What Should Uncle Sam Do?
The recent troubles at Fannie Mae, Freddie Mac and IndyMac show just how messy things can get when the relationship between the government and the market gets too cozy. Fannie and Freddie are private for-profit concerns that operate for the benefit of the shareholders, but with government intervention both in their mission and as a source of bailout money when things go badly. This leads to both the privatization of profits with the socialization of losses and political interference in the processes of profit making and loss mitigation.
The plan advanced by Secretary [Henry] Paulson provides an open-ended source of funding for the government to buy the stock of the companies and to lend them unlimited amounts of money. While it may be a necessary last-ditch effort to save them, the plan leaves existing management and directors in place and asks for no explicit accountability for existing shareholders and other investors. Unfortunately, this appears to be related to the enormous political power Fannie and Freddie have developed through decades of political contributions and management by politically connected individuals like Frank Raines [Clinton's OMB director and former chief of Fannie Mae] and Jim Johnson [until recently an Obama adviser. Johnson was also chairman of the Goldman Sachs board's compensation committee while Paulson was its CEO].
The immediate cause of the failure of IndyMac was, according to its regulator, the release of a letter questioning the solvency of the institution by Sen. Chuck Schumer of New York. This also highlights the problems of politics and the market getting too close. While the senator was clearly within his rights to write the letter to the regulator, releasing it to the public undermined the regulator's ability to fix the institution without causing a bank run or the loss of taxpayer money. Moreover, now that pictures of people lining up outside the bank trying to get their money have been broadcast, other financial institutions may also find themselves in trouble.
These close interactions between politicians and regulated businesses sap public confidence in both government and the market. Real GSE [government-sponsored enterprise] reform and more caution on the part of politicians before interfering publicly in the business of regulators would help address these worries.
The Lessons of the Great Depression
Jeremy J. Siegel , professor at Wharton Business School
Given the turmoil in U.S. capital markets, our government had no choice but to rescue Fannie Mae and Freddie Mac. These mortgage giants, which had long been undercapitalized, had become far too important to the faltering housing market to see them go under.
Now that the government has stepped in, it is mandatory that Congress structure its investment so as to capture any gain in their stock price, similar to the profit that the government realized when it bailed out Chrysler Corp. in 1980. There is no reason that this deal should only become a "heads, the stockholders win" and "tails, the taxpayers lose" proposition.
Member Comments
Posted By: melbee1971 @ 09/19/2008 10:26:28 AM
Comment: As a public high school teacher, the current state of our public (and private) institutions reflect our values as a society, from my point of view. I ask all readers to consider this comparison of the following American institutions: Wall Street, Financial Powerhouses, and our public schools...
We are bailing out these failing institutions with taxpayer dollars. The state of our public school system continues to decline. Bailouts and deregulation and more money for failing financial (private) institutions. But increased regulation and LACK of financial support for our PUBLIC SCHOOLS - does this tell us something about our overall priorities as a nation? Are we reaping what our leaders have sown for us?
Think about this, voters PLEASE! Not just for the sake of your own personal interests, but for the sake of our country.
Good teachers are being laid off and class sizes are growing. No child left behind is a law that requires improvements without the promised funding to implement these improvements. And our schools are listed as "failing schools" losing support from the federal government who "regulated" the schools in the first place.
What is left in our public schools is often a stressed out skeleton staff that does not have the resources to properly educate our students, our future, which we would hope will lead us someday.
More evidence is proving that No Child Left Behind (an unfunded mandate) has actually lead to increasing drop outs of our high school students. PLEASE don't blame the teachers for this. We don't want any child to fail. We are working as hard as we can. We are not "in it for the money."
Meanwhile, these corporate lobbyists have effectively secured deregulation and what they consider "optimal" conditions for their financial success (deregulation). And a few well-connected people have lined their pockets with enormous amounts of other peoples' money.
This sort of short-term gain at the expense of long-term growth way of thinking have really infected our entire way of running our society.
Unfortunately middle and lower class young people (the MAJORITY) of our future do not have the money or the resources to hire corporate lobbyists. Their teachers and their schools have very limited resources. And there is little to NO organized efforts to effectively support the reform and progress to lead our public schools to educate and prepare our future.
In every other developed and developing country we compare our students' progress with, there is a clear and dedicated effort to improve, fund, and prioritize education. We are and will be competing with these nations. In America, we are starving our schools while bailing out reckless fat cats who've thrived on greed. Is this the American Way? Or have we lost our way?
Let this be a lesson. Hopefully (as we say in class) we will learn from all of this and use it to improve, grow, and succeed.
Posted By: samser @ 08/05/2008 3:20:48 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)
Posted By: samser @ 08/05/2008 3:18:51 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)