Paulson has asked Congress for a blank check from the taxpayer to pay off investors for losses already incurred and likely to be incurred in the next few years. He told Congress that, if it promises unlimited funds to backstop the lenders, Fannie and Freddie are unlikely to draw on the credit line. But the nonpartisan Congressional Budget Office estimates the most likely outcome to be a cost of $25 billion over the next two years — and more if housing deteriorates further.
He also wants authorization for Treasury to buy senior preferred shares in Fannie and Freddie. That prompted Sen. Jim Bunning (R‐Ky.) to remark that he thought he’d woken up in France. Yes, socialism is alive and well in America — thanks to a Republican Treasury secretary.
Absent from Paulson’s plan is any protection for taxpayers. They’ll fund the downside if losses mount at the two mortgage giants. But if Fannie and Freddie recover, stockholders and management gain. Call it “casino capitalism” — taxpayers bankrolling management high rollers.
The plan doesn’t ask stockholders or management to suffer for their financial indiscretions. The players who put their companies in jeopardy get to stay in charge — Paulson says he isn’t looking for “scapegoats.” Someone should remind him that capitalism without failure is like religion without sin.
There are now three possible outcomes:
- Congress passes the Treasury plan in its current form. That gives us the status quo on steroids — Fannie and Freddie continue to make risky bets and rack up more losses, with the taxpayer guarantee fueling the financial fiasco. This would be the worst outcome, but it’s where we’re headed.
- We could truly privatize the two companies: Remove the federal guarantee and force them to retrench and reform. Fannie and Freddie would have to raise private capital and downsize their bloated portfolios. They’d become just two ordinary‐sized financial firms, whose balance sheets would be measured in billions, not trillions, of dollars. A long shot now, this would be the best outcome.
- Nationalize both companies and end all pretense that they’re private. (Fannie was a government agency until 1968; Freddie was only chartered in 1970.) They could return to being federal guarantors and packagers of mortgages, and would hold no sizeable assets themselves. This last approach is called “honest socialism.”
Republicans, especially in the House, have found their political spine and are pushing back against Paulson’s largesse for Wall Street. House GOP Leader John Boehner demands more time to review the proposal — and opposes attaching it to the Housing bill.