The Binary Circumstance

I thought they said Fannie Mae and Freddie Mac were not in trouble.

Now they say it could cost taxpayers as much as $25 billion to bail them out.

WASHINGTON (AP) — A federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion, Congress’ top budget analyst said Tuesday.

But Peter R. Orszag, director of the Congressional Budget Office, predicted in a letter to lawmakers that there’s a better than 50 percent chance the government will not have to step in to prop up the companies by lending them money or buying stock.

Congress is expected to vote this week on a housing measure that would give the Treasury Department authority to throw Fannie and Freddie a temporary lifeline.

As I pointed out in my last post, Fannie Mae and Freddie Mac spent a fortune buying influence. Now the government is planning to bail them out.

July 21 (Bloomberg) — Treasury Secretary Henry Paulson suggested that U.S. lawmakers must pass his rescue plan for Fannie Mae and Freddie Mac to avert a slide in confidence in U.S. financial markets.

International “investors need to know that we in the United States understand how important these institutions are to the capital markets,” Paulson said yesterday on CNN’s “Late Edition” program. He separately declined to reject Democrats’ calls for a second fiscal-stimulus package, as the effects of the first initiative wane.

Paulson’s remarks, on the eve of a two-day visit to Wall Street, indicate he’s raising the stakes for lawmakers debating his proposed rescue. He reiterated his optimism that Congress will enact the plan, including potentially unlimited government investment in the firms that account for almost half the $12 trillion U.S. home-loan market.

Fannie Mae and Freddie Mac helped create the currently mortgage crisis and all the related financial problems by using government to their advantage.

If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.

But the political tentacles of the mortgage giants extend far beyond their checkbooks.

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

Fannie and Freddie’s aggressive political maneuvering has helped stave off increased regulation and preserve special benefits such as exemption from state and local income taxes and the ability to borrow at low rates.

When their stock prices took a dive last week, their government allies extended another helping hand with a plan for the Treasury Department, the Federal Reserve and, possibly, Congress to shore up the companies.

This is exactly the marriage of government and business that Ayn Rand warned against.

In an effort to bolster confidence in the financial markets and prop up the housing market, the federal government is moving to bolster Fannie Mae and Freddie Mac, the two Government Sponsored Entities that buy up about 50% of mortgage loans.

Treasure Secretary Henry Paulson made the announcement on Sunday in an effort to halt the ongoing slide in financial stocks. It didn’t work. Bank stocks and other financial stocks took a big hit in Monday’s trading.

There have been many headlines in recent weeks outlining various bail-outs. Usually they give the impression that the government is doing the bailing-out. I think the media needs to be more accurate in their reporting and clearly state that when the “government” steps in to bail-out a financial institution, it means that the taxpayers are going to pay the bills. It’s really the taxpayers that are being required to bail-out these fat cats.

On Friday, IndyMac, a bank I’d never heard of, closed its doors after depositors set off a run on the bank. Turns out it’s the third largest bank failure in history. Until it can be liquidated, the bank has essentially been nationalized and is being run the the FDIC.

Many depositors who had more than $100,000 in individual accounts will lose a portion of their money because $100,000 is the limit on FDIC insurance. The FDIC has said they will pay 50% of amounts over $100,000.

The irony is that the more the government moves to “bolster confidence” with more bailouts, investors are losing confidence in the system and the continuing decline in the stock market reflects this lack of confidence.