In a classic marx brothers scene from A Night at the Opera, Groucho is dining at a high-end establishment with Margaret Dumont, the heavyset woman who was frequently at the wrong end of his constant barbs. When the waiter brings the check, Groucho scans it with his eyebrows in full motion before shouting, “Nine dollars and 40 cents? This is an outrage.” He then hands it to Dumont and quips, “If I were you, I wouldn’t pay it.”Lately, I’m feeling a bit like Ms. Dumont — the gnawing uncertainty that comes when anticipating the bill in an expensive restaurant.
Or perhaps like the average taxpayer facing the current debacle that is Freddie Mac and Fannie Mae. I make that comparison because experience tells me that we’re going to get at least part of the check for cleaning up their current malaise.
The two companies, which were set up by the government but are actually owned by shareholders, own or back about $5 trillion worth of home debt. But under that structure, as critics have charged, if things go well, the stakeholders get the rewards. But should the situation head south, as it clearly has, Uncle Sam, er, I mean the taxpayers, get the bill.
Since the implosion of the credit markets, Fannie and Freddie have been one of the few funding sources for banks and similar lenders for home loans. Therefore, it would probably not be a bad thing if each remained solvent. Unfortunately, between them, they have posted aggregate losses of about $12 billion and accumulated debts of roughly $1.5 trillion.
One may ask how they both got ensnared in this mess. The answer is simple, actually. While the companies themselves didn’t directly buy risky subprime mortgages from lenders, they did invest in subprime mortgage securities. In a bull market, that strategy was wildly profitable. But in a bear market, concerns over capital levels have prompted their stocks into a downward spiral, and the ripple effect has scared lenders.
Enter Treasury Secretary Henry Paulson.
Last month, he revealed that the White House would petition Congress to pass legislation extending the lines of credit from the Treasury to the mortgage providers — albeit temporarily. Currently, both are able to borrow up to $2.25 billion each. At press time, a new credit limit had not yet been determined. Paulson also proposed that his department be allowed to purchase an equity stake in the companies on an “as-needed” basis. Meanwhile, the Fed announced that the Federal Reserve Bank of New York could now lend to both — again, on an as-needed basis.
But back to my cynicism about a taxpayer bailout. After all, it isn’t without precedent. In the 1980s and 1990s we saw 747 savings and loan associations go belly up at a cost of more than $160 billion. Of that, $125 billion was funded by the taxpayers.
At this point, I don’t know if the Freddie Mac-Fannie Mae debacle can be called S&L: The Sequel. One thing is for certain: If we do get stuck with the bill, you can be sure it will be a lot more than $9.40 — and not nearly as funny as Groucho.
