Wednesday, July 23, 2008

WHY ARE WE BAILING OUT THE F* ING STOCkHOLDERS?

Dean Baker, Prospect - There is a clear rationale for making good on Fannie and Freddie's bonds. If the government allowed these bonds to default, not honoring the implicit guarantee, then investors would recognize that these bonds are far more risky than they had believed. This would raise mortgage interest rates for many years to come. It is understandable that we would not want to see this happen, especially in the middle of the housing meltdown.

But what interest does the public have in protecting the share prices of Fannie and Freddie stock? Don't stockholders understand they take a risk when they buy stock? In this case, the stockholders made a bad investment. They are supposed to lose their money (possibly all of it), right?

I have yet to hear any explanation from anyone as to why the government is supporting the share price. (In an NPR interview this morning, Senator Chris Dodd gave an incoherent answer that implied that supporting the share price was somehow tied to backing up the bonds. It isn't.). . .

5 Comments:

At July 23, 2008 12:50 PM, Anonymous Anonymous said...

The government guaranteed bonds have traditionally been regarded as being among the safest and most conservative investment instruments. The expectation of security of investment overshadows modest performance. As such, these securities represent of portion of countless pension and retirement funds. Their inclusion intended to offset the more volatile performance of the array of derivatives and other exotic paper that can populate a fund.
Therefore, rescuing Fannie & Freddie is about far more than attempting to protect two stocks. Their failure would have impact across the board and touch just about everyone who any kind of savings or investment portfolio.
Cheers

 
At July 23, 2008 12:50 PM, Anonymous Anonymous said...

The government guaranteed bonds have traditionally been regarded as being among the safest and most conservative investment instruments. The expectation of security of investment overshadows modest performance. As such, these securities represent of portion of countless pension and retirement funds. Their inclusion intended to offset the more volatile performance of the array of derivatives and other exotic paper that can populate a fund.
Therefore, rescuing Fannie & Freddie is about far more than attempting to protect two stocks. Their failure would have impact across the board and touch just about everyone who any kind of savings or investment portfolio.
Cheers

 
At July 23, 2008 12:57 PM, Anonymous Anonymous said...

The question shouldn't be why are we protecting the shares.
More to the point is what happened to the various controls, regulation, and enforcement that once made these and secure instruments of investment?

This is the inevitable conclusion of thirty years of deregulation. Milton Friedman was grossly wrong and now we are all paying for it.

 
At July 23, 2008 7:58 PM, Anonymous Anonymous said...

Milton Friedman knew exactly how we would all wind up paying for it. Old Milton simply provided the intellectual sales pitch for free markets uber alles. This has all happened before. The taxpayer-funded bailout of the S&L's during Poppy Bush's regime sent the message that financial institutions don't need to adhere to responsible business practices: they are free to take all the risks they can get away with, and Uncle Sam will bail them out.

The white collar crime enabled by deregulation has stolen trillions more dollars that all the convicted thieves that ever served time in U.S. jails. Before tax dollar one is spent on these bailouts, the crooked accountants and managers who made these high-risk loans should have every cent of their assets seized to pay for the debacle.

 
At July 23, 2008 10:15 PM, Anonymous Anonymous said...

AMEN, Brother 7:58

 

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