The Bush administration seized control Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, aiming to stabilize the housing market turmoil that is threatening financial markets and the overall economy.
YOU'RE SEIZED! FEDS TAKE OVER MORTGAGE GIANTS...UP TO $100B EACH?
Treasury Secretary Henry Paulson is betting that providing fresh capital to the two firms will eventually lead to lower mortgage rates, spur homebuying demand and slow the plunge in home prices that has ravaged many areas of the country.
The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said.
But more importantly, “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” he added in a televised announcement.
The companies, which together own or guarantee about $5 trillion in home loans, about half the nation’s total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.
Fannie May A $40 Billion Democratic Scandal
Paulson’s plan begins with a pledge to provide additional cash by buying a new series of preferred shares that would offer dividends and be senior to both the existing preferred shares and the common stock that investors around the world already hold.
The two companies will be allowed to “modestly increase” the size of their existing investment portfolios until the end of 2009, which means they will be allowed to use some of their new taxpayer-supplied capital to buy and hold new mortgages in investment portfolios.
But in a strong indication of Paulson’s long-term intention to wind down the companies’ portfolios, drastically shrink the role of Fannie and Freddie and perhaps eliminate their unique status altogether, the plan calls for the companies to start reducing their investment portfolios 10 percent a year, beginning in 2010.
The investment portfolios are now slightly more than $1.4 trillion, and the plan calls for that to eventually shrink to $250 billion each, or $500 billion total.
“Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,” Paulson said. “We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSE’s,” he added, a reference to the companies as government-sponsored enterprises.
'ACCOUNTING METHODS INFLATED CAPITAL'...
Treasury Secretary Henry Paulson decided to take control of Fannie Mae and Freddie Mac after a review found the beleaguered mortgage-finance companies used accounting methods that inflated their capital, according to people with knowledge of the decision.
Paulson will hold a press conference at 11 a.m. today in Washington, according to a statement. Morgan Stanley, hired by the Treasury to probe the companies’ finances, concluded the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings are confidential.
In reading this article about Crony Capitalism at Fannie Mae (tip to Instapundit), I noticed that Jamie Gorelick was one of the Fannie executives who benefited from inflated bonuses based on Enron-style accounting. She was Vice Chairman of Fannie Mae from 1997 to 2003 (Fannie’s fraudulent accounting scheme was made public in 2004).
This is the same Jamie Gorelick who was Deputy Attorney General in the mid 1990s and was reported to have been the author of the Clinton Administration’s WALL against sharing intelligence data between foreign and domestic agencies. Without the policies instituted by Gorelick still in place in 2001, officials might have learned more about the 9/11 attacks before the planes hit the buildings.
The Wall Street Journal quoted Attorney General Ashcroft on the possible influence of Gorelick’s wall:.
:..So what’s Jamie Gorelick doing now? Do we have to fear for the health of any other major US institutions on her account?
Wikipedia tells us:
She is currently a law partner in the Washington office of WilmerHale and a non-executive director of the oilfield services provider Schlumberger Ltd.
Jamie Gorelick’s ties to Fannie Mae and What She’s Doing Now–.
When most people hear the word “Enron,” they mentally complete the phrase by adding the word “scandal.” As reporter Lester Holt of NBC’s “Today” put it in a Jan. 1 story, “Enron has been the poster child, if you will, of corporate scandals.”
It isn’t the only one, though. There’s $40-billion scandal with most of the same elements ” even connection to prominent politicians. Just don’t expect to see much about it on TV. After all, the top people involved here are Democrats.
Welcome to Fannie Mae, the government-sponsored mortgage giant. As part of a scandal that’s been running nearly two years, Fannie Mae has “misstated earnings” to the tune of $10.8 billion. That’s some tune.
So far, the Fannie fiasco has cost Chief Executive Officer Franklin Raines and several other top executives their jobs. The stock has dropped from nearly $80 a share to around $50 ” roughly $30 billion in lost value. And the company recently settled with the federal government and agreed to pay $400 million in fines, stemming from allegations the firm fiddled with the books to ensure bigwigs got performance bonuses.
To top it off, the Fannie Mae leadership was quite well-connected in D.C., especially to the Democratic Party. The Washington Post on May 23 made this all clear in black and white. The front page of that day’s Business section showed how James A. Johnson, a former campaign manager for Walter Mondale’s presidential run, had created “a political powerhouse.”
To top it off, the Fannie Mae leadership was quite well-connected in D.C., especially to the Democratic Party. The Washington Post on May 23 made this all clear in black and white. The front page of that day’s Business section showed how James A. Johnson, a former campaign manager for Walter Mondale’s presidential run, had created “a political powerhouse.”
That story had a photo of Mr. Johnson, who had been chairman and chief executive of Fannie Mae, flanked by two other photos — both other prominent Democrats. On one side was Mr. Raines, a former head of the Office of Management and Budget under Bill Clinton. On the other was Clinton Deputy Attorney General Jamie Gorelick.
While the rest of the graphic listed other prominent Democrats and Republicans, the titanic captains at Fannie Mae were clearly Democrats.
Sounds like an amazing political scandal. Certainly, newspapers and business magazines think so. The Wall Street Journal, New York Times and The Washington Post have done hundreds of stories on the Fannie fiasco. An Oct. 4, 2004, Wall Street Journal editorial summed up the crisis: “The company was cooking the books. Big time.”
WASHINGTON PUTTING ASIDE FREE-MARKET IDEOLOGY...
Now, with the U.S. government preparing to save Fannie and Freddie only six months after the Federal Reserve Board orchestrated the rescue of Bear Stearns, it appears that the mortgage crisis has forced the government to once again shove ideology aside and get into the bailout business.
“If anybody thought we had a pure free-market financial system, they should think again,” said Robert Bruner, dean of the Darden School of Business at the University of Virginia.
Previous Posts:
Paulson: Feeding failure at Fannie, Freddie:Legislate in haste, repent at leisure.
Others blogging:
- LewRockwell.com Blog
- Calculated Risk
- The Big Picture
- The Huffington Post
- Buck Naked Politics
- The Glittering Eye
- Marginal Revolution
- Washington Post
- EconLog
- Marginal Revolution
- THE CUNNING REALIST
- The Glittering Eye
- Donklephant
- Buck Naked Politics
- Memeorandum
September 7, 2008 - 06:10 PM on September 7th, 2008
[...] Original Pam [...]
September 8, 2008 - 11:44 AM on September 8th, 2008
Hey, don’t blame me about Mrs. Gorelick.
I voted all eight of my Schlumberger shares against her as soon as the proxy statement came in.
September 8, 2008 - 08:31 PM on September 8th, 2008
Oh look, Ellis is too afraid to face the facts!