A New Twist on the Ownership Society

Sun, 07 Sep 2008 15:59:55 +0000

As of this morning, we -- the taxpayers -- apparently own Fannie Mae and Freddie Mac. Here's the press release from the Treasury, including remarks by Secretary Paulson and FHFA Director Lockhart. I'm still catching up on the news, but this statement by Paulson caught my eye:

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

I would go even further. The government should never make an ad hoc loan to any financial entity that has been guilty of malfeasance. The equity holders of the entity should have their claims wiped out. The managers who had been acting on behalf of those entities should be removed (and prosecuted as necessary). If liquidity is needed, the government should make loans to other entities whose balance sheets may be compromised by the bad actor's prior actions or to a new financial sponsor for the remains of the bad actor's balance sheet. And new procedures must then be put in place to protect taxpayers from similar crises in the future.

From what I've seen this year, first with Bear Stearns and now with the GSEs, the Bernanke Fed and Paulson Treasury seem to be following these prescriptions pretty well.