wipe out common stockholders, it may also leave preferred shareholders and others with losses.

The “recapitalization” plan is a failsafe in the case that the government-sponsored giants are unable to raise substantial capital to cover future delinquencies. This plan would act to reestablish stability in the nation’s two largest mortgage-finance firms, but it would do so while continuing to undermine our economy, thus only making the problem worse.

If the Treasury Department chooses to step in it will do so with revenue taken from taxes; and with no plan in place to increase taxes, any money redirected from the tax pool will equate to nothing more than deficit spending.

The United States government, in an impromptu attempt to rebuild failed institutions, will take money from its taxpayers and its homeowners and redirect that money to the very institutions which failed them. The government could and should have demanded better management from Fannie Mae and Freddie Mac; and it should have demanded fiscal responsibility from two organizations which have the power to completely topple the housing market. Instead, it allowed corrupt lending practices to run unchecked, and is now offering a reward for failure in hopes that it can salvage something before all is lost. If ever there were an example of what is wrong with the American economy it is Fannie Mae and Freddie Mac. If ever there were an example of what is wrong with the way that economy is operated, it is the government’s handling of Fannie Mae and Freddie Mac.

Source Reuters:

The U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime.

…

Such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.

…

If the government-sponsored enterprises fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the agencies.

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