Second Anniversary: Fannie & Freddie Government Protection Program

It's hard to believe, given the incompatible realities of the anemic economy and the stalwart insistence of the Federal Reserve, Treasury Department and Andrew Ross Sorkin that things would have been so much worse without the bailout, that it was exactly two years ago that the government first moved to subsidize the ailing government sponsored entities (GSE's), Fannie Mae and Freddie Mac, whose stock prices now hover at around 30 cents. 

Yet, today marks the second anniversary of that first step in what became a multi-trillion dollar bailout and subsidization of the entire financial sector. On Sunday, September 7, 2008, the government announced it would buy $200 in preferred stock in Fannie and Freddie (their stock prices subsequently plunged as trading opened on September 8, 2008), followed by another $200 billion round of purchasing in February, 2009. As a quiet Christmas Present last year, Treasury Secretary, Tim Geithner, raised the cap on how much stock the government could purchase to keep the entities afloat - from $200 billion a pop, to - ready for it? - an unlimited amount.

In the past two years, the Treasury Department has explicitly purchased $220 billion of mortgage-backed securities (MBS). It has increased guarantees for the Government National Mortgage Association (GNMA) to $398.4 billion and for the Federal Housing Authority to $365.9 billion. The Fed has bought another $1.4 trillion of GSE mortgage backed securities. And, according to the July Sigtarp report, the government is providing an implicit guarantee of $5.5 trillion for Fannie/Freddie and $1.3 trillion for the Federal Home Loan Bank (FHLB).

Considering that the balance of sub-prime loans at these agencies was only about half a trillion dollars worth, it would seem that this method of excessive, strategy-devoid subsidizing remains - well - haphazard, expensive, and reckless. Far more efficient and economical would be extracting the non-performing loans from their securitized container and forcing their restructuring to benefit the borrower and thus, the related security in which that loan lives, rather than throwing a whole pile of money at the general entity without pinpointing and separating of the worst loans, and thus, providing a more cost-effective remedy to the problem.

Since almost everyone's mortgage lives somewhere within the GSE framework, it's in all of our best-interests to find a solution. This kind of bottom up approach to bailing out and subsidizing has always made more financial sense - to me, anyway. 

Palin: Posturing Like a Banker?

Like many other journalists, or actually all of them, I don't know why Sarah Palin chose to announce her resignation as Alaska's governor on a slow news weekend, except the desire to draw less attention to it. It certainly reeks of miscalculated political maneuvering - that whole maverick thing - which ultimately fails in the Washington establishment. Though, it might play well with existing Palin-converts.

But, I do know that many powerful men have resigned from one post in order to jump to another one offering more power, money, or both. President Clinton's former Treasury Secretary, Robert Rubin, left his public position to 'pursue other interests', which turned out to be code for 'a high-level spot at Citigroup.' There, he made $126 million over an eight-year period. True, Citigroup recently almost imploded and he resigned from the firm earlier this year. But before these pitfalls, he did okay for himself, if not the rest of us. 

President Bush's Treasury Secretary, Hank Paulson left his extremely lucrative job running Goldman Sachs to swing over into public office, where he proceeded to initiate the largest bank bailout in US history. And, former co-President of Goldman Sachs, John Thain, left that position to run the New York Stock Exchange, which he took public, bagging millions of dollars for all its major shareholders. From there, he leapt to the helm of Merrill Lynch in late 2007, netting the highest bonus for a Wall Street CEO that year. Things haven't worked out so well for him lately, but his bank account would still make yours cry.

As for Palin - she didn't just jump. She stated that her resignation was really the best thing for Alaska. But, even fabricated humility is a banker ploy. Last fall, JPM Chase CEO, Jamie Dimon, went out of his way to make sure we all knew that his bank did not need TARP money. He was only taking it for the team - so that all of the banks who truly needed the capital wouldn't look as bad. The fact that his firm received all sorts of other federal perks not withstanding.

All that said, these men did demonstrate more advantageous timing and a clearer strategy. Palin's timing, if there is a wider goal, leaves much more to be desired. But, whether Palin runs for President in 2012 (which is likely, certainly doesn't mean she'll win) or whether she just doesn't feel like running Alaska anymore - the move to move on has precedent regardless of whether the outcome is positive or negative for the nation. So either way, there's going to be more Palin pontification in our future.