Sallie Mae and Freddie Mac: The Pending Bailout

For sale signs

For sale signs (courtesy http://realagile.wordpress.com/)

A frugal investor that I know very well, someone who doesn’t buy what he can’t afford, will once again pay for the sins of those less frugal than him.  That him is me.

I saw this coming five years ago and I didn’t try to do anything about it. My bad.

Congress is currently mulling a bailout for Sallie Mae and Freddie Mac which will, no doubt, get one unless the housing market does a huge turnaround in hurry (it won’t).  Mark Zandi, chief economist for Moody’s Economy.com told NPR:

“Unless you’re a shareholder I wouldn’t be worried because there is no chance that the federal government would allow these institutions to fail — to stop doing business. It would just be catastrophic for the system, for our economy. It’s just not going to happen.”

Bloomberg’s web site was a bit more cautious, indicating that a taxpayer-fueled bailout was a last resort:

“The government would not step up to support the enterprises until they’ve exhausted all options, including acceptance of significant shareholder dilution,” [Joshua] Rosner, whose research firm is based in New York, said in a telephone interview. “And if the government did have to get involved, I would expect equity holders would lose everything.”

What irks me is that this is a repeat of the S&L crisis of the late 80’s, prompted by the deregulation of the banking industry, which eventually led to 1) a recession and 2) today’s banking system where savings accounts earn a whopping 0.3% a year while credit cards cost you somewhere around 1 ½ to 2% a month for outstanding debt. The subsequent S&L $157 billion bailout plus interest, to save the industy, came courtesy of Congress.

This decade the mortgage credit industry learned to wrap their riskiest tranches in sweet-smelling language, leaving the rotting carcasses for whatever investor was at the end of that food chain.  Typically, that is the small investor, you and me.  (Stan O’Neal, Merrill Lynch’s former CEO, only got $161 million when he resigned after leading his company to an $8 billion dollar loss in a single quarter; his shareholders got coal in their stockings.)

I am unclear on the concept of not letting foolish investors suffer the risks of foolish investment.  I am unclear on why one should receive any kind of reward for buying a house that wasn’t affordable in the first place.  Is there something wrong with a free market economy? Congressional attempts to prevent the greedy from taking advantage of the less-greedy seem filled with loopholes that allow the greedy to 1) become greedier and 2) shoot themselves in the foot knowing that they’ll probably get some kind of bailout anyway.

Today’s mortgage crisis was perpetrated by greed all the way around.  Any bailout will guarantee that I will pay for that greed twice, by living through the recessional fallout and paying for the bailout.  Ugh.

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3 Responses to Sallie Mae and Freddie Mac: The Pending Bailout

  1. […] didn’t see the Fannie Mae/Freddie Mac bailout coming, did you?  As predicted, we are now about to live through the recession while paying for someone else’s […]

  2. […] What I’m saying is, there are two disorders here that affect such a large number of our population that it belies the meaning of “disorder,” a term that indicates an abnormality. Two disorders that seem to call a majority of the world “abnormal” — which, the last time I boarded the logic train, really makes “abnormal” the new “normal.” The disorder that pathologizes women gets a green light. The disorder that pathologizes men gets a movie industry, and a bailout. […]

  3. Ed G says:

    Don’t you mean Fannie Mae, not Sallie Mae?

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