One of the problems that led to the subprime mortgage meltdown was the passing along of risk. Banks lent money to people without checking their income, and then sold those mortgages (along with the credit risks) to investors. Since the banks were selling the debts, they were not taking the risks. This led them to be a little less worried about whether borrowers could actually repay their loans. This phenomenon is called moral hazard. The mortgage meltdown and the takeover of Fannie Mae and Freddie Mac have moral hazard written all over them.
Another way to understand this is to think about the children's card game Old Maid. One corporate player after another passes the old maid, or risk, to the next. When risk turns into non-performance, the player holding it is in trouble.
Fannie Mae and Freddie Mac were at the end of the long chain of moral hazard, until the Secretary of the Treasury, Henry Paulson, stepped in. Both corporations are Government Sponsored Enterprises. They are not part of the government. They are for-profit corporations that the government set up to make money flow more easily to the housing market. Many people wrongly believed that they were backed by the federal government until yesterday, when that backing appeared.
Yesterday, the Secretary of the Treasury decided to pass the risk on to the American taxpayer and stockholders in these behemoths. Since most people will continue to pay their mortgages, the old maid doesn't look so dangerous for the moment.
The sigh of relief from Asian central banks and rejoicing on most of Wall Street drowned out the sound of golden parachutes opening as Paulson dismissed the CEOs from their posts. Unfortunately, they also drowned the sound of Fannie and Freddie stockholders gnashing their teeth as the stocks of both companies fell to about 1 per cent of their value last year at this time.
That old maid doesn't look dangerous until you find her in your stock portfolio. "Nah, not in my stock portfolio," you say, or maybe, "What stock portfolio?" Some people will escape the risk. However, many others own the now worthless stock through retirement plans. This is where, once again, the federal government cleaned up a mess and let regular folks take a bath.
Employees of these two firms often received as much as a fifth of their compensation in shares of stock. Much of their retirement funds hinged on that same stock. According to SEC filings, institutions like Citicorp and Barclays have been big holders of their stocks, which puts their investors at risk.
However, the really scary part is the number of mutual funds that own a piece of these two, because so many people hold mutual funds through their retirement plans. Good plan managers got rid of these dogs long ago. Brilliant ones short-sold them.
Economists continue to assure us that the economy is sound. Why would we need such assurances if they were true? Paulson made his move now, hoping not to interfere with the coming election. One can only hope this is the last installment of "No Millionaire Left Behind."
The Handbasket Chronicles, a weekly column by Ann Weaver Hart, appears on Monday evenings, and consists of commentary on political and social issues.
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Comments: 55
We sold our house for 60% of it's value due to the real estate situation and were fortunate to sell at all. With the mortgage companies and banks troubled and failing, and American jobs going out of the country, I don't envy the next Adminstration the task of fixing it.
---but like most estimates for the US crisis, the bailout will do nothing in terms of revitalizing its trade strength nor do anything about the crash of the home market, and only will temporarily and slightly at that, reduce some mortgages.
In the end, all that happens with this bailout, is even more US debt winding up in China, as a concrete metaphor.
I was one of the ones that Country Wide destroyed, It was my own fault the home I purchased was worht far less than Country wide had it appraised for, which at the time I thought was a good thing because it insured me of getting the loan in the first place.
Who would have known that 13 years into a 15 year contract it would get so out of hand I'd lose it.
Great article by the way
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Fannie Mae was a result of revitalizing the US in 1938 after Black Thursday in 1929, and in the late 60's began being privatized to help pay for the Vietnam War...
I can't stand it when I hear ultra-conservatives trying to inflate fears over the possibility that some of the taxpayers' money may go to people and firms who don't deserve it. It's regrettable that this happens, and frankly it makes me sick—but the point is to minimize it, not eliminate it. You can get the percentage of recipients who are cheating the system pretty low without passing the cost-benefit point. But weeding out the last few percent of cheaters actually costs a lot more than letting them go. Since it's the taxpayers' money potentially being spent, you'd think people would be willing to accept 3 or 4% cheating in exchange for avoiding the massive expense of figuring out who they are and proving what they did.
But many people have this idea that the 'bailout' should only be done if we can be assured that none of the money will go to people who don't deserve it. That kind of ideological rigidity, if practiced across the whole economic spectrum, would shut the entire country down in a month.
Ann, you make it sound like it was the government's fault these people lost their money.
If they hadn't stepped in, everyone would be in that bathtub with them.
So a corporate-military government by the greedy-rich for the greedy-rich is no kind of government-------well, it's a KIND of government - a rotten kind of government. I.P.A.M.s: Imperialist phonies after monies.
I sadly cant not seem to publish an article for the life of me right now.
I have attempted to save an article, heck I have tried to publish an article, even retried publishing an article just now asking is this is happening to anyone else as well.
But nothing is working.
After I hit publish it is bringing me to the next page with nothing just the top inch of the website...
So is anyone else having this same issue...
I will be checking the comments by my friends on my home page to see if anyone answers this...
But again I will be doing cut and paste to alot of articles for a while trying to see if anyone else is having the same issues or if it is just me...
Or who knows what is going on. ~ Felicia
(Oh PS I rated your article a 10 for the bonus of me being annoying)
Your article is Featured in the Triple Name Club.
I guess you folks are getting a little tired of Texans screwing up your lives. Well you aren't alone a lot of us Texans are also getting a little tired of it. The "Dixie Chicks" were right you know.
Gather Broadcasting: Have it your way
It seems the last of Roosevelt's New Deal has been eliminated, which was a neocon goal.
:O\
The reason, I'm so angry about the taxes and OBAMA schemes, you'll find OBAMA'S tax the rich, doesn't work out, and doesn't make sense-because he NEVER tells the truth about where the rest of this money for all these programs is coming from.
Note he say's "working" folks, making less then etc, etc.
We were getting ready to retire.
NEO-CON'S, CONSERVATIVES, why is everyone blaming them, seems to me like your man OBAMA is just a liar and a scam artist, the rich won't be paying this "ADDITIONAL" tax hikes, it will be middle and lower-middle-so-called neo-cons and CONSERVATIVES.
Always the blame game for what are now the poorest groups in America, white couples, sure it's their own fault.
Thanks for all the "stupid" lib programs, and all the dishonesty as well.
The very notion that Republicans are *fiscally conservative* is a delusion, empirically! The Republicans have managed to create a huge body of fiction with that term, and perhaps only now are we beginning to pull away the cobwebs that have suspended our disbelief.
Seen the massive poverty and blame games leveled upon poor whites, that was the beginning of the horrible violence against any whites, which pleased the LIB agenda to "no end". I have been there, I have watched this and KNOW, why it occurred to cause a lot of harm, spread a lot of lies and cover up a lot of truths which made some very obscene people sound like HERO'S.
Since the forced integration and all the claims of persons like KENNEDY etc. all has come to the point that lazy do nothing people, have become this way via liberals, and white profiteers upon the poorest in America. Always finding a way to blame and murder someone due to race, yes that's true but they blamed the wrong race.
Now that any resemblance to white/Caucasian rights have been destroyed the nation has a tremendous CRIMES problem, all real Christian values are destroyed what does the US have-nothing to brag about. So many stupid wasteful BILLIONS, have been spent and have posed a burden upon any white due to the claimed IOU'S that were never a valid claim, heck a new born white -just listen to the applauded ranting's of such as laughable Rev. WRIGHT, this has been going on since the civil war blame whitey.
they have nothing left except a few that took part in their slaughter, and they wonder what went wrong, then blame them or Christian values, or white people's greed, who's GREED, was it really look who's the predominate wealthy groups in America now-NO it isn't whites/Caucasian, ask a African America or any other group to give something to a white/Caucasian family in need, no strings attached and it's nothing but complaining it's just murderous tide of GREED, CRIMES AND CHAOS.
OBAMA-BIDEN, do not INTEND to give relief to poor middle class whites he INTENDS to steal yet more, take their life savings from them simply put, he will NEVER explain this truth people have a right to know. The lib's ridiculous spending, tax n spend, do nothing but pay their high paid cronies in the Government MORE.
Their programs are a waste of money and the teen problems as well as all problems have increased with their power.
Go ahead and lie some more, but it won't change the truth of the matter.
You sound like you are trying to write another chapter to William Golding's Lord of the Flies. and turn allegory into schizophrenic fiction.
Typical, prove it -it's OBVIOUS, you prove anything I said isn't so.
Again: Where are you getting any facts to substantiate your mad ranting!?
I agree that the CEOs should not be allowed to collect their astronomical compensation packages as they exit the scene in shame. They should be stripped of their golden parachutes, and that money should be rolled into the recovery effort. Unfortunately, corporate interests still have so much political power that I doubt it will happen.
What I was objecting to in my earlier comment is the cries of 'socialist bailout' and 'taxpayer boondoggle' from those who feel that the Fed shouldn't take over FNMA and FDMC. They point to the cheaters within the system and the fact that some of them will get off scot free, then conclude that this is reason enough to refuse federal support. This conveniently overlooks the fully half of Americans who have mortgages on their properties, who face potential financial ruin without a takeover. I find this kind of thinking absurdly rigid and self-destructively ideological.
Yes, we absolutely must make a reasonable effort to identify the cheaters and frauds who contributed to this disaster, and hold them accountable. But, regardless of how successful (or not) we are in that effort, the takeover is absolutely essential. I think those who cry 'socialism' know the takeover must happen, and will happen. But they're using it as an opportunity to gain a political advantage by posing as protectors of the American pocketbook and heroes of the people, a la pretending to be against it. That's the kind of big fat hairy lie that dumbs down the whole national discussion, in the interest of personal advantage.
I would imagine that there are two lessons to be gleaned from that one.
Only by the grace of something rather improbable would the speculation idiocy of the home mortgage industry have ever resulted in benefiting society.
By thinking completely out of the contemporary box, and returning to the simple economic theory of trading this for that w/o hidden agendas, will society benefit. And here is where good regulatory administration from the White House ought to lead.
Those who wish to speculate can always make a journey to Las Vegas.
Someone once said that those who do not understand history are doomed to repeat it. So are you going to sit back and passively repeat the sortid history of our money or are you going to take some action to understand the nature of money as we know it? If you go to the economists, you will not understand money because the problems of money have not been solved at all by hundreds of years of economists. They have not changed the nature of money for anyone nor have they suggested doing so.
Please read
Invisible Hand here on Gather if you really want to understand our money and what we could do to change it into a root of good.
To avoid the Gather ads, you can also find the complete novel at:
http://www.unc.edu/~mason/hand.html
I agree with this: I agree that the CEOs should not be allowed to collect their astronomical compensation packages as they exit the scene in shame. They should be stripped of their golden parachutes, and that money should be rolled into the recovery effort.
I would like to see all of the people who snatched up foreclosed properties for a fraction of what they were worth pay increased taxes on their rental properties, if that can be done without passing it on to the poor people who are now paying double rent to live in the houses that were practically stolen from them.
Another item. No investment is without risk. Not even certificates of deposit are without risk as there is always a risk of the loss in purchasing power. I'd also like to point out that SmartMoney Magazine had an article, last year I think it was, that touched on risk according to asset class of investment. Stocks had the same long term risk as certificate of deposit. While I certainly have sympathy for those that got caught on the short side of the stocks, that is the nature of any investment. I also have concern for those who are now jumping in gambling that they will go back up. One of the options on the table is to completely wipe out all the common stock holdings in a scorched earth plan to rehab the companies. I also have concern that one of the replacement execs is an ex-president from Merrill Lynch, one of the companies along with Citi and Bear Sterns that hatched all the derivatives that made the securitizing of mortgage pools possible.
What happened with the home mortgage industry had nothing to do with investments. It had to do with how risks were diffused and traded all sorts of places outside the bank a "homeowner" got her mortgage from, and speculators trying to grab a windfall in the process with no one having accountability.
Unemployment insurance is nice, but not essential to life. People put out of work could go get real jobs, start businesses, or get in the welfare lines.
I just wanted to say I am finally going through my currently over 6,500 pieces of gather new mail that is in my inbox on here. So with that in mind I have finally come to a piece of mail that was addressed to me in regards this article submission you have created to share with the gather community. Thank you for taking the time and sharing your piece with us here at gather. :o)