Paulson and Bernanke Bailout Friends on Wall Street, a Disaster for US Tax Payers

Jason Simpkins writes: Standing on the steps of the U.S. Treasury building across the street from the White House, Treasury Secretary Henry Paulson asked Congress for the power to prop up Fannie Mae ( FNM ) and Freddie Mac ( FRE ), the two failing mortgage giants involved with nearly half of the $12 trillion U.S. mortgage market.

"The president has asked me to work with Congress to act on this plan immediately," Paulson said Sunday. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."

But half a world away - in his new home in Singapore - peripatetic investing guru Jim Rogers blasted the federal government for its new activist approach, which conflict with the very idea of a free market. A rescue of Fannie Mae and Freddie Mac - the second federally sponsored corporate bailout in four months after the Treasury Department rode to the rescue of The Bear Stearns Cos. Inc. ( BSR ) in March - is shifting the cost of errant financial strategies away from shareholders and onto U.S. taxpayers.

"I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae," Rogers, the best-selling author and famed investor told Bloomberg News . "These companies were going to go bankrupt if [the feds] hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made. What's going to happen when you … put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?"

Clearly, a sweeping rescue of the government sponsored entities, such as the one planned, will bring with it a broad new range of liabilities for the American taxpayer, who will be financing institutions that are widely regarded as insolvent.

The debt securities issued by Fannie and Freddie are widely owned by pension funds, mutual funds, institutional investors, and even foreign governments. So a collapse of the two government-sponsored enterprises would send shockwaves through an economy that is already struggling to overcome the worst housing recession in a quarter-century, tight global credit markets and soaring inflation thanks to rising food and energy prices.

Paulson asked Congress for the authority to buy equity in - and lend to - the companies, while also substantially increasing their lines of credit.

The Treasury Department did not specify the amount of credit that would be made available to Fannie Mae and Freddie Mac, but those briefed on the plan told the International Herald Tribune that administration officials are lobbying Congress to extend the line of credit to $300 billion .

Each company currently has a $2.25 billion credit line that was established close to 40 years ago. At the time, Fannie Mae had only $15 billion in outstanding debt according to IHT . Now, Fannie has a total debt of about $800 billion and Freddie has roughly $740 billion.

Many on Capitol Hill, particularly Senator Charles Schumer (D-NY), greeted the plan with enthusiasm.

"The Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," Schumer said.

"While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies, should it be needed."

But Rogers - who contends that the U.S. economy is in the midst of its worst recession since World War II - referred to Paulson's plan as an "unmitigated disaster."

"They're ruining what has been one of the greatest economies in the world," Rogers said, making a collective reference to both Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke.

Said Rogers: Paulson and Bernanke "are bailing out their friends on Wall Street … but there are 300 million Americans that are going to have to pay for this."

[ Editor's Note : For an insider's explanation of the catalysts for the Fannie Mae/Freddie Mac financial crisis - as well as the long-term fallout investors can expect - check out Contributing Editor Shah Gilani's " Inside Wall Street " column also contained in this issue of Money Morning . Global Investing guru Jim Rogers has been particularly critical of the U.S. government's willingness to bail out Wall Street's financial miscreants. Indeed, in an exclusive interview with Money Morning earlier this year , Rogers predicted the failure of the U.S. Federal Reserve for this very reason. And while that's very bad news for U.S.-focused investments, there is an alternative - Asia, and more specifically, China, Rogers says. For more details of this global investing game plan, and to obtain a free copy of Rogers' new bestseller, " A Bull in China ," check out this investing report .]

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By Jason Simpkins

Associate Editor

Money Morning/The Money Map Report

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Comments

Jacquette Dunham

23 Jul 08, 21:04 Bailout

At least it is good business for some.

John

10 Sep 08, 06:25 Fannie Mae bailout

It was smart of the Wall Street financiers to put a fellow alumnus (Treasury Secretary Paulson) in charge of the piggy bank. Clever.

Brad Johnson

08 Oct 08, 11:15 Friends on Wall St.

This song was recorded yesterday. We'd love to get an MP3 to you! Country song written by Billy Craig 10/7/2008 Friends On Wall St. Sell my house and sell my boat Before I’m really going broke Ya know those genius mortgage dealers Are drivin my damn four wheeler Sold me some fancy finance package Now their stuck in some kind of wreckage With their hands stuck in my face They got the bailout what a waste It’s always the same ole story But I don’t need to worry Cause I got friends on Wall St. They all smarter than us Keep sending you’re hard earned dollars And don’t put up a fuss Cause I got friends on Wall St. They take care of me Live long and prosper In the land of the free Last stop is called Hooverville I ain’t forgot I remember still Packin up and goin west Pickin peaches I think that’s best My Bowl is full a dust But investing dollars is a must Look to the future seeking growth I watched Fuld take his oath And it’s always the same ole story But I don’t need to worry Chorus Chorus Chorus

Brad Johnson

14 Oct 08, 12:38 Friends on Wall St.

National Attention Given To “Friends On Wall St. A New Release Now Playing Coast To Coast After watching The House Committee question Richard S. Fuld, CEO of Lehman Brothers on C-SPAN last week, country music artist Billy Craig wrote a timely classic called FRIENDS ON WALL ST. “I wrote the lyrics, emailed them over to some friends and got a huge response” said Billy. In turn, his national promotions Manager, Brad Johnson of All Things Media, forwarded the lyrics and received the same response. “It was suggested to me by many in the music industry, and I agreed, that Billy needed to record this song right away” says Brad. As of today, the media’s incredible response has made the song a coast to coast sensation. Made available to the readers of New York’s Daily Newscaster which quotes, “Billy Craig's new song is a voice from the American Heartland and a message for Wall Street from Main Street.” (D. H. Williams - Daily Newscaster) The song will be featured on San Francisco’s KALW 91.7 FM and has already been getting spins on many stations across the USA including WCTH –Thunder Country 100.3 FM Miami-Dade and The Florida Keys and KXKX radio in Missouri. There is a media player on this link to listen to Friends on Wall St. http://www.dailynewscaster.com/2008/10/10/late-night-video-scratch-that-song/

