The Wall Street 'socialists' save the rich again

The Wall Street "socialists" are at it again — with another big-government takeover of privately owned firms, aimed at protecting the rich by extorting money from working people.

This time, it's a rescue of the would-be rescuers of the mortgage crisis — Fannie Mae and Freddy Mac. Like previous bailouts in this year-old financial crisis, the CEOs who created the mess will pocket tens of millions of dollars, while taxpayers get stuck with the bill.

A year ago, we were told that Fannie Mae and Freddy Mac — both "government-sponsored enterprises" chartered by the federal government but run by private shareholders — would bail out banks reeling from the mortgage meltdown by buying up mortgage-backed securities and guaranteeing new loans.

Now, they've been taken over by government regulators, only weeks after Treasury Secretary Henry Paulson assured Congress that such action was highly unlikely.

But the move became inevitable after the plunge in the two firms' stock prices and a pull back by the investors who hold their bonds. As a result, it was almost impossible for Fannie and Freddie to raise new capital to cover losses incurred from the housing market collapse.

By taking over the operations of Fannie and Freddie, which own or guarantee nearly half of the US$12 trillion worth of mortgage loans in the US, the treasury department is undertaking the government's biggest financial bailout in decades in the latest effort to contain a credit crisis that threatens the entire world financial system.

"While the Bush administration stopped short of using the word 'nationalization', analysts said the moves amounted to a de facto government control", the Financial Times observed. "Fannie and Freddie have [$5.4 trillion] in outstanding liabilities and guarantee three-quarters of all new U.S. mortgages."

As supposed free-market Republicans, the Bush administration uses the term "conservatorship" to describe the takeover.

"You would be hard-pressed to find the word 'nationalization' in any of the news releases, but that is basically what the government 'conservatorship' amounts to", a Wall Street Journal blogger wrote. "Hugo Chavez must be smiling."

Socialising losses

Of course, Wall Street's brand of nationalisation involves privatising the profits and socialising the losses.

When the investment bank Bear Stearns collapsed earlier this year, the Federal Reserve Bank put up $29 billion to cover any losses by JPMorgan Chase, which bought Bear Stearns.

The Fed also created a variety of new "lending facilities", including pumping billions into Wall Street investment banks by using a law dating from the 1930s Great Depression. As collateral, the Fed accepted mortgage-backed securities that were virtually unsellable on the open market.

Several Wall Street CEOs were pushed out for their role in the crisis, but all got to walk away with multimillion dollar severance packages — such as the staggering $165.5 million for ousted Merrill Lynch boss Stan O'Neal.

Now this scenario is being replayed at Fannie and Freddie.

Using its new authority granted in housing legislation signed into law in July, the treasury department is pouring billions more into Wall Street.

It will inject up to $100 billion each into Fannie and Freddie — though not all at once, in order to minimise any political backlash. The treasury department will also buy $5 billion worth or mortgage-backed securities from Fannie and Freddie, putting the US government more directly into the housing market than ever.

Furthermore, the treasury will create "a backstop liquidity support facility of unlimited size, modeled on the new credit facility created by the Federal Reserve for investment banks and managed by the New York Fed", as the Financial Times put it.

Translation: Fannie and Freddie have a blank cheque from the government agency that prints money.

To make all this more politically palatable, Paulson's plan gives the government a 79.9% share of Fannie's and Freddie's preferred stock, which will pay a 10% annual return (assuming they get out of the red). Common stock in the companies will become virtually worthless, wiping out most shareholders.

Dividend payments will cease, and Fannie and Freddie will be barred from continuing their notorious lobbying operations in Congress.

The ousted CEOs of Fannie and Freddie won't be feeling any pain, however. Daniel Mudd, kicked out as head of Fannie Mae, is set to receive $9.3 million, adding to his $12.4 million in compensation since taking over as boss in 2004.

For his part, Richard Syron, the former head of Freddie Mac, will get $14.1 million to walk out the door — on top of $17.1 million in compensation since becoming CEO in 2003.

Though Fannie and Freddie stockholders will get shut out under Paulson's plan, the agencies' bondholders will be rewarded.

For decades, foreign central banks invested heavily in bonds issued by Fannie and Freddie, which were seen as almost as safe an investment as US treasury bonds. As of mid-2007, foreign investors held $1.3 trillion in long-term bonds issued by US government agencies, most of it by Fannie and Freddie.

But despite the implicit promise of government support for Fannie and Freddie in the recently passed housing bill, foreign investors got nervous about holding their bonds. They reduced holdings in US agency securities by $9.75 billion for the week ending September 3.

It was the seventh consecutive week in which foreign investors pulled back.

"There is little doubt that foreign central bank holdings of agency bonds were a major factor shaping Treasury thinking on how to deal with the Fannie/Freddie restructuring", economist Nicholas Lardy of the Peterson Institute for International Economics told the British Guardian. "The People's Bank of China, of course, is the largest foreign holder of agency paper."

If the bondholders continued to dump US agency debt, it would have compounded the international credit crisis. According to the International Monetary Fund, banks worldwide have lost at least $500 billion so far in the housing crisis, and the total could hit $1 trillion.

A collapse of Fannie and Freddie would have driven that figure far higher and could have caused the failure of major financial institutions internationally.

Working people lose

It may be the case that the Fannie-Freddie bailout will help lower mortgage rates a bit. Yet the same housing bill that empowered Paulson to take over Fannie and Freddie has failed to provide what little relief it offered to homeowners — incentives for mortgage servicing companies to renegotiate sub-prime loans.

As the Arizona Republic reported, "The much-debated federal housing bill passed in late July isn't likely to change much for distressed borrowers, Arizona experts said, because its Federal Housing Administration refinancing plan requires participating banks to reduce the principal amount of each sub-prime loan by at least 10 percent — something banks simply aren't willing to do".

The government could have carried out a more aggressive form of nationalisation of Fannie and Freddie — using the companies to confront the foreclosure crisis head-on by buying up and refinancing mortgages directly.

Instead, the aim is to shore up the financial system at all costs, while leaving homeowners to endure the shrinking value of their houses.

The housing crisis continues to drag down the entire economy. The recent jump in the US unemployment rate to 6.1% is but one sign of a deepening worldwide recession.

It's not hard to come up with a government spending plan that would tackle these economic problems directly, and improve the lives of working people — creating jobs and raising living standards via spending on health care reform, schools and mass transit infrastructure.

But the only time the US government is willing to take urgent action is to protect the interests of the wealthy and powerful.

[Reprinted from US Socialist Worker, .]