On Moral Hazard and Housing (h/t Bloomberg.com)

Even though I’m on the road, this was nearly enough for me to blow my stack. Forget about the TARP sideshow. This is moral hazard illustrated:

Rather than beginning to extricate itself from Fannie Mae and Freddie Mac as it is with other bailed-out businesses, the Treasury Department on Christmas Eve removed a $200 billion limit on aid to each of the companies and promised to cover their losses through 2012. Earlier, the Federal Reserve extended a mortgage-bond purchase program by three months, through March.

via Mortgage Anxieties Mean Limbo for Fannie and Freddie (Update2) – Bloomberg.com.

I don’t care what others have said about the government put option that these two companies have. It never should have come to this in the first place. A strong, independent regulator may have helped here.

We can all blame politicians, regulators, and lobbyists of all stripes for this, but the truth is we’re not doing anything to correct the situation. How is giving these two behemoths a checkbook with blank checks supposed to solve anything?

The truth is, it won’t. This is AIG all over again. Put a huge taxpayer-funded tarp over it to cover it up, because the markets might implode “if they knew what we knew.”

We see where that got us. Bear Stearns goes to JPMorganChase for a song and a backstop, Lehman implodes because the reaction to the Bear Stearns arrangement could only be described as a shit sandwich, just to backstop all of AIG and sweep it under the rug.

It’s obvious Treasury and the government en masse are still clueless…

Advertisements

Leave a comment

Filed under finance, government, Markets, You're kidding

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s