Fannie

Bailout of Fannie and Freddie Will Cost Double Earlier Estimates

by Hans Bader on October 22, 2010 · 5 comments

in Bailout Watch, Deregulate to Stimulate, Economy

The bailout of Fannie Mae and Freddie Mac will cost double earlier estimates, and could cost $363 billion over the next three years, report NBC and the Associated Press.

Fannie Mae and Freddie Mac are the corrupt government-sponsored mortgage giants that contributed to the mortgage crisis by engaging in fraud and misrepresenting subprime mortgages as prime.  Earlier, the Obama administration showered their executives with $42 million in pay, even as Obama’s pay czar was ordering productive private-sector banks to chop the pay of their executives and traders (leading one bank to dump a profitable trading operation), and imposing new taxes and burdens on private banks (but not Fannie and Freddie).

As Professor Roy C. Smith noted, because of the Obama administration’s attempt to restrict bank employee pay, “Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.” Meanwhile, Bank of America’s stock has fallen over the last six months from over $19 to less than $12,  shrinking many Americans’ 401(k)s, as it has been injured by new rules and red tape such as the Dodd-Frank Act (which also is wiping out most free checking accounts).

While the taxpayers have lost a huge amount of money on the government-sponsored mortgage giants, they have actually made money on many private banks that accepted government bailout funds and then returned the money with interest.  (Healthy banks that never wanted a bailout and repaid their “bailout“ in full with interest, like BB&T, were pressured by the Treasury Department into accepting bailout money along with their unhealthy competitors, so that the public would not know which banks really needed a bailout; the Treasury Department feared that such knowledge would result in a run on those banks.)

Taxpayers to Put Up Billions More for Bailouts of Greece and Corrupt Mortgage Giant

by Hans Bader on May 6, 2010 · 1 comment

in Bailout Watch, Economy, International, Labor, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

Government-sponsored mortgage giant Freddie Mac is demanding another $10.6 billion in bailouts, which the Obama administration is expected to give it. Obama’s so-called financial “reform” proposal does absolutely nothing to reform Freddie Mac, admits Obama’s Treasury secretary, tax cheat Timothy Geithner, even though he admits that Freddie Mac was “a core part of what went wrong in our system.” (At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.)  By contrast, the Republican alternative “aims to wind down, and break up” Freddie Mac and “limit taxpayer exposure” to its losses.

“American taxpayers are paying for $6.8 billion of the Greek bailout” through contributions to an international bailout fund backed by the Obama administration.   Greece is being bailed out by Europe and the international community because it is running up huge budget deficits due to a bloated bureaucracy and government pensions that let many retire in their 50s. “The Obama administration wants to use U.S. tax dollars to bail out a nation that is in a financial death spiral brought on by years of amazingly irresponsible deficit spending and similar behaviors often found in socialist states.”

Rioters in Greece killed three bank employees yesterday in their rage over possible budget cuts.  “The protesting civil servant workers trapped the bank employees in a burning building.”

Government spending is out of control in America, too.  Earlier, the Obama administration lifted the $400 billion limit on bailouts for the government-sponsored mortgage giants Freddie Mac and Fannie Mae, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.  The Obama Administration is now expanding the bailouts of these mortgage giants so that they can lavish pay on their CEOs and reduce the payments of deadbeat mortgage borrowers.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”  They paid their CEOs millions, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As Government-Sponsored Enterprises, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

Banking expert Peter J. Wallison, who prophetically warned against the risky practices of Fannie Mae and Freddie Mac for years, says that Obama’s proposals will lead to “bailouts forever” and give big, politically-connected banks that are “too big to fail” the ability to drive smaller rivals out of business at the expense of consumers and taxpayers.

Obama claims that it will not lead to more bailouts, but even congressional Democrats admit that it will.  As Congressman Brad Sherman (D-Calif.) admitted, the “bill has unlimited executive bailout authority. . .The bill contains permanent, unlimited bailout authority.”

Government pressure on banks to make loans in economically-depressed neighborhoods was another key reason for the mortgage meltdown and the financial crisis.  If Obama has his way, that pressure will increase.  The House earlier approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  It would do so without regard for banks’ financial safety and soundness, even though the Community Reinvestment Act was a key contributor to the financial crisis.

“Big, bad banks” — a “faux-populist” response

by Fran Smith on January 21, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation

Uh-oh.  It was speculation yesterday, but reality today - President Obama and the Democrats have the banking industry in their sights with their trigger fingers itching.  It’s their populist response to the “Massachusetts Miracle” election of Republican Scott Brown.  After reviewing the election results and polling numbers, they probably finally realized that “We the People” don’t want a cobbled-together, trillion-dollar health care plan rushed through Congress.  Nor do they want a cap-and-trade bill that will restrict energy use and jack up their energy costs.  Neither do they want more spend-and-tax schemes that leave them holding the bag.

Picture White House advisors plotting:  ”So what else makes People mad that we can use to get popular with the People again?” “Big, Bad Banks! Big, Bad Banks!” is the answer and is likely to be the Democrats’ populist slogan in this mid-term election year.

So President Obama today said that he will be cracking down on big banks and restricting their activities.  And , if they don’t turn over and play dead, he warned:

“If these folks want a fight, it’s a fight I’m ready to have.”

Congressman Scott Garrett (R-NJ) was right on target with his response to President Obama’s announcement.   Garrett attacked what he called Obama’s “faux populism” in jumping quickly – in the wake of the Massachusetts election — to paint the banks as the sole villains in the financial debacle, while ignoring Fannie Mae and Freddie Mac:

Garrett said in his press release:

“What is indisputable is that Fannie Mae and Freddie Mac were central to the mortgage market meltdown, which ignited the economic crisis that has left millions of Americans unemployed and has yet to be resolved. It is laughable that Chairman Frank and the Obama Administration have ignored their parasitic effect on our economy, yet proclaim the desire for reform. Passing strong GSE reform legislation should be at the top of the agenda of the House Financial Services Committee this year, in order to stabilize the mortgage market and alleviate risk to the taxpayer.  Any financial regulatory reform that does not reform Fannie Mae and Freddie Mac is not true reform.”

That’s a point that CEI’s John Berlau has long made.  In a statement today on President Obama’s announcement, Berlau pointed to the likely consequences of the President’s ill-conceived plans, which he termed “Glass-Steagall 2.0″:

What it would do is hurt economic recovery, reduce types of financing available to businesses big and small and give European and Asian financial services firms a huge competitive advantage over their U.S. counterparts.

“In short,” Berlau concluded, “The biggest systemic risk is that of hazardous government subsidies to and regulation on the financial sector.”

Populism, jobs and the economy — where do we go from here?

by Fran Smith on January 20, 2010

in Deregulate to Stimulate, Economy, Employment, Energy, Environment, Global Warming, Health and Illness, Stimulus to Nowhere

Scott Brown’s decisive victory in the Massachusetts Senate race has upturned the Democrats’ Progressive agenda.  Brown, “the people’s seat” senator, had a resonant message that tapped into the electorate’s disenchantment with ever-increasing government (with the health care proposals figuring strongly), huge deficit spending, and increased taxes to pay for the trillions of dollars in new government programs. Jobs and the economy were an overarching issue.

It was a populist victory that carried many of the themes of the “Tea Party” movement, which, so far, haven’t been promoted by either party.  If the Republicans don’t latch onto those themes with an agenda of their own, they really are the “dumb Party.”

What’s a cause for concern, however, is how the Democrats are likely to embrace people’s fear and anger by taking up their own populist cudgel to even more vigorously attack capitalism, consumer choice, and any and all Big Business entities.

There indeed is fierce popular anger at bank bailouts and big bonuses – Wall Street has become a synonym for greed and arrogance that caused the financial meltdown, with little recognition that government and quasi-government entities like the Federal Reserve and Fannie and Freddie contributed to the financial problems.

Though some banks deserve much of the public disapprobrium because of their mismanagement and sellout on TARP funds, even those banks that were healthy or fought their own way back to solvency are being asked to pick up the tab for their less-responsible brethren. Expect the Democrats to exact more such retribution from banks — in the name of the people.

In addressing the big issues of jobs and the economy, the Democrats will have a hard time spending more money on stimulus packages that seem to evaporate before any jobs are created. But there will probably be an even bigger push for “green jobs.” Democratic leadership may decide that a massive and economically destructive cap-and-trade bill isn’t feasible in this political climate.  They may look to more “green jobs” and “alternative fuels” boondoggles through taxes and fees on fossil fuel industries as a better way to sell the idea of restrictions on and higher costs for energy use. Yet those subsidized jobs themselves are costly, as the Wall Street Journal noted in mid-December 2009 about the 253,000 of direct jobs created:

The 253,000 direct jobs works out to a cost of about $90,000 a head-just for one year. Clean-energy manufacturing jobs are even more expensive to create, costing about $135,000 per job.

It will be difficult to relate the Democrats’ health care proposals to jobs and the economy when the costs are projected by the Congressional Budget Office at $1 trillion in additional federal spending over the next 10 years. But that figure – while astronomical — doesn’t include the states’ mandates, which will cost $25 billion more over 10 years or the unknown costs of the mandates for individuals and employers to buy insurance. Those costs will be paid for by increased yet hidden taxes – and not just on the so-called rich.

Plus, the closed-door negotiations on the bills have resulted in deals that most people consider unfair and outrageous, for instance, Nebraska is the only state that won’t have to pay future unfunded Medicare and Medicaid mandates; Louisiana gets $300 million for agreeing to support the Senate bill; and union members don’t have to pay “Cadillac-plan” taxes on their generous health care plans. These proposals will actually hold back job creation by causing uncertainty among both small and large businesses and thus reluctance to expand jobs. And taxpayers rightly understand that they will bear the increased costs.

In the wake of Scott Brown’s election, whether the Democrats will continue their shenanigans on their health care proposals isn’t yet clear.  Right now, they’re damned if they do and damned if they don’t.

Recently, CEI’s president Fred Smith wrote an article titled “Change we can really believe in,” which sets out a blueprint to stimulate the economy by liberating it.  Fred must have been prescient when he wrote this on January 4 — before the surge for Scott Brown:

This year holds promise for a new start for America. As 2010 begins, we may be teetering on a cliff, but Americans aren’t lemmings. Support for statist policies is dropping, and taxpayer anger is growing. There is a renewed understanding that the limitations on government of the Constitution are the best protections of our liberties. Their restoration should be the primary hopeful change advanced by all friends of liberty.

More Enron-like Behavior by Administration Officials Comes to Light

by Hans Bader on January 7, 2010

in Bailout Watch, Economy, Insurance, Legal, Politics as Usual, Precaution & Risk, Regulation, Sanctimony, Zeitgeist

Earlier, the Washington Post reported on how the Obama administration pressured Freddie Mac not to disclose to investors and the SEC the $30 billion in losses it was incurring as a result of Obama’s mortgage bailouts for undeserving (including high-income) borrowers.

Now, Bloomberg News reports that then-Federal Reserve Bank head (and now Treasury Secretary) “Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis,” and to hide them from the SEC in its SEC filings.  Such conduct is not too surprising coming from Geithner, a sanctimonious and hypocritical tax cheat.  Geithner also used the government’s bailout of AIG to pay billions of dollars to the wealthy Wall Street investment firm of Goldman Sachs, money that it neither needed to stay afloat, nor was legally entitled to.

Earlier this year, Freddie Mac’s CFO killed himself amidst a sea of red ink, as the administration forced Freddie to run up losses on mortgage bailouts, even though economists and real estate experts have criticized those bailouts as harmful to the economy.  Now, the Obama administration is making Freddie Mac and Fannie Mae deliberately run up losses on bailouts and buying up risky loans, even though the government took over Fannie and Freddie in 2008 in the name of ending their risky practices.  It is rewarding their executives for carrying out such terrible policies by showering them with multimillion dollar pay.

The mortgage crisis was caused partly by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and partly by the affordable-housing mandates imposed on them.

But Obama’s proposed financial rules overhaul does absolutely nothing about the risky practices of Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Instead, it pressures banks to make even more risky loans.  The House has approved Obama’s proposal to create a politically-correct entity called the Consumer Financial Protection Agency. “The agency would be in charge of enforcing the Community Reinvestment Act, a law that prods banks to make loans in low-income communities.”  The Community Reinvestment Act was a key contributor to the financial crisis.  But the administration’s proposal would direct the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.

LibertyWeek 20: The Future Is Cao?

by Richard Morrison on December 9, 2008 · 1 comment

in CEI Projects, Podcast

Welcome back to LibertyWeek, where your hosts Richard Morrison and Cord Blomquist bring you the best in news and views, always from the perspective of free markets and limited government. We start this week’s episode with praise for the new look and feel of OpenMarket.org: the blog you want to read. We then move on to the most delicious edition of Scandal Watch yet — the arrest of Illinois Gov. Rod Blagojevich on federal charges of “staggering” corruption. After that we look at the demise of Rep. William “Freezer Cash” Jefferson, the rise of Rep.-Elect Anh “Joseph” Cao (pictured, right), investigations into the mortgage mess, how taxpayers get trashed by recycling mandates and a debate over the ethics of scalping tickets in Olympic News.

# Special thanks to Josh Barro for the Tweet of the Week.

CEI Partners with NTU to Launch BeyondBailouts.org

by Cord Blomquist on October 22, 2008 · 3 comments

in Bailout Watch

Did the free market cause the financial crisis?  Was it unbridled capitalism?

The Competitive Enterprise Institute and the National Taxpayers Union don’t believe for a minute that capitalism caused the financial crisis.  How can we be so confident?  Because capitalism doesn’t exist in the United States, especially in the financial sector.

Nearly every industry in the U.S. finds itself making regular pilgrimages to Washington to seek special favors—subsidies for this or that, regulations that harm competitors or smaller firms, or trade deals that benefit their industry while hurting the American consumer.  No, America doesn’t have a capitalist system, we have a system of special favors, handouts, and perversion of the free market.

That’s why we’ve launched BeyondBailouts.org.  The financial system should be a free market one, not one controlled by the government, because government control and influence over the financial system is to blame for much of the current crisis.

Freddie Mac and Fannie Mae bought up bad loans, pushing the industry to make more of them.  The Fed played fast and loose with monetary policy by making money so cheap that financiers used it recklessly.  Our tax policies and myriad Federal programs are geared toward pushing people into homes they can’t afford.  Many of these policies were put into place by corrupt politicians bankrolled by those who sought to make a fast buck while distorting the free market.

Tell Congress enough is enough.  Write your Member of Congress and sign our petition at BeyondBailouts.org.

Bailout fails — Move on to Mark-to-Market Reform

by John Berlau on September 29, 2008 · 13 comments

in Bailout Watch, Economy

Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.

It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.

Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee — such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul — spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn’t jibe with members, and certainly not with the American people.

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Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

by Michelle Minton on September 29, 2008 · 11 comments

in Bailout Watch, Economy, Precaution & Risk

Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

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