Freddie Mac & Fannie Mae were the catalyst for our current financial crisis. By buying up risky sub-prime mortgages, Freddie & Fannie encouraged banks to make risky loans to folks who otherwise wouldn’t have received mortgages.
Freddie & Fannie did this because they had the backing of the U.S. Treasury. The executives at Freddie/Fannie knew that if they made a bad move and lost billions in the market, the government would bail them out.
This notion was laughed at a few years ago by Rep. Carolyn Maloney (D-N.Y) when Fred L. Smith, the president and founder of CEI, suggested that Freddie & Fannie might use more than their allotted line of credit at the Treasury. Maloney scolded Smith and said of what was then a $2 billion credit line:
It is really symbolic, it is obsolete, it has never been used,
Mr. Smith responded that it was still important to repeal any such promise of credit from the Treasury, stating:
As long as the pipeline is there, it is like it is very expandable. It is only $2 billion today. It could be $200 billion tomorrow.
Fred was wrong, but only because he underestimated. Freddie & Fannie took more than $300 billion of our tax dollars for their foolish decisions.
Now it seems that every bank in the country is backed up by the Treasury. Look no further than the Citigroup and its bailout. Citi has already received $7 billion in taxpayer dollars and will now receive a possible $300 billion more. This is sounding a lot like a sequel to Freddie Mac and Fannie Mae, and yet this is a private business, not a “government sponsored entity” like Freddie/Fannie.
CNNMoney gives us a Dow Jones story today on the subject:
Citigroup executives worked with U.S. government officials over the weekend to identify $306 billion in troubled assets – or about 15% of the bank’s total. In exchange for $7 billion in Citi preferred shares, as well as warrants to purchase additional shares, the government agreed to absorb 90% of any losses above $29 billion that that troubled pool of assets eventually racks up down the road.
This means nothing less than the federal government repeating the disasters that were Freddie Mac & Fannie Mae over and over again. We have started out Citigroup with a credit line of nearly $300 billion. They’ll likely get even more as the federal government has shown it rarely sticks to its spending limits.
Worse yet, all of this does nothing to solve the fundamental problems of the crisis, in fact, every government action to this point has deepened those problems. We have now given handouts to the worse players on Wall Street, flooded the economy with low interest money, and failed to reform any of the government programs that push companies toward making risky loans to folks who just shouldn’t get them.
Turns out, when government does more of the same, we should expect more of the same. We need to end the bailout madness, face the fact that even big companies need to fail, and suffer through the short-term losses.
The alternative: turning a crisis into a disaster through trying to avoid short-term pain. We really can’t afford that option.
For more on the bailouts, visit beyondbailouts.org.