September 7, 2008 – 11:54 am

Less than a month after acquiring the power to do so, Treasury Secretary Paulson has put Fannie Mae into conservatorship. You can read Paulson’s joint press release here, but let’s not forget how he previously said he wouldn’t need to do this. The government take down of its own agency purportedly came about when an accounting probe found the agency to be undercapitalized. In other words, when reality overcame hope:

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

That it came hurriedly together is true, but there’s little doubt that Paulson could be surprised by the audit results. It stretches fantasy to believe that he was unaware of the difficulties when he asked for the bailout power. That’s why he asked for it to begin with. So, they gave him the power and now the shareholders have been defrauded, and the taxpayers are stuck to pay the bill.

In an historic move that virtually wipes out the stockholders of Fannie Mae, the government has taken over the reins and purse strings of both mortgage giants. The American taxpayer is now on the hook for losses yet to be seen, in what many media outlets are calling “the chickens have come home to roost.”

The reaction on the street is that Fanny is finally beginning to be treated like the trash that she is. S&P has finally come out and cut her to junk. Witness:

Standard & Poor’s on Sunday cut the ratings on Fannie Mae and Freddie Mac preferred stock to junk status after dividends were eliminated in a takeover bu the U.S. government.

Regardless of the ensuing fallout, the public can be sure of two things. Firstly, the bailout has nothing to do with helping people keep their homes, and secondly:

The only question is how badly this will blow up. Government bailouts are never confidence inspiring regardless of whatever short term reaction we may see on Monday.


Post a Comment