Bailout bonanza not for taxpayers, shareholders
I may be coming to this discussion with a skewed point of view. My mother made a bundle on real estate investments and taught me to do the same. My father lost most of her profit from the last one in the stock market. To be more specific, it was the commodities trading that did him in. He knew trading in copper futures was a risky business, but got caught up in the thrill of it all, the possibility of huge rewards. Kind of like sub prime borrowers.
Mom always said you can’t lose on California real estate, and she never did. Long before Dad’s doomed adventure, she warned me not to invest in stocks. Real estate seemed a better fit for me anyway. I bought only one property at a time, always at low or distressed prices, from what the brokers euphemistically call motivated sellers.
While I was waiting for the appreciation, I lived in them or rented them. For the most part, it worked.
Of course in those days you went to your banker, the guy who actually knew your name and your mother’s, or whoever would co-sign your note. I was told exactly what I could reasonably afford to buy without risk of default. I never lied on a loan application, nor did I obscure inconvenient details. I was afraid to. Ah, those were the days.
Earlier this year, I sold what will most likely be my last real estate investment. I thought of the condo I bought at a reasonable price not so much as an investment as my retirement home-small, efficient and slightly under market value. I never even thought of selling it. But sell it I did, at my daughter’s behest. Too far away from any services, she said, and driving a dangerous canyon road every week was too risky. After six months on the market, which was suffering the beginnings of a slowdown, it sold at a modest profit and we all breathed a sigh of relief.
Now look what’s happening to that market. After circling the drain for several years, it’s in the toilet. Too many mortgage brokers and real estate agents fixated on making the sale, however ill advised, have turned that once golden opportunity into a nightmare.
Cue the federal bailout. Isn’t that what we do when big bloated businesses are in danger of going bust? The white knight, in this case Treasury Secretary Henry Paulson, rides to the rescue of Fannie Mae and Freddie Mac, the government- backed mortgage giants that are tanking on the heels of the sagging real estate market. With a combined $15 trillion in home loans, we’re told we must rescue them because if they completely fail, they might take the rest of the economy with them. A Wall Street Journal editorial called it “protecting the walking dead to keep the world buying their mortgage backed securities.”
Whether homeowners facing foreclosure will be helped by this is not clear. It’s unlikely to help taxpayers, who may be stuck with the tab even though they were smart enough not to buy houses they couldn’t afford or stock in companies that broker sub prime mortgages.
Since Paulson’s announcement Sunday, this has become a talking point with presidential nominees, though neither seems sure what to say about it. McCain said: “We need to keep people in their homes. But we can’t allow this to turn into a bailout of Wall Street speculators.” It may, however, do just that.
Obama said: “Intervention was necessary to prevent a long-term, much bigger crisis.” Okay, but isn’t that what they said about Bear Stearns? And what about Countrywide Financial Corp., the largest provider of loans purchased by Fannie and Freddie? How slippery is this slope?
Going back to the earlier bailouts, why didn’t Congress, or Treasury, act sooner when the price would have been far lower? In July, when Paulson won the power to add taxpayer capital to Fannie and Freddie, he said he had no intention to use that power and wanted to sustain the pair in their “current form.” Experts say this gave the two an incentive to take even greater risks in a falling market.
So how will it work? I’m not sure, but I’ve learned a little so far. Fannie and Freddie are government-sponsored enterprises (GSEs), publicly traded companies regulated by the Federal Housing Finance Agency.
Treasury said it would buy on the open market $5 billion of new preferred stock issued by each of the two companies. The new federal “conservatorship” (not receivership) is a form of nationalization that puts regulators in control. Company boards of directors and CEOs have been fired. All dividend payments, $2 billion a year, have been stopped. If all the warrants are exercised, the feds will own 79.9 percent of both companies. If the companies recover, taxpayers may get some return.
So who loses? Stockholders, from individuals to major banks.
Who is protected? Bondholders, mutual funds, foreign controlled banks and government investment funds that own large amounts of the companies’ debt.
Who is in line for the next bailout? Possibly America’s Big Three automakers currently pressing Congress for $50 billion in loans.
Please don’t say we can’t allow them to fail.