As I noted over the weekend, Fannie Mae and Freddie Mac were taken over by the federal government. Previously, the federal government had agreed to prop them up and in effect to make good on many of their losses. So as things deteriorated, that existing guarantee and the exposure it reflected was becoming too expensive for taxpayers to bear.
Further, while governments can seldom run things better than private businesses, Fannie and Freddie were only quasi-private. Their business model proved to be an expensive one, in part because they wasted huge sums on lobbying and executive compensation that was unwarranted given the firms’ poor performance. Also, it seemed to the Treasury Department that if the firms were taken over, the rates to place their mortgage debt would drop, in essence that the interest that they had to pay out to place their paper was too high.
So Fannie Mae and Freddie Mac had become too big and too expensive to taxpayers to let the firms continue on as they were. Allowing them to continue to operate was wasting too much taxpayer’s money, since we were on the hook for their expensive and wasteful business model.
In part to reduce the expense to taxpayers of the guarantees given in July, on Sunday the federal government put Fannie and Freddie in receivership, removed their board, put in new management, and eliminated their lobbying costs. Fannie Mae and Freddie Mac had become too big and, given the pre-existing promises to make good or offset much of Fannie and Freddie’s losses, too expensive to let them become yet more expensive for taxpayers. Better to takeover and potentially take losses sooner than to let the expense of a rescue explode in the future.
As I understand it, Sarah Palin made this point in passing, saying that they had "gotten too big and too expensive to the taxpayers." She was right; their growing expense to taxpayers was one of the main reasons for the takeover (among other worries were secondary effects on some investors of further Fannie and Freddie troubles).
Not surprisingly, Palin was roundly attacked by people either too partisan to be honest about things or too ignorant that Congress had already written a blank check to Fannie and Freddie that was getting more expensive to taxpayers by the day.
Here is Peter Viles’ take on things at the LA Times blog:
My take: The Palin comment is well within the margin of error on the campaign trail. There is no "gaffe" here. Congress earlier this summer — in the housing bill that both John McCain and Barack Obama supported but didn't bother to vote on — gave Treasury Secretary Henry M. Paulson Jr. a blank check* to invest in Fannie or Freddie. It OKd a big bailout. Perhaps in your book a blank check freshly signed by Congress is not "too expensive." Perhaps you trust the government not to spend a blank check. Perhaps pigs have wings. Palin was right: The very existence of a blank check means that Fannie and Freddie are too expensive to taxpayers.
*In a comforting bedtime story that several members of Congress actually believed, Paulson said the blank check was so big and powerful (a bazooka of cash!) he would never have to use it. By the time Palin spoke, it was clear that Paulson's attempt at "verbal intervention" had failed and that real taxpayer money will be spent to prop up Fannie and Freddie. No one knows how much, but the Treasury has signed contracts to invest up to $100 billion in each company. Oh, and loan them money too. Oh, and buy their mortgage-backed securities. Do you really want to argue that she made a mistake by saying the two companies are "too big and too expensive to the taxpayers"?
Give her time, and a few one-on-one interviews. I'm certain she's as capable of the other three of a real screwup. This is not it.
But then the antiPalin commenters on another thread picked this one up as if there were something to it.
A suggestion to both sides: THINK FIRST.
There are plenty of real weaknesses about all 4 candidates that you don't have to make things up.
Jim Lindgren
A suggestion to both sides: THINK FIRST.
To be perfectly blunt, the people attacking Palin aren't exactly the strongest when it comes to brains. They've been emoting for about a week now and they still haven't come to grips that all their attacks are reinforcing middle America's love of Palin, and that the more hysterical they are, the more favorable Palin becomes.
Palin will probably make a couple of gaffes in the campaign, but nothing, NOTHING, she says in the future will damage her in a way like the leftists are dreaming. That's because no matter what mistake she makes, they'll try to amplify it into a mountain and people will remember the big mountain of crap that the liberal MSM tried to initially push on Palin. So it really won't matter.
Here's the actual quote, from which it is pretty clear that she clearly was mistaken AND that you lack any ability whatsoever to be even-handed:
They’ve gotten too big and too expensive to taxpayers.... The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.
However you want to cut it, she clearly does not understand what the companies are, what their relationship is to the Federal government (much less to the executive branch), and what problems they face. She fits them into her preordained worldview: we must shrink the size of government... shrink, baby, shrink! Never mind these are private companies, not agencies, and certainly nothing a McCain-Palin administration would have any say about whatsoever, much less as to their potential size and functioning.
But whatever.
You've lost all credibility with this string of Palin posts today/tonight. I see you feverish, high on caffeine, typing furiously away to salvage the worst vice presidential pick this side of Ferraro. (Yes, Ferraro). It's sad.
Also, I just find it so ironic that all certain intellects around these parts are fawning over someone who clearly couldn't hold her own at their dinner table and probably wouldn't be invited back. But she likes guns, so whatever.
How will McCain and Palin make Fannie and Freddie "smaller" and "smarter" and "more effective" for all those homeowners who need help?
How are they "quasi" private? While Fannie and Freddie are government chartered, they are privately owned and run. Their shares trade on public stock exchanges, and their prospectuses explicitly state there is no government guarantee, meaning you invest at your own risk. What makes Freddie and Fannie less private than say Bear Stearns? Or Lockheed, Chrysler, and Penn Central? Is it simply the charter?
But what Palin actually said is more straighforward and conveys the essential fact of the situation. To call this a gaffe is ridiculous.
How will McCain and Palin make Fannie and Freddie "smaller" and "smarter" and "more effective" for all those homeowners who need help?
Right if you listen to the entire quote it becomes clear she has no idea how Fannie/Freddie work. Face it Jim she's such a lightweight she makes Dan Quayle look like William F. Buckley.
I'm not saying she's unintelligent she just isn't well versed on many national/international issues.
I don't understand all the ins and outs of the financial system. It's incredibly complex. I don't think Palin does either, and this quote reveals that.
Can you make a credible claim to her understanding on any issue besides energy exploration in Alaska?
Anybody who questions the wisdom of having Fannie Mae and Freddie Mac underwrite loans to marginal borrowers ans speculators, which are likely to go into default and foreclosure is clearly in the tank for Pailcain and deserves no credibility. Etc. Some would say that fewer people should be getting mortgages, and that neither property speculation or marginal mortgagors should be features in the mortgage market landscape, but I'm not one of them. Keep lending to marginal homebuyers and speculators - otherwise, you'll prove Palin, and Larry Kudlow, and a lot of investment bankers right.
There are gaffes where a politician tells an unpleasant truth intentionally.
You might call this, at worst, getting it right by accident.
And making F&F smaller and more efficient for homeowners wasn't the issue. The issue is what to do with them. They were backed up--implicitly--by the feds, which makes them "quasi" governmental, by the implication that all mistakes would be made good by the taxpayer, as happened. That's more than "quasi".
So let's acknowledge that she was marvelously lucky in her mistake. At the very worst. I'll take a few of those for myself this week.
When Fannie Mae was privatized and Freddy Mac created, was it not to align their interests with those of the larger securities industry? To let them employ lobbyists and give big salaries to support big political contributions?
So cui bono? Of course, many of the mortgage orignators and packagers who were there on the way up had made their pile and moved on before the bubble burst. The house flippers and spec contractors and cookie-cutter condominiumisers made piles, but probably are bankrupt now. Now there's a huge overhang of housing inventory, just like there was excess office building capacity after the S&L crisis, especially in the boom areas. Who loses is the non-investor homeowner, who's lived in an older house for 10+ years, paid taxes on artificially high property values, and now is left with most of their savings tied up in an illiquid asset.
attackeddefended by people either too partisan to be honest about things or too ignorantthat Congress had already written a blank check to Fannie and Freddie that was getting more expensive to taxpayers by the dayto admit that Palin clearly misspoke and perhaps displayed a lack of depth of knowledge on the subject.Wow.
Well, if this is evidence that Fannie &Freddie are only "Quasi-Private" then there isn't a private company in the whole of the country.
Seriously, you can see how absurd a defense of Palin this post if just by adding up all the times it echoes Palin's phrase "too big and too expensive" as if it were the most natural thing in the world and in no way meant to validate Miss Teen Alaska's feeble grasp of the U.S. Economy and its major players.
Surely you're joking:
What is absolutely hysterical about this is that a bunch of leftists, who have no idea how FM works, are criticizing someone for "not knowing how Fannie Mae works."
Again, you can no longer parody the left.
I don't understand all the ins and outs of the financial system. It's incredibly complex. I don't think Palin does either, and this quote reveals that
Um, since you don't understand the financial system, how do you know she is wrong?
Again, you can no longer parody the left.
Instead of saying that, why don't you explain it to us?
Your answer(s) will be illuminating.
Otherwise,
Step up champ, please.
As a Toronto realtor I know there is 1 of every 400 mortgages default in Canada. In the US it's 1 of every 11. This situation hasn't developed overnight - the mistake was done long time ago, again and again. And while government will be using tax payers to cover risky behavior of some gamblers, it will happen again. And it's not only about the USA of course...
Jill
Without google.
Also, the CBO "has estimated the costs of those subsidies in two parts: First, there is the direct cost from the fees and taxes that otherwise would be collected by federal, state, and local governments. Second, there is the opportunity cost of providing free credit enhancement to the GSEs, because competing financial institutions would be willing to pay to receive similar treatment." Those are costs borne by taxpayers.
But of course the major cost now, in 2008, is the cost of bailing them out. I just don't see what's wrong or controversial, given the cost of bailing them out now, in saying they've gotten too expensive for taxpayers.
As far as the next part of the quote, I took it as one of those detail-less statements politicians make all the time, like saying they're going to make government work for you or make it responsive to your needs. That said, Fannie Mae was created first and Freddie Mac was created later to provide Fannie Mae with a competitor. Palin could have decided that a duopoly isn't much better than a monopoly and that instead there needs to be 8 to 10 of those institutions to provide real competition to each other (and hopefully not all take actions that later turn out to be mistakes), which would necessitate making Fannie Mae and Freddie Mac as they existed on Sept. 6, 2008 smaller.
Easy peasy MBS's are mortgage backed securities which I think most readers of the VC are already familiar with, DMBS's are discounted MBS's and MRB's are mortgage revenue bonds this stuff isn't rocket science.
Try billions. I still remember all the right-wing idiots trying to take down the young Clinton over all sorts of trivia and self-reinforcing ridiculousness. To all those grasping at any possible straw to take down this woman, a warning: It is not only her reputation at stake.
Curiously, the bill text contains no reference (at least that I see) to the Constitutional authority under which it was passed.
and what Fannie does with each?
I'd bet a lot of money that "Nate in Alice" has not the foggiest clue as to what an MBS is.
As I said I think most VC readers are financially literate enough to recognize these terms in their non-acronym from but if you insist.
MBS- are instruments that are used by Fannie to provide liquidity to lenders.
DMBS- if memory serves correctly the key difference between MBS and DMBS's are that the discounted securities are shorter term and usually muti-property
MRB's these are issued in conjunction with local governments to finance home buying programs.
Satisfied?
I hope you weren't planning on getting other work done today, because there's a new Palin story that must be debunked! she billed the state for 312 nights when she was living at home, and billed the state for her children's travel both within and out of the state. That's what the Washington Post says.
From Wikipedia article "Jamie Gorelick".
(return sarcasm to mute mode).
FM squared have been mismanaged for a long time. Congress created them, last summer Congress gave them a blank check guarantee (with taxpayer money), and Congress can change or eliminate them.
Mortgage backed securities and Mortgage revenue bonds. Essentially, Fannie and Freddie (and other banks), make a bunch of mortgages into a security and then sell shares of it. I'm not familiar with DMBS, though I note that it has all the consonants describing a person who makes unfounded assumptions about people on the other side of a debate, DuMBaSs!
McCain is +15 now with the Indys.
And the "progressive" left is busy attacking Palin for not staying home with her kids.
Of course not.
a person who makes unfounded assumptions about people on the other side of a debate
Considering I'm correct, how "unfounded" is my assumption?
Again, you people are simply hysterical in the non stop comedy.
Maybe it was a gaffe. However, I don't think that voters care all that much about the finer points of expense recognition.
Oh, we don't know? I guess that's why we call it a blank check, the amount hasn't been filled in. What have we spent so far? Oh, we're just starting to run a tab? Are there corresponding benefits provided to taxpayers by the GSEs that should be accounted for?
So many questions. How much easier it is just to give the pre-ordained answer.
Fannie and Freddie are called GSE's -- Government Subsidized Enterprises -- for a reason.
They have long received direct and indirect taxpayer subsidies, and when the mortgage bailout law was passed last month, the GAO estimated its cost to taxpayers at $25 billion.
They've long received subsidized lines of credit from the treasury, and also been able to borrow hundreds of billions of dollars at lower interest rates based on the (accurate) presumption by investors that the government would bail them out if they ever went broke.
And everybody agrees that the bailout will indeed cost taxpayers tens of billions of dollars, to bail out these mismanaged GSEs that went broke by gambling on taxpayers' money.
Repair completed.
Said person is basically in the same situation that she'd have been without FM promoting a housing bubble, except for the high property tax thing. (Which is why CA's prop 13 is a good thing.) The property tax will go down with the next assessment and the local jurisdiction will scream about losing revenue.
10 years ago housing was an illiquid asset - we're back to that. Said house's value has lost its bubble boost, so it just has 10 years of normal appreciation.
No link, but I heard someone on CNN yesterday estimate the taxpayer cost at $80-$200 Billion. They also said it was potentially the most costly bailout ever, even surpassing the S&L bailout in the '80s.
Not in life expectancy, let's hope.
Yes - its true that Fannie and Freddie are too big, but why are they too big? Years and years of bipartisan efforts to expand their reach and expand marketshare while taking on ever riskier portfolios. Can't say that I didn't see this coming.
Certainly there are PLENTY of other things to question Palin on but this isn't one.
How small minded, and desperate. Keep it up, leftits. You are making Palin's case for her.
Cue the Imperial theme music...
But if the left wants to spend its time trying to show that Palin is not a policy wonk, I say go for it.
1. Their GSE status has always been used as an implicit guarantee of USGOV backing, resulting in what's generally assumed to be a 50 basis point advantage over actually private banks on borrowing. This meant that no bank could fairly compete in the markets they were allowed to enter.
2. Their regulation regime, through the OFHEO, was far more lenient than normal banks in terms of reserve capital they were required to have to back their loans. There were two reasons for this: congressional lobbying and regulatory capture.
The implicit guarantee meant that the USTREAS was always going to be on the hook for the failure. (Yes, in theory, the USGOV could say no, but now at least that would argue a counter-factual.)
Those who are taking issue with Palin for asserting that their administration would make the FMs smaller apparently also did not read the details for the conservatorship agreement. According to it, the FMs will be allowed to grow in terms of loans carried through next year, but their portfolio will shrink by 10% a year until they reach a stable point of $250 billion.
As Paulson suggested in his announcement, he believes that the next president and Congress should make one of two decisions:
1. Make the FMs fully private, not GSEs, with no implicit backing and with the same regulatory standards that all banks in the space must follow.
2. Fully nationalize, but keep them small, so their incentives can be kept focused.
In either case, the FMs have been since their inceptions as GSEs, one of our greatest examples of crony capitalism, privatizing profit and socializing cost. That needs to end.
Thanks to PLR for correcting my error before I did.
Given their governmental-creation, decades of governmental subsidies (through subsidized lines of credit and special immunities), government appointment of some of their officials, etc., it is not accurate to depict them as wholly "private sector" enterprises.
And even if they were private sector enterprises, it's undeniable that they will indeed cost taxpayers a bundle, because of their "too-big-to-fail" size.
However the second part of the quote has been contested, that is that the McCain-Palin administration would make these institutions smaller, smarter and more efficient.
What I don't understand is if that is something that is within the power of the president and vice president. It seems like Congress has taken them over under a receivership, but perhaps the executive branch has some input as well. Can someone explain how the receivership will work and whether the president and VP will have power to reform?
In New Jersey we called that the "Insurance Pool". Basically a dumping ground where bad or unprofitable deals go so taxpayers can bear the bill.
@ CFG in IL
Good idea!
And that right after the questions over her uterus, the sexuality of her daughter, flying while pregnant, being her youngest child's grandmother and how could she possibly consider having a professional career and be a responsible mother all at the same time.
But why listen to the Ace, since I doubt if without Google he can explain a Scissors Coup, the Najdorf Variation, and the Riemann Hypothesis.
@ Js5
ROFLMAO!
A *conservative* talking about "anti-intellectualism" in the Republican party??
Oh yeah I'm buying that one for a dollar.
Amazing how many solid conservatives show up to denigrate a VP pick who believes in fiscal responsibility.
Let's face it. The traditional role of a VP in American politics?
Zzzzzzzzzzzzzzz. Senate needs a tie-breaker vote? Zzzzzzzzzzzzzzz.
Regardless how this turns out. This has been, by far, the most entertaining election cycle of my entire life.
Originally I viewed the prospect of a 2+ year election process with great trepidation and angst. But as time has passed the sheer intensity, and insanity, that has come up again and again is like an unscripted Monty Python sketch played by mad people. All it requires is a man slapping someone in the face with a fish or perhaps a renegade blancmange winning the US Open.
Pray continue dear liberal fellows. You amuse me.
Nary a word on this from the leftists...
Perhaps the Left --or all of us, since the abuses encompass both sides-- should look at the reverse.
Fannie Mae/ Freddie Mac receivership was made possible some time ago. The act was consumated when it became realistically possible that executive power could shift to alter these corporations or shield taxpayers from mistakes.
When the electoral bounce became apparent, Congress/ the establishment/ 'Da Man' moved their money to a safer place.
A tremendous waste of time, but completely unrelated to the elections, it has provided a nice opportunity to learn more about what's going on. As for the candidates, none of them are going to come out looking like they're against homeowners, as any serious and responsible engagement with the issue risks doing.
waste of time-it has been put forth as a serious issue showing Palin's ignorance. these critiques, of course, lack any substance given that they don't refute that fm/fm were given a blank check before and now even more.
I recommend this brief and amusing video
Because since the poster since does not understand the issue at all, how would they know know Palin is wrong? Which was stated.
Even before the current federal bailout, which the Congressional Budget Office estimated back in July would cost $25 billion, Fannie Mae and Freddie Mac were already costing taxpayers a bundle.
Economists estimated the cost to taxpayers of the subsidies to Fannie and Freddie at $10 billion per year. That amount has risen as they have gotten progressively bigger as a result of all the special privileges and advantages they enjoy under federal law.
Moreover, they get special exemptions from many kinds of income taxes (state income taxes, etc.), many kinds of regulation (securities regulation, capitalization/reserve requirements)
Thus, the term commonly applied to them -- Government-Sponsored Enterprises -- is apt.
Actually, media rumors are piling up. Scores of them that have been debunked. The machine is in overdrive. That doesn't say anything about anyone except the media types who are peddling lame deception.
This is a joke, right?
Otherwise, r.friedman's is the most cogent (and brief) assessment I've seen anywhere.
The arguments about FMx2's status as wards of the state is beside the point. I am old enough to remember that the Cheaspeake Bay Bridge-Tunnel bonds were explicitly not wards of the state, but Virginia bailed them out anyway.
If I'd had $800K then, I'd have made $20M with no risk.
"Obama tries to steal Nebraska electoral vote from McCain"
If this was reversed and was about McCain/Palin, I'm sure we would have Lindgren and Co. screaming about how it was a lie and a gross example of media bias since it's impossible for someone to literally "steal" an electoral vote.
As of Sunday, Sept. 7th, there were 71 rumors, mostly debunked, and those not debunked are of the "why are you wasting my time" variety (e.g., her husband did get a DUI -- 22 years ago, or some 2 years before they married). See Palin Rumors (backup) at http://sarahpalinrumors.blogspot.com/
Some of the rumors are quite entertaining.
The "per diem scandal" hasn't made it to the site yet. Perhaps the blogger is getting writer's cramp noting all the "NY Times v Sullivan protects us unless you can prove actual malice" level of reporting. Meanwhile, even WaPo didn't actually allege that Palin's per diem payments violated any legal or ethical standard under applicable Alaska law. Reading the article carefully, it appears to be a report on a non-scandal scandal.
Perhaps if there hadn't been so many lies parroted in the media, an actual scandal might attract some attention-at this point, I doubt anyone will believe what the media prints about Palin unless there are actual, non-photoshopped, pictures. (aside from jbg, of course, international expert on obstetrics and child rearing).
My favorite jbg claim is that so far in his life, he has been admitted to six ivy league universities.
Comment by Howard Buckley McHugh
See if you can guess which two I didn't bother applying to.