the visible hand

it is the theory which decides what can be observed – einstein

bazooka bailout

Posted by ecoshift on September 10, 2008

While today’s financial news is focused on Lehman Bros morning call the big news this week is of course the explicit Federal bailout and backing offered to FannieMae and FreddieMac. Today’s email contained an excellent summary of the bailout itself and the likely implications from RGE monitor. I’ve excerpted from the email below and the full text is posted at Mercato Libero News. If you want to understand what just happened follow the link for a quick professional review.

MERCATO LIBERO NEWS: RGE Monitor – FannieMae & FreddieMac Seized: Bail-Out of the Mortgage Industry

Today we focus on the bazooka bailout by the U.S. government of Fannie Mae and Freddie Mac and its likely short and long term effects on the economy.

On Sunday, September 7, 2008, the U.S. Treasury finally recognized the inevitable – that Fannie & Freddie (GSEs) are insolvent. Secretary Paulson’s adopted action plan entails 4 dimensions: 1) Expand the GSEs combined investment portfolio from currently $1.55trillion to a max of $1.7trillion by 2009 and then start shrinking it by 10% per year; 2) the Preferred Stock Purchase Agreement includes an immediate $1bn stake in each company, with option to expand the preferred equity stake to max $100bn in each company. The Treasury’s new preferred equity is senior to existing preferred and common stockholders but junior to existing senior and subordinate debt holders. The creditors’ interest and principal payments are guaranteed by 3) a new secured lending facility for GSEs, including the Federal Home Loan Banks, intended to serve as an ultimate liquidity backstop. 4) Treasury is also initiating a temporary program to purchase a yet unspecified amount of GSE MBS starting later this month.

Today’s RGE email is a much calmer summary than yesterday’s EconoMonitor blog post by Noreil Roubini at the RGE monitor website:

“Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or cross dressing or found to be perverts these Bush hypocrites who spewed for years the glory of unfettered wild west laissez faire jungle capitalism (and never believed in any sensible and appropriate regulation and supervision of financial markets) allowed the biggest debt bubble ever to fester without any control, have caused the biggest financial crisis since the Great Depression and are now forced to perform the biggest government intervention and nationalizations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.”

Whoa, Noriel.  Stop holding back.  Noriel has been warning about this housing crash and credit crunch for nearly two years while the political apparatus and economic analyst mainstream was in total denial. So I guess he’s entitled to let off a little steam…

William Greider also weighs in at The Nation:

The Silence of Lambs
posted by William Greider on 09/08/2008

The 2008 election has many unusual aspects, but none is more bizarre than the sorry spectacle of the bailout for Fannie Mae and Freddie Mac.

American voters are like the lambs being led to slaughter and at the very height of the presidential campaign. Yet not a peep of protest from John McCain and Barack Obama, not even a hint of the righteous anger injured taxpayers will rightly feel as they figure out the deal for themselves. The rescue of the two giant mortgage firms is another huge expenditure of the public’s money–one or two hundred billion dollars this time–to reassure bankers and financiers the government stands by them in their troubles, whatever the costs.

Think about it. Candidates Obama and McCain are wagging their fingers at the governing system in Washington, both warning they intend to make big changes if elected. Meanwhile, business-as-usual doesn’t wait for the next president. The financial system needs the capital right now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes them look look the political goats, their grand talk of change pushed aside by what Wall Street demands. The 2008 election may be close, but it looks like the status quo has already won.

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One Response to “bazooka bailout”

  1. World News said

    It doesn’t take much to see that the problems of three little people doesn’t add up to a hill of beans in this crazy world.

    HumphreyBogart

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