Another month, another bailout, and this one is a biggie.

From NY Times:

Mr. Paulson’s plan begins with a pledge to provide additional cash by buying a new series of preferred shares that would offer dividends and be senior to both the existing preferred shares and the common stock that investors already hold.

The two companies would be allowed to “modestly increase” the size of their existing investment portfolios until the end of 2009, which means they will be allowed to use some of their new taxpayer-supplied capital to buy and hold new mortgages in investment portfolios.

And not only have both CEOs been fired and replaced, but Treasury secretary Henry Paulson is also putting the two mortgage giants on the road to either becoming publicly traded or owned by the government. They will no longer be a hybrid at the end of this process.

[…] the plan calls for the companies to start reducing their investment portfolios by 10 percent a year, beginning in 2010.

The investment portfolios now total just over $1.4 trillion, and the plan calls for that to eventually shrink to $250 billion each, or $500 billion total.

“Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,” Mr. Paulson said. “We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the G.S.E.’s,” he added, a reference to the companies as government-sponsored enterprises.

Honestly, as much as this angers me personally that this type of system has gone on for so long, I think this move was inevitable and will ultimately be seen as the most responsible that could have been done.

I know a lot of free marketers say “let them fail”, but that’s putting flawed philosophy above fiscal realities, and since this move has a lot more to do with making sure the housing and mortgage market don’t completely implode, it’s a good move for Americans.

  • bubbles

    Hmmmmm…. I’m interested to see what the markets do tomorrow.

  • wj

    What I really want to know about this take-over is: do they spend government money (i.e. our tax money) reimbursing shareholders? Those shareholders who let the managers they hired (whether they saw it quite that way or not) take big risks, because the government would be there to bail them out. I’m really, really hoping not — because shareholders getting burned is the only way that this kind of bailout is going to be discouraged in the future.

  • Justin,

    There’s a bigger picture here guys, and I think it was wise to keep your comments more general, b/c it’s so complicated. The whole thing started in past administrations with former Fed Chairman in charge.

    The explanation I got was that the Mortgage Lender’s game was changed with deregulation that allowed “Mortgage Brokers’, or independent entrepreneurs to write contracts, promise the customer the moon, collect the fees and sell them off to underwriters and then to Wall St. investors. So the mortage industry became controlled by Wall Street, rather than your local bank or credit union. What that meant was a total lack of accountability and diligence in writing home mortgages. Fannie and Freddie simply stepped into the action later as a way to try and recoup the large amount of market share they were losing in this new game and bought the risky bonds that mortgages were being bundled into and sold off to investors. Because of the reckless way the mortgages were being marketed and sold, when the housing bubble crashed the whole mess came tumbling down, and still is.

    I hope my laymen explanation was understandable. It’s fascinating and I wish these types of conversations will come up in the debates b/c it would be interesting to see how they handle the topic. It’s not so much how they master the math, but who they put in charge of the whole thing is crucial to how we get out of trouble.

  • According to the New York Times, Democrats blocked Bush’s Fannie Mae and Freddie Mac reforms so low income people with bad credit could buy houses.
    ”These two entities -Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, and the less we will see in terms of affordable housing.” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee.