Reactions to story from FOX News

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  Are we in a recession?

  http://dividendpirate.com/2008/09/23/are-we-in-a-recession/
  106 days ago in The Dividend Pirate · Authority: 2

  Are we in a recession? Are you kidding me? Is this still a question? Just look at a few recent headlines, Lehman Bros files for bankruptcy US government planning a $700B bailout U.S. Government Takes Over Fannie Mae, Freddie Mac Fire Sale At Bear Stearns And Panic At The Fed Fed in AIG rescue - $85B loan Goldman Sachs, Morgan Stanley no longer investment banks But here’s what Uncle Bernanke told the congress today, Recession more likely without bailout. This is what I call a perfect politically correct sentence. And it’s true that “technically speaking” we are STILL NOT in a recession. A recession is defined as “A period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters.” And we apparently have not had 2 consecutive quarters of declining GDP. Ah, that brings up the point of GDP numbers. I highly recommend the book CRASH PROOF by Peter Schiff in which he explains in detail how the GDP numbers are manipulated by the government. While Mr. Bernanke still doesn’t think that we are in a recession, Warren Buffet thinks that we are in a recession and several other prominent figures think that we are in a situation very similar to the GREAT DEPRESSION because of the financial turmoil. So never mind all the technical definitions or the expert talk. Here’s what I think about whether we are in a recession or a depression. “When your neighbor loses his job its a recession. When you lose your job its a depression” Thanks.
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  Re: A Study in Contrasting Responses

  http://www.anchorrising.com/barnacles/006307.html
  123 days ago in Anchor Rising · Authority: 53

  UPDATED ON SEPTEMBER 8 & 9 Incentives drive human behavior but, especially in government where there are no market forces, rarely does anybody pay attention to the impact of the incentives created by laws, regulations or government actions. Which is why government actions will always create "unintended" consequences and less than efficient solutions. There is a concept called "moral hazard" in the finance world which one source defines as: One of two main sorts of MARKET FAILURE often associated with the provision of INSURANCE...Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for. What both Palin and especially Obama are missing in the Freddie and Fannie bailouts/takeovers is the larger issue of moral hazard. These bailouts/takeovers are signaling to the marketplace that nobody in the future will suffer meaningful adverse economic consequences as a result of their bad decisions. As a first step into the moral hazard world, the federal government enabled this situation by not officially giving its full faith and credit guarantee to backstop any future defaults by Freddie and Fannie, as government-sponsored enterprises...but then winking at investors, as if to tell them that the government would step up if they had to. Now think of how a bailout works, about what incentives and rewards it dishes out: Investors have generated greater than T-bill rates of return on Freddie and Fannie debt investments in past years while really only having marginally more risk than T-bills, which are explicitly guaranteed by the federal government. So investors have made out by generating a higher rate of return. Who paid for giving investors that higher rate of return? The American taxpayers. By now bailing them out, American taxpayers - who never contributed one iota to the misdeeds of Freddie and Fannie - are forced to pay billions of dollars of their hard-earned monies toward the bailouts. Said another way, taxpayers are being forced to make a payment for a past-due risk premium which is the difference between a T-bill level of risk and the Freddie and Fannie risk actually taken. The government says that the bailout proceeds will be repaid, while adding that it will be up to the next administration and Congress to decide the particulars. The players committing publicly today to a payback won't be around to ensure it happens so their words are meaningless. The government players who could be responsible for repaying taxpayers in the future have no obligation to do so and the government world provides them with no incentives to do so. Which, I predict, will yield a not-surprising indifference to paying back American taxpayers. Meanwhile, the people in Freddie and Fannie who actually made the bad decisions (including, it sounds like, aggressive accounting practices) that led to the bailout have no incentive to moderate their risk-taking behaviors because they have learned - just like children learn from bad parenting practices - that they will get away with acting out of line. Sure a few top executives lost their jobs but what else has changed? So the bailout/takeover has largely rewarded bad behavior and even those who lost their jobs have not suffered consequences anywhere near the magnitude of the actions they took or allowed under their watch. Lovely. The only genuine solution to stop the stupidity of incentivizing bad behavior that costs taxpayers money is to let something fail completely. Yes, it would be painful and that is never pleasant. But if anybody had the courage to do it, the proper alignment of incentives, of risk and reward, would ensure organizations rapidly returned to paying attention to their business fundamentals. This is yet another example of what happens when government gets too large and when big business can buy favors from government. ADDENDUM See, once it starts, it just keeps going. Don't lose sight of the obvious: It's big government and big companies doing corporate welfare OR it's big government doing other forms of undeserved welfare. Meanwhile, average working Americans have no such welfare options. Nope, the government just takes more of their hard-earned monies via taxation to fund everyone else's misbehavior. Call it justice, big-government style. ADDENDUM #2 With a H/T to Ramesh Ponnuru, the Wall Street Journal weighs in: ...Treasury Secretary Henry Paulson wants to prop up the walking dead so the world keeps buying their mortgage-backed securities. His action may calm jittery credit markets, and it may get the companies through the current mortgage crisis -- albeit at enormous cost to American taxpayers. The tragedy is that he and Congress didn't act 18 months ago -- when the cost would have been far less -- and that he still isn't killing the Fannie and Freddie business model that has done so much damage. These corpses could still return to haunt us again... At least Mr. Paulson has finally figured out he's been lied to...[previously] saying that the battle over the two government-sponsored enterprises (GSEs) was nothing but a scrap between "ideologues." So he bought the Congressional line that Fan and Fred weren't a problem and would help financial markets through the housing recession... This weekend's formal rescue puts an end to those illusions... The new federal "conservatorship" is a form of nationalization that puts regulators firmly in control. The feds fired the company boards and CEOs, though the clean up needs to go further to change the corporate cultures. Both companies remain Beltway satraps that hire for reasons of political connection, not financial expertise. The taxpayer purchase of preferred stock means that the feds will own about 80% of the companies if all the warrants are ultimately exercised. The feds also stopped dividend payments, saving about $2 billion a year. This amounts to significant dilution for current Fannie and Freddie shareholders, and it offers taxpayers some return on their bailout risk if the companies recover. We only wish Mr. Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure. Fan and Fred holders had profited handsomely for decades by exploiting an implicit taxpayer guarantee that their management claimed didn't exist. Now that the taxpayers are in fact stepping in, the current common and preferred holders deserve to lose everything. Mr. Paulson apparently wanted to dodge that political fight... The Treasury chief also gave a free pass to the holders of some $18 billion in Fan and Fred subordinated debt. He did so even though these securities were understood not to have the same status as mortgage-backed securities or other Fannie debt, and even though this will set a bad precedent for other bailouts. Watch for Citigroup's subordinated debt to jump in price as investors conclude that the feds would do the same thing if Citi needs a rescue. By far the biggest risk here, however, is that the companies could still emerge with their business model intact. That model is the perverse mix of private profit and public risk, which gave them an incentive to make irresponsible mortgage bets with a taxpayer guarantee. Mr. Paulson could have ended that model immediately by putting the companies into "receivership." Both companies could have continued to securitize mortgages, even as their riskiest businesses were wound down...And in any case, had Mr. Paulson acted sooner and given markets time to understand that receivership doesn't mean immediate liquidation, the risk of a run might now be far less. The Treasury plan does at least put some useful limits on Fan and Fred risk-taking, albeit starting only in 2010... Treasury says all of this will provide a motive for Congress and the new President to change how Fan and Fred do business, and in the meantime the conservator has also ordered a stop to their political lobbying. It's also nice to see that on this point Mr. Paulson has found religion. In his statement Sunday, he blamed the need for a bailout on "the inherent conflict and flawed business model embedded in the GSE structure." Welcome to our merry band of "ideologues," Mr. Secretary. The Treasury chief has nonetheless decided to leave the hardest political choices to his successor, who will have to face down the usual phalanx of Fannie apologists: Democratic barons Barney Frank and Chuck Schumer, the homebuilders, various Wall Street sages and left-wing journalists... ...who knows how the political mood will have shifted once the housing slump passes. It's easy to imagine the next Treasury Secretary concluding that he also thinks the fight for permanent reform is too difficult. Then we are back to the same old stand. The Fannie-Freddie bailout is one of the great political scandals of our age, all the more because it was so obviously coming for so long. Officials at the Federal Reserve warned about it for years, only to be ignored by both parties on Capitol Hill. The least we can do now is bury these undead monsters for all time. ADDENDUM #3 More from Jim Rogers: Has America created its own variety of communism with the U.S. Treasury Department’s bailout of two beleaguered government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac? According to Rogers Holding CEO Jim Rogers, the answer is yes. "America is more communist than China is right now," Rogers told CNBC Europe’s "Squawk Box Europe" September 8. "You can at least have a free market in housing and a lot of other things in China. And you can see that this is welfare for the rich. This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters." Rogers...said the bailout was not benefiting homeowners or helping average citizens improve their standing for a home mortgage. “It’s not bailing out the homeowners who are in trouble, by the way,” Rogers said. “It’s not bailing out people who want a mortgage – it’s just bailing out financial institutions...I think it’s a mistake.”... "This is a big huge mess and neither [Obama nor Palin] has a clue as to what to do next year," Rogers said. "Bank stocks around the world are going through the roof, that’s because they’ve all been bailed out. You don’t see the homeowners in Kansas going through the roof because they’re not being bailed out." Rogers had previously called for Fannie and Freddie to be allowed to go bankrupt... "Let the patient go bankrupt,” he said. “We have courts in America; they will be reorganized." Fannie Mae and Freddie Mac were "wove a mantle of invincibility" through lobbying according to a September 8 Wall Street Journal "Deal Journal" blog post. According to the Journal’s Heidi N. Moore, the mortgage giants had $170 million in lobbying bills in the past decade and spent $3.5 million on lobbying just in this year’s first quarter, spreading their largesse among 42 outside lobbying firms. Yep, big government works for the powerful who can buy favors. Now if the less powerful only had some more community organizers to help them out... ADDENDUM #4 McCain and Palin weigh in with a WSJ editorial. Corruption. Politicians and former politicians scratching each other's backs, getting wealthy at the expense of average Americans while not serving the public. Where is the outrage?
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  Government Takeover of Fannie Mae and Freddie Mac

  http://reporter.uslegal.com/2008/09/08/takeover-of-fannie-ma...
  122 days ago in USLegal Reporter · Authority: 1

  Government Takeover of Fannie Mae and Freddie Mac September 8th, 2008 The US Treasury Department announced Sunday that it will take control of congressionally-chartered lenders, Fannie Mae and Freddie Mac due to the failure of the agencies to operate effectively on their own. Under the takeover or conservatorship, the Federal Housing Finance Agency will manage the agencies’ loans in an effort to promote the housing and financial markets by preventing bankruptcy filings by the agencies. Congress recently authorized the Treasury Department to help the agencies by purchasing stock or equity lending or by stepping in to control the agencies’ finances. The agencies will be responsible for paying back the government once the temporary takeover expires. Approximately $5 trillion in mortgage loans in the US are processed through Fannie Mae and Freddie Mac. Source: http://www.foxnews.com/story/0,2933,418241,00.html Posted in Uncategorized | Comments Off
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  Least Bad

  http://www.neptunuslex.com/2008/09/07/least-bad/
  123 days ago in Neptunus Lex · Authority: 172

  Mortgage giants Fannie Mae and Freddie Mac have essentially been taken into receivership, with the federal government deciding at last to intervene in the market by seizing control of the banks. The intent here is to ensure the safety of the entire banking system, not to mention the core foundation of middle class wealth - housing values: Saying that market conditions have made it impossible for the nation’s top mortgage lenders to sustain its loans, the Treasury Department announced Sunday the government is seizing Fannie Mae and Freddie Mac. The quasi-government agencies’ executives have been ousted and the loans will be managed by the Federal Housing Finance Agency. The move is intended to prevent major financial turmoil, Treasury Secretary Henry Paulson said in a press conference. “I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions,” Paulson said. “Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.” Normally a conservative would have to lament what amounts to the nationalization of a publicly held banking company. But these are neither normal times nor normal companies: Federally constructed to further a common good, they were owned and operated as publicly held companies whose management believed that they were too large - and far too important - to be allowed to fail: As owners of nearly 80% of US mortgages, a failure of these two companies would have led to a collapse in housing prices and an implosion of the broader, consumption-based economy. The companies also believed that their unique status and aggressive currying of favor from Congress protected their flanks politically. This sense of invulnerability allowed managers and stockholders to believe that they could operate outside the boundaries of normal risk, knowing that the taxpayers would be on the hook for their misjudgments. Treasury’s actions today relieve both shareholders and management of that sense of invulnerability - shareholders in particular will be taking a bath - and we are all reminded that when it comes to money, if it sounds to good to be true, it probably is. Since the taxpayer would have been on the hook in any case, at least now the taxpayer exerts proxy ownership through the arms of the state, while the threat to the banking system is greatly ameliorated. The alternative would have been further and continued injections of federally sponsored cash into a failing system. This was the least bad option.

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