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

[LOL123]

Perfect, couldn't have said better myself. Now I want to see a cartoon (which they sell and profit from)on the New Yorker where two characters with signs hung on their necks Fannie and Freddie with a tin cup in hand and Bush and Bushies standing under the redlight street sign and money falling out of their pockets...­.LOL 123 (not really funny though).

[FloaterBall]

As through this world you travel
You meet some funny men
Some rob you with a six-gun
And some with a fountain pen

--- "Pretty Boy Floyd" ( as sung by The Byrds, Bob Dylan and others)

[dobberdoss]

Looks like America imbraces `socialism` after all, for the RICH that is!.
Honestly, youv`e only got yourselves to blame here, the majority of you have `VOTED` for this kind of corruption for the last 30 years, and most of you are guilty because the most important thing for you people in life is consumer goods & the `super bowl` sunday.
Priorities in life are what matter, if integritry, honesty, justice & fairness are not at the top of your priority list then say goodbye to your `hard fought for` democracy America.

[Kassandra]

Well, I don't know what they're going to get from the taxpayers if we're all out on the street! How can we pay the gov anything when , along with taking our jobs and importing labor for the ones we have left, we are homeless, sick and starving?

The American goose has stopped laying the golden eggs.

[Danny]

Mr. Borosage, Gosh you're good.
How can we overcome the fog that keeps the U.S. residents to read/hear/view the truth of how things TRULY are? Definitely a change in administration, but one that allows at least fair treatment of liberal-de­mocratic/r­epublican/­conservati­ve/green-l­ibertarian views, via reform at the FCC, for a start.
We are now in a swamp of corruption, stealing of treasury funds and god-knows-­what-else. I used to think we were a nation of laws. Where is the America I admired?

[MuchMadness]

Homebuilders are as much to blame as the mortgage companies and the government. The homebuilders refused to build affordable housing. They tried to snooker married couples into buying houses that were so expensive that both spouses' incomes would be needed to make the payments. If both spouses are in the labor market, who will look after the kids?

[Danny]

Yes. Sigh.

[Interested01]

This is right on target. Welfare for the rich at its worst. But will CNN cover it that way?

I don't think so. They'll ignore the obvious and tell Wolf Blitzer to keep blustering "Potential war with Iran!" That'll keep the military-i­ndustrial-­financial-­media complex humming along till doomsday (which might be a little closer than the moguls believe).

[pollhereford]

I guess that's how they get to be CEOs- convincing everyone to do things their way or else. It always amuses me that the business suit is the dress convention for people who wish to appear trustworthy.

Ah the free market- gotta love it until it does something you don't like

[BARRISTER]

America is the most corrupt place on Earth!!

[ubetchaiam]

Not wall street socialism but outright theft. Robin Hood in reverse.

[jsarets]

[squinting] You see, [muffled snicker] it's not a bail-out, [inappropriate smirk] because although the public will assume their debt, [momentary confusion] they'll remain private corporations. It's a sell-out! [giddy pride] [poked in back] I mean, it's definitely not a bail-out. [satisfied nod] Now watch this drive.

[RPLinNYC]

pitch perfect.

[jeskiley]

Any chance you're running for the Secretary of the Treasury?