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September 8, 2008

Fannie Mae and Freddie Mac Seized by U.S.

From Prof. Dale Oesterle BusinessProf Blog:

"Over the weekend the United State Government, read Treasury Secretary Henry Paulson, seized two federally charted mortgage companies, Fannie Mae and Freddie Mac.  This comes on the heels of a federally sponsored buyout of one our largest investment banks, Bear Stearns.  Now there is news that the three largest automobile companies, GM, Ford and Chrysler, want federal loans to sustain their companies.  For any who criticize the United States for engaging in "naked capitalism,"  this is proof that they are way off the mark.  We do not have anything close to a "free" market economy -- it is heavily managed.

The seizure of Fannie Mae and Freddie Mac makes two major mistakes and two minor ones as well.  The two major mistakes -- it is a windfall bailout of the subordinated debt holders of both companies -- the government preferred stock dividends and option to buy common take behind the current obligation to pay subordinated debt holders.  The subordinated debt holders, like the stock holders of both institutions should be wiped out -- they took a risk for return gamble and it failed.  Second, the remaining companies will still play the public interest game of lending money at below market rates to stimulate the mortgage market.  The companies are not, with government ownership, any more profit driven than they were before the seizure.  This should be no surprise -- government run companies are always quasi-political animals. In other words, the government will use these companies to "stimulate" the economy - a backdoor grant system. Great.

  The minor mistakes -- first, the company should sue the previous CEOs for breach of fiduciary duty and get back some of the outrageous salary and severance benefits they claimed while running the company into the ground.  Second, we should know the names of the politicians that carried the water for these companies for years, blocking reform efforts, so as to get campaign contributions.  Who are the Fannie Mae and Freddie Mac eight (or whatever)?"

September 8, 2008 in Current Affairs | Permalink


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