Bush Housing Crisis Policy 4 — Inventive Interventions

Continued from Fashioning Solutions

In March 2008 George W. Bush, champion of privatizing the Social Security program, decides to socialize the U.S. financial system instead. Investment firm Bear Stearns (founded in 1923, weathered the 1930s Great Depression without laying off employees) receives a toxic shock from the subprime mortgage meltdown — it holds umpteen-gazillion-dollars-worth of securitized mortgage toilet tissue.

For some reason, investors are reluctant to give Bear Stearns the billions it needs to avoid bankrupcy just because some of its hedge funds collapsed and, okay, it “wrote down” (lost) a couple of billion dollars in mortgage-backed bonds in 2007. A Bear Stearns death-watch ensues; everyone — even naked people! — buys “short positions” on the firm, betting it will fail. Vultures sightings are reported on Wall Street.

Disappointing “short” investors, the Federal Reserve Bank announces it will bailout Bear Stearns and guarantee a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns at a price so absurdly low the buyer later raises it to keep the suckers investors from realizing the actual perilous state of the entire financial sector. So much for the Wisdom of the Market.

The government bailout of Bear Stearns increases pressure on the Bush administration by players who once opposed federal marketplace intervention as a matter of holy Republican doctrine. Everyone else wants a bailout, too.

Enter Fannie Mae and Freddie Mac. These “Government Sponsored Enterprises” (GSEs) are quasi-governmental organizations, private corporations that pay earnings to private investors in good times and revert to governmental ownership when they fail. Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) were formed to help insure mortgages for workingclass homeowners. They were really government entities until LBJ opened them up to Wall Street investors to disguise the extent of national indebtedness caused by the Vietnam Conflict.

Fannie and Freddie, pressured by private shareholders to maximize share value, unfettered by government regulation, joined the rush to insure subprime mortgages and trade them by any means possible. In July 2008, value of Fannie Mae and Freddie Mac shares fell by half. Treasury Secretary Henry Paulson, coordinating with the Federal Reserve, tries to buoy up the two sinking GSEs with a flimsy life raft, increasing their Treasury line of credit, establishing Treasury’s right to purchase equity in these outfits, “reforming” the GSE regulatory system to include Federal Reserve consultation, and allowing the Federal Reserve Bank of New York to make loans to them as necessary. Share prices and the capital pool continued to shrink; the GSEs continued to sink.

Compare and contrast with Ginnie Mae. Who? What? Exactly. The Government National Mortgage Association, the agency that backs FHA and VA home loans, hasn’t been in the news because it has remained a Federal Government enterprise since its inception, has tough underwriting rules, and was never sold to the public à la Freddie and Fannie. Think there’s a lesson there?

Freddie and Fannie continue to sink until they they are re-nationalized in September 2008 (the euphemism is “under conservatorship”) by the Federal Housing Finance Agency (FHFA), which fires the leadership of the GSEs and assumes their power and also assumes trillions of dollars in debt obligations on behalf of U.S. taxpayers. Can’t we even get souvenir T-shirts?

 

Next: Too Big To Ignore

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