Wall Street Socialism

This weekend, Treasury Secretary Henry Paulson, former head of the Goldman Sachs investment house, provided us with a perfect demonstration of Wall Street socialism.

He announced that the Bush administration would seek congressional approval to bail out Fanny Mae and Freddy Mac, the government created, but privately owned, profit-making housing finance companies that hold or guarantee nearly half of the US mortgage market -- some $5 trillion in debt. Paulson seeks and will get an unlimited line of credit to guarantee their debt, as well as authority to purchase their shares to supplement their capital base. The Federal Reserve announced it was ready to provide lending while waiting for Congress to act. Paulson said the new subsidies were designed to sustain the two institutions in "their current form."

Perfect. The two institutions have always been more foul than fish. Created by the government in the 1930s to help lubricate the US mortgage market by buying mortgages from the banks so they would have the cash to make more mortgages, Fanny and Freddy were able to borrow money at a discount because of a widely shared assumption that the government would stand behind their debts if push came to shove. Their operations were regulated, limited by laws detailing what mortgages they could assume (They were essentially prohibited from diving directly into the subprime muck). But as they grew and profited, their executives pocketed lavish salaries and bonuses -- giving them an incentive to grow even more (and as we discovered earlier this decade, to cook the books). Last year, for example, the Chair of Freddie Mac took home a cool $18,289,575.
Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in pay to $13.4 million in 2007 while the company lost $2/1 billion and its shared fell 33%. Nice work if you can get it.

Now with the bursting of the housing bubble, push surely has come to shove. Foreclosures are soaring, the two institutions have sustained billions in losses, their shares have plummeted, and, according to former St. Louis Federal Reserve President William Poole, one and possibly both would be bankrupt if their assets were marked down to their current market value.

So now the Bush administration proposes to make the federal guarantee explicit and even to offer taxpayer money to help recapitalize the two banks if needed. Everything has been nationalized -- except the profits and the pay scales of the bank's executives.

That's right. If the guarantees work, private speculators, having driven the stock down, will clean up on the upside. And the bank's CEO's will continue to pocket the multi-million dollar salaries that are de rigueur on Wall Street. Call it Wall Street socialism. Their losses are socialized; their profits are pocketed. You and I will pay for their failures. And if conservatives have their way, their families will pocket their successes, without even having to pay a tax for the transfer of the estates we've helped to create.

These enterprises are operating on our tab now -- completely. Why not just nationalize them, as even that font of economic convention, Sabastian Mallaby suggested yesterday in the Washington Post. Sure, we'd have to add the $5 trillion in debt to the federal balance sheet, but we could add the assets also. And after Paulson's announcement, global investors are already toting up their debts onto the federal balance sheet.

Why pay dividends to shareholders when they are essentially playing with our money? Why pay managers of public enterprises the bloated pay packages of Wall Street speculators? Why allow them to finance lobbyists to shield them from accountability? The fiction of their separate existence has been exploded; let's save the dough and run them efficiently.

Fannie Mae and Freddy Mac are only the most recent and extreme version of Wall Street socialism. The Bush administration has done essentially the same for private providers of college loans. The Federal Reserve has made taxpayers the guarantor not simply of the banks that it regulates, but the shadow banking system of hedge funds and investment houses that it doesn't regulate. After the bailout of Bear Sterns, they basically are gambling with our money. The Federal Reserve has now traded more than $500 billion in federal bonds for the toxic paper of private banks and investment houses, some $200 billion of it in mortgage backed securities, worth dimes on the dollar. This massive subsidy -- justified as necessary to keep the banking system afloat -- is not accompanied by limits on what gambles the speculators can make, how much debt they can take on, what rewards they can pocket. They are playing with house money -- not exactly an incentive for prudence.

Republicans seem ideologically committed to these kinds of arrangements. In Medicare for example, conservatives have demanded that the government subsidize private insurance companies to compete with public Medicare, even though Medicare provides healthcare much less expensively. When Bush and the DeLay Congress drove through the prescription drug bill, they included a provision that PROHIBITS Medicare from negotiating cheaper prices for drugs, effectively turning the bill from a benefit to Seniors to a multi-billion subsidy to private drug companies (not surprisingly, after Wall Street, the drug companies finance one of the most lavish and powerful lobbies in Washington).

Now it makes sense to me for the government to subsidize housing mortgages and college loans. Encouraging home ownership and higher education are central to sustaining the broad middle class that is America's triumph. But I can't imagine why we need to let bankers and investors pocket the upside, when they are playing with our money and we're covering their losses. Public enterprise may be staid and bureaucratic, but it's a lot cheaper and more efficient than the perils of Wall Street socialism.

Comments

[Wiredwilly]

Solution : Audit the Federal Reserve , eliminate the Central Bank and return to a Jeffersonian, interest free currency backed by Gold, Silver , or Energy . To hell with the Federal Reserve , Freddie Mac , Fannie May, the World Bank and all the efforts to " help " the economy in the period between 1913 and 1945 . All the Warburgs, Roosevelts , Morgans and McCloy's have done is to put us into the situation we are in today, essentially living under a system whereby the Central Bankers funnel OUR Public money into THEIR private accounts and "help" themselves to a free ride.

[KCFreedom]

All this while creating a handy-to-them world government. It's the 100-year plan.

[Sneaky]

My God man. Sensible folks DO still exist! Well said, sir.

[William1950]

ummm...

[worldsforgottenboy]

A FINANCIAL bloodbath (shareholder value collapse, etc.), not a physical bloodbath, in case you are wondering....

[dadw5boys]

THEY FOUND A WAY TO GET THE RETIREMENT MONEY INVESTED IN MUTUAL FUNDS BY CRASHING THE BANKS!!!!!!!

[worldsforgottenboy]

One could argue that a financial bloodbath for banks and shareholders is fair, given their complacency and greed during the housing bubble. What is more important, however, is that such a bloodbath is absolutely necessary, regardless of what is fair or not fair.

To preserve a functioning economy in the long term, the government must not create expectations that will cause the next bubble to become even more excessive. Bailouts of insolvent banks should be OK, as long as loss of shareholder value is 99%.

The other lesson banks and investment funds must learn, is that real estate is not particularly low risk. Too much capital has flowed into old-fashioned sectors such as housing, and too little into new sectors which require some thought and analysis on behalf of the investor.

The market must be allowed to punish both the careless, and the uncreative.

[mgloraine]

I agree 100%. Nationalizing a corporation or an entire industry can be an excellent solution if, as Mr. Borosage points out, we get the whole package - assets as well as liabitities.

Nationalizing healthcare payment, a la Medicare-For-All, would be a very efficient and cost-effective solution for the problem which is the health insurance industry.

I have elsewhere suggested that the people of the USA should nationalize those corporations which have accepted no-bid contracts for services and materiel in Iraq and failed to deliver, or delivered partial / unacceptable work. That would include all of the big-name cronies like Halliburton, KBR, Bechtel, Blackwater, Dyn-Corp, etc. They took our money and failed to deliver, so We The People own them. Every effort should be made to recover the large salaries and bonuses paid to executives of those corporations since acceptance of the no-bid contracts. That might include the seizing of their property and accounts, and auctioning off of their estates.

Next up, nationalizing the US oil & gas industry...

[booksnmore4you]

Norway used their nationalized oil industry to invest mightily in its people. In fact, they have billions sitting in escrow from the next generation.

Not the US, no way. Nationalized industries are taboo. We'd rather have a few become fabulously wealthy and live it up beyond wild dreams rather than invest in our people.

It's pathetic and a tragedy.

[Sneaky]

How much does someone in Norway pay for gasoline? I'd love to compare that to how much someone here in the United States pays for gasoline.

[Bettysdad]

About 90% of the world's oil is produced by state-owned companies.

[unionave]

I wish all Americans saw these things with your wisdom . We seem to always fall for the old smoke and mirrors tricks . We are presently fighting and dying in Iraq to take their resources and in Afgan to pipe line another country's resources through Afgan . I think we should consider all of these activities as unAmerican and anyone involved in the instigation of these activities as unpatriotic and treasonous considering the damage it has caused to the American public . Where is McCarthy when we need him .

[outnow]

Reward the bubble's enablers! Bail them out!

[ShamusNYC]

By any reasonable analysis, we got shafted. The bondholders should rightfully hold some of the bag on this and the shareholders should get royally spanked.

However, these institutions are so huge that their collapse could easily have a domino effect. So, there was a gun put to our collective heads. The same situation with Bear Stearns, but worse.

So, what's the answer? Perhaps a scale back in the scope of the businesses. The US gov't will offer implicit guarantees on a smaller portion of bonds. How does the rest of the business get done? Well, they can still be packaged and underwritten and, if it's Fannie or Freddie they can explicitly pay us for the implicit guarantee (where do you get an insurance policy for free?) or the bonds can be collected in the private sector. The bar will be higher leading to (hopefully) decreased leveraqe in the situation, less supply and either a bit of an increase in borrowing rates or (more likely) increased standards for the underlying mortgages (bye bye liar loans). Not ideal, but clearly rates were too low to begin with and standards were lax.

Other measures could include requiring the originators to hold a portion of the loans. Originators get paid on volume, they don't care and will just shove product. Also, there should be standardized scenario analyses offered to customers and limitations on structures available to buyers of residential properties - neg amort loans have been a disaster.

Lots of work to do!

[ShamusNYC]

The other thing we could do is outsource the underwriting to the banks, make them conform to standardized structures (such as those that exist today) and have the gov't sell insurance for the bonds. The price for the insurance would not be something arbitrary, but done w/ rigorous analysis (like what MBIA should have done). The gov't could effectively control our exposure explicitly. We could also offer some limited liquidity - but if we do, we need to get paid.

[TRYKER]

Our entitled elite class, so fully funded and so secure in their lifetime of greed and plunder...so proud and so well insulated from the cold reality.
Hell yes, nationalize Fannie and Freddie, along with the oil companies, the Federal Reserve Bank. Get a grip on these entities that we are "buying" without owning.
They are ruthless and without conscience, that only leaves US.

[wagadog]

Yah! Why are we bailing them out and not socializing them?

Bizarre.

[markie1111]

everytime i hear the right holler "socialism" as if it was evil and watch them suck up to corporate welfare, i lose faith in america.

[ChristianEcon.com]

You must've started out with a heckuva lot of faith then.

[gmgl]

Here's the quote I was mentioning and going to paste below:

"Roubini thinks the two firms' bondholders should eat this cost, not U.S. taxpayers. That's because bondholders have been compensated by about a 100-basis points spread above Treasuries for buying Fannie and Freddie debt, he says. At the same time, if the government bails out Fannie and Freddie, then bondholders don't experience a credit loss. Instead, they've been directly subsidized by the federal government.

Based on the $5 trillion in liabilities between the two firms, that amounts to a $50 billion annual subsidy today to "Wall Street, the investors, and the well-connected," Roubini says.

If bondholders collectively took a 5% haircut on the value of their Fannie and Freddie loans, this could fund the $200 million to $300 million shortfall in capital at Fannie and Freddie, he says.

However, he admits this plan is unlikely, partly due to the large clout by Wall Street firms who are whining for a bailout. He calls the Treasury plan "socialism for the rich." "

It's from http://www.thestreet.com/story/10426547/3/taxpayers-bear-brunt-of-this-bailout.html

Again, unfortunately we can't just ignore the problem as the last time we let a bunch of people lose their houses it resulted in the great depression, and our best case scenario is more bailouts to avoid that. However, I'd like to see some people besides the common stock holders and common people paying for all this.

[raskolnikov72]

Right on the button, Mr. Borsage; and people do not understand the existential problem represented by this graph of American wealth. The rising tide is only rising in certain "areas of the ocean" ...

http://www.tinyurl.com/68ru9x ...

Wake up people .. what do you think happens when the vast majority of the population has increasingly paltry disposable income, if any at all? It ripples through the economy. They don't buy things. They can't invest. They can't save. It impacts companies. Companies stop hiring people or spending on goods and services. If you're an entrepreneur who provide goods and services to these companies you're hosed ...

wake up .. a rising tide ....

[gmgl]

Turns out we could get some of those bond holders of privilege to pay for some of this mess if the bailout were structured differently. Here's a great quote:

No, unfortunately we probably can't ignore the problem unless we want another great depression on our hands. In general the fed needs to bite it and cut rates to around 0 for a bit and give the banks a chance to raise capital on the yield curve for a year as an answer to the bigger problem of more banks failing but it's afraid of looking soft on inflation or there is needs to be an agreement tthat way or ignore regulations (just when ironically it wants to enforce some finally but now it's too late)

[JFWilliam]

Right on the F* nose Sir Borosage !

Galbraith was also...

Now where is everybody ?

GOING UP !
Top 1% share of total income
Income gap between rich and poor
Foreign debt as a percent of GDP
Age at which one can receive Social Security
Hunger
Consumer credit debt
Housing foreclosures
Severe poverty rate

GOING DOWN !
Real income
Real manufacturing wages
Percent of single women and mothers in the workforce
The bottom 40%'s share of national wealth
Older families with pensions.
Workers covered by defined benefit pensions.
The savings rate
US manufacturing jobs

ALSO...

Protests restricted/ignored
Labels dissenters terrorists/traitors
False-flags
Elections suspect
Leaders benefit from wars/disasters
Uses propaganda/lies & partisan mass-media
Claims War is needed for everchanging false reasons
Runs secret/extrajudicial/torture camps
Curtails/suspends civil rights/liberties
Runs wiretap/intercept/surveillance net
Stealthily expands int'nl influence/power
Judiciary/Opposition ineffective/ignored
Legislates to defy Constitution

BTW, have you noticed how the good guys always win except on the news ?

[JFWilliam]

“The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.” - John Kenneth Galbraith

Washington has become Versailles. We are ruled, entertained and informed by courtiers. The popular media are courtiers. The Democrats, like the Republicans, are courtiers. Our pundits and experts are courtiers. We are captivated by the hollow stagecraft of political theater as we are ruthlessly stripped of power. It is smoke and mirrors, tricks and con games. We are being had. - Chris Hedges

“They call it the 'American Dream' because you have to be asleep to believe it.” - George Carlin

[dzent1]

Also going down - the U.S.S Bush administration and all Republican seamen on deck, never to rise again above the murky, toxic waters of its inglorious legacy.

Damn, that's almost poetic...

[rowzeer]

They're turning this once great nation into a third world country....

[lisakaz2]

Sounds like Robin Hood Reversed: rob from the poor to feed the rich aka business as usual for Rethugs.

[PublicAdvocate]

Privatize the profit and socialise the risk is the philosophy of corporate welfare and corporate socialism. That's not the philosophy of Capitalism where there is a balance between risk and reward.
This is all reward and corporate bail outs for mismanagement, stupidity and naked greed.

Future taxpayers not yet of voting age or even born have a gift coming to them that they scarcely comprehend. They will be the owners and heirs of this odious debt while the executives have long since retired with 10's of millions in salaries, bonuses and golden parachutes and admitted to no wrong doing or malfeasance.

Ralph Nader has a plan to END corporate welfare and the feeding from the public trough. He recently sent a letter to Rush Limbaugh the "Kingpin of corporate welfare as a radio broadcaster" who receives a $38 million dollar salary without paying a penny of rent to the owners of the airwaves. Who are these owners? That's you and I and the public citizens who are the rightful property owners and are owed compensation and backpay. Should Rush continue to get a free ride or pay his fair share for his blistering rebuke of liberals? Ralph Nader gives his email out on one of his UTube videos. Time to email Rush and ask him to pay his fair share-if he is a true Conservative.

[petecook5]

Ralph nader???? THAT'S YOUR ANSWER? SERIOUSLY?

[RRonin]

Hey, I bet Flush is quivering in his boots at the prospect of Nader and his Raiders having a snit over his malfeasance!

[ChristianEcon.com]

"That's not the philosophy of Capitalism where there is a balance between risk and reward."

I'm not sure how you would describe the risk of, say, a multimillionaire in the market compared with that of someone on a worker's salary caring for their family as "balanced."

[ChristianEcon.com]

"Time to email Rush."

Email Rush? You're trying to appeal to Rush Limbaugh's sense of reason?