You have to admire the spin. The US Treasury Secretary, Comrade Hank Paulson, pictured here, announced today, Sunday 7th September, 2008 that the US government is natonalising two huge US banks, Fannie Mae and Freddie Mac. Which means in effect that Comrade Paulson is socialising the losses of the shareholders and investors in these banks - $5.4 trillion of guaranteed mortgage-backed securities (MBS) (mortgage backed securities) and debt outstanding. These liabilities are equal to all the publicly held debt of the United States. This in the words of Prof. Roubini is ‘socialism for the rich, the well connected and Wall St.” (see below).
Only Comrade Paulson didn’t say that he was socialising losses or nationalising banks. He said they were placing them ‘in conservatorship’.
I like it. Please can we place the NHS safely in ‘conservatorship’ – conserve it for the nation, ensuring it is not privatised. And please, please can we place the railways in ‘conservatorship’……No, we’re not a bunch of communists, honest guv. We don’t want to nationalise; we simply want to conserve. That’s my party line from now on…..
I wrote about Fannie Mae and Freddie Mac on 22nd July this year, warning that ‘their insolvency threatens a global systemic crisis’ and, drawing heavily on Setser and Roubini, reviewed the likely impact on our globalised highly integrated financial economy, in particular China and Russia. Am re-posting my blog of that date, because you might find the links helpful….
“……The effective insolvency of two US government sponsored banks or enterprises (GSEs) – Fannie Mae & Freddie Mac – will now impact not just all those US individuals, institutions and local governments that may have invested in these banks; not just on US taxpayers who are expected to bail them out; but also on you and I (our banks may well hold Fannie and Freddie securities); and the central banks of the world that have bought their debt – confident that it will always be repaid.
As Professor Nouriel Roubini argues:” Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.”
We know, because of Brad Setser’s sustained and diligent research, that the central bankers of Russia and China have exposed their taxpayers to losses at Fannie and Fred to the extent of about 10% of their countries respective GDPs. Those are huge potential losses……
Roubini has many points to make on this massive crisis of insolvency:
“these were effectively public institutions – not private ones – used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.”
Could not have put it better myself.