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 It's Fannie Mae, Freddie Mac wall to wall. For all the coverage -- and it was complete and detailed -- it's worth pondering a few issues. There will undoubtedly be more -- much more -- to come. So stay tuned.
First, it might have been necessary, but Henry Paulson and Treasury certainly favored debtholders over shareholders. Shareholders obviously got screwed. That's interesting from a number of angles. Much of Fannie's and Freddie's stock was held by U.S. mutual fund and pension fund investors. Obviously, investors like Legg Mason's Bill Miller lost big. Who won? Shorts, a group recently demonized by the Securities and Exchange Commission. It's pretty hard to argue now that Fannie and Freddie were brought down by scurrilous gossip and rumor. Foreigners were also big winners. Much of the debt was bought by overseas central banks, including a few of our very best overseas pals, like Russia. Treasury was clearly forced to move because buyers of Fannie and Freddie debt were bidding up rates necessary for them to take the risk of holding the paper.
This demonstrates yet another case where overseas money, which has enabled a variety of fiscal excesses in the U.S., has shaped U.S. policy, despite a tendency in this administration -- more than any in memory -- to espouse unilateralism, even xenophobia. In a global financial system, unilateralism is self-defeating. This might become a lively campaign issue -- so we help out the Russian central bank and hammer the American Federation of State, County and Federal Employees -- if anyone thought ordinary voters had a clue about what Fannie and Freddie really do, and how they do it. Good question for Sarah Palin. Second, Paulson deserves credit for hanging in there in the dying days of the administration and acting. But this bailout will now leave another massive riddle for the next administration to solve. It's bad enough that Paulson has left financial regulation in a state of suspended animation -- though that's as much Congress' fault as Treasury's (see Monday's cover package on regulation in The Deal). But now the federal government gets to absorb Fannie and Freddie, without anyone knowing what the end game is. It's Congress' problem? Oy vey. Will Fannie and Freddie become a new permanent part of the federal government? Or will it be broken up and privatized? Will Congress, particularly the Democrats, say good-bye to a few of its favorite piggy banks? The bailout of Freddie and Fannie is a telling action for an administration that, while arguing it's in favor of small government, has overseen, usually justified by an emergency of some kind, the largest expansion of federal powers and prerogatives in living memory. Domestic wiretapping meet Fannie and Freddie. Third, what does this mean for the larger credit crisis, including floundering firms like Lehman Brothers Inc.? So far, entities the market has decided have too little capital and too many toxic mortgages have crashed, despite declarations of confidence all over the place: Bear Stearns Cos., Fannie and Freddie. And, of course, there's Lehman, which is facing imminent third quarter-losses and has floated all kinds of ideas to save itself. Now, with Fannie and Freddie dealt with, will Lehman face more or less pressure? It's true, markets could respond favorably, and the climate could improve, breaking the downward spiral. At least one can always hope. On the other hand, the effect of the Fannie, Freddie bailout may take some time to be felt, particularly in mortgage markets. In the meantime, investors -- spooked by how shareholders got creamed in Fannie and Freddie -- may run for cover, leaving Lehman in worse shape. Besides, having taken on Fannie and Freddie, will the federal government -- notably the Fed -- be willing to bail out yet another firm? And if it does, doesn't that make a joke of moral hazard? And if it doesn't, what effect will that have? Again, all these steps might be necessary, but it does raise a big question: Does the administration have any substantive beliefs when it comes to the relationship of finance to the political economy? Or is it all about short-term exigencies? At this late date, does it really matter anymore? - Robert Teitelman TheDeal.com: Fannie Mae, Freddie Mac seized Dealscape: Fannie Mae, Freddie Mac seized CategoriesComments Deal Video
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You are an idiot to say shareholders "got screwed". wHAT PLANET ARE YOU ON? Shareholders should get nada, nothing, zip when, in fact, a company fails and this is a massive failure. The funding of the debt of Fannie and Freddie is critical to their continued existence. The government put the capital in the right spot of the capital structure. As the equity in this company would actually wiped out if they truly marked to market, they are where they should be. Maybe you should read some corporate finance textbooks. Look at the chapter on capital structure, you dolt.