Art, over at the Conservative Reader, yesterday: [1]
Today US Treasury Secretary Henry Paulson announced plans [2] for the new Federal Housing Finance Agency (FHFA) to take Freddie Mac and Fannie Mae into conservatorship. The power to do this was provided in HR 3221 which was passed in July.
The move includes replacement of the CEO of both organizations, and an infusion of about $200 billion. In return, the Treasury gets $1 billion in preferred stock from each company without providing the cash for it up front (I’m assuming this will work like a stock option).
From the Wall Street Journal:
It is unclear how much the government’s intervention will ultimately cost taxpayers. In exchange for agreeing to provide as much capital as needed to the companies as they cope with heavy losses on mortgage defaults, the Treasury will acquire $1 billion of preferred shares in each company. It has obtained warrants that give it the right to a stake of 79.9% for a nominal sum. The Treasury’s preferred shares will be senior to those earlier issued, meaning the government will have the first right to receive dividends.
The new overseers will also eliminate dividends on billions of common and preferred stock, moves that are expected to drive down the price of those shares, which have already dropped precipitously this year. The issue of additional preferred shares will dilute common shares.
And now the government gets to cover the bad debt, which means you and I cover the bad debt, and presumably the dividends from the preferred stock will go into the treasury.
Although I recognize the fact that the potential of these companies failing would have a devastating affect on the US and world economies, the deal smells to me.
[3]Art is correctly worried about the growth of government, but I think loses sight of the fact that the things are government entities to begin with, much the same as Conrail was at it’s onset. (Shrug) I’m not overly worried. (Ed- I’m certainly less than convinced this outcome itself marks a growth of government… that Rubicon was crossed at the conception of Freddie and Fannie)
Matter of fact, I view the removal of the two CEO’s to be a hugely good thing in this case. The grey area between public and private corporation is where these two have been making themselves money for some time. And while I don’t like the government stepping in, there seemed little choice in the matter. During the gravy, the two could be run in the fashion they were and not many could say anything, inclduing, give the makup of the companies, sharewholders. With somewhat harder times, the ‘companies’ could no longer be mismanaged so. Combine that with the effects of them failing and Paulson’s hand was forced. The bottom line is that the mismanagement of Freddie and Fannie have had effects far deeper in our enonomy than many are saying just now. If proof is desired, look closely at the result of the action; We’re now being told that prime interest rates will be falling somewhat, causing people to refinance at a lower rate and the effect of that on our economy can only be a postive one.