Not too long ago, I wrote for this blog that when Congress passed a plan to help Fannie Mae and Freddie Mac, it amounted to a taxpayer bailout of these two mortgage giants. There were those who took issue at the time with my use of the word “bailout.” Sadly, as the events of the past few days clearly show, I was right.

I say sadly because what will likely happen down the not too distant road will be a situation where taxpayers, all of us, will end up paying through the nose to bailout greedy lenders, irresponsible borrowers, and lax regulators.

And here is the real rub: no one can be certain this will really make right, that which is wrong with our economy at this point in time!

The conventional wisdom is that the government’s seizure of Fannie and Freddie will soon lead to lower mortgage rates as banks and other lenders become more confident about extending credit. This, in turn, is supposed to raise the housing market in this country from the dead and, presto, before you know it, all is right with the world again.

Want to buy a bridge I’m selling real cheap?

If there is one thing we should have all learned from the past few months, it is that the so-called conventional wisdom is–excuse my French–a bunch of crap.

Over the past several months, various experts have told us that the credit crisis would soon end once it roared through all those sub-prime loans. Well, that didn’t happen. Credit got so tight that even a blue blood with many silver spoons in his mouth would find it difficult getting a mortgage.

Over and over, “experts” told us that we would soon hit the bottom of how far down home prices will go…only to see home prices continue dropping with no real end in site.

A very short time ago, we were assured that Fannie and Freddie would make it through this crisis just fine, thank you.

Actually, maybe I can sell you two bridges if you still believe in the “conventional wisdom.”

Does anyone know what is going on here?

I’m afraid that is what it all boils down to–does anyone really, truly know what is going on here?

Don’t waste too much of your time thinking it over, I’ll answer my own question: NO! No one really does know what is going on–or, more to the point, perhaps, how to fix the problem. They are throwing darts at the board hoping one might find its target.

At least Treasury Secretary Henry Paulson appeared somewhat honest the other day when he said, according to Reuters, that he “could not estimate how big a burden this (the government’s seizure of Fannie and Freddie) would mean for taxpayers until the extent of declines in the mortgage market were fully known.”

You don’t need any conventional wisdom to tell you what that means–hold tight to your wallet, the government is about to pick it clean!

It doesn’t really do much good, of course, to fret about how we got into this mess to begin with–that Fannie and Freddie were allowed to grow too big, too powerful, too needed!

What is important is what lies ahead. Right now, I will submit to you, the ship of state is drifting in a sea of ice with no radar, no lights and no real captain at the helm.

Maybe this will change in November with the election and maybe not. So many different forces are at play, some the U.S. can do nothing about, though Americans do like to believe we can always do something to fix any situation.

Here’s the bottom line my friends–the next time you hear someone on TV talk about conventional wisdom, turn your set off. The next time you read an article about conventional wisdom, click to a different site.

Anyway, that’s my conventional wisdom. Take it with a grain of devalued salt.

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Tags: bailout, fannie mac, freddie mae, Henry Paulson

In a clear sign the federal government is far more concerned about the financial health of mortgage finance giants Fannie Mae and Freddie Mac than its public comments indicated as late as Friday, the U.S. government Sunday night announced what some are calling a “massive aid” package to the two shareholder owned and run companies officially cementing a government relationship that till now was only implied but never admitted to.
According to a Reuters dispatch, the plan, which will require swift approval from Congress, is designed to “head off a potential meltdown in financial markets.”

Here’s what the government is offering Fannie and Freddie:

1. Access to its emergency cash–the so-called discount window
2. A huge “temporary” increase in the line of credit available
3. The U.S. Treasury will, for the first time ever, purchase equity in both companies should it be needed
4. Investigation by the Securities and Exchange Commission to stop the spread of “false information.”

Both Fannie and Freddie are vital to the housing market–they buy mortgages from banks and other lenders and either keep them or repackage them into securities that are sold to investors.

“Welcome to the socialist state”

Strong words from some critics are already greeting the government plan. Josh Rosner, the managing director at Graham Fisher in New York told Reuters, “It’s outrageous. It’s offensive. Welcome to the socialist state. In capitalism, winners are supposed to reap rewards and losers are supposed to take losses for bad risk management. These are private companies.”

But others are deeply concerned that should Fannie and Freddie fail–though they both say they are well capitalized–the shockwaves would cause a financial meltdown world-wide.

The most troubling part of the government plan,perhaps, is the possibility the Treasury might buy equity in Fannie and Freddie. Some critics charge this could end up costing taxpayers enormous sums of money.

It will be interesting to see whether Wall Street gives the plan a thumbs up or thumbs down during Monday’s trading.

Here are 2 more articles worth reading:

• Government as the Big Lender
• Treasury Acts to Save Mortgage Giants

Tags: bailout, bank, banking, fannie, fannie mac, fed, federal reserve, freddie, freddie mae, housing bailout, lenders, mortage, paulson, subprime