Thursday, March 19, 2009

More Obfuscatory Outrage

Fannie Is Handing Out Its Own Sizable Retention Payouts. It is unclear whether (a) anyone has noticed and (b) whether this will gin up the same level of faux-rage from the political class that abetted this outcome through credit bubbles, market intervention, and bailouts.

Fannie and the other GSE's have been the Democrat's special preserve: a place where they can pursue their goals for gov't induced "affordable housing," make some quick millions, and do it all while keeping a major gov't liability off the books. It is the perfect symbol for our "sugar and spice" approach to governance.

The story you hear about the GSE's is that they were public companies that got in over their heads with subprime loans and needed a $200 billion bailout. And that is true, if that is all you know.

 But, what is almost never spoken out loud is this: the GSE's were once a part of the gov't (born of the New Deal) and spun off to shareholders in the Sixties because their balance sheets were making the federal budget look awful. But even as "private" companies, they benefitted from an almost-unspoken "implied" guarantee that the feds would guarantee the GSE's liabilities. But, if there was an "implied" guarantee, then it was really an explicit one. It officially became explicit late last summer, pursuant to their own lil' Bailout. You might have missed this if you weren't paying attention. And yet the fiction still exists. We are told the GSE's are private companies whose executives must be compensated lavishly, lest they jump ship. I think we should make it official and call them what they really are - civil servants - and pay them as such.

The story of the GSE's is one of the great head fakes in recent history. The shadow bailout enabled by AIG is in the same league, but the goal is the same: to ensure the survival of a broken system for the benefit of those who made the most $$ off of it. The bonuses are chump change (emphasis on the "chump") compared to the high billions in bailout $$ that are explained to voters in a manner that seems to assume they all have PhD's in economics. The bonuses have the benefit of being easy to understand and symbolic of the rip-off that these bailouts represent. 

But, in focusing on the bonuses, we should never lose sight of the true scandal: the bailouts that were passed in an atmosphere of chaotic panic were more harmful than doing nothing. And that the absence of trasnparency in these trasactions - despite the massive tax payer liability they imposed - was a mockery of our representative form of gov't.

These bonuses also have the look of the Four Deadly P's: the Persistence of Peacetime Personnel Processes. Such bonuses make sense if your company is experiencing a downdraft and you want to keep your best people from jumping into the waiting arms of a hedge fund. But that is not the world we are living in.

In the spring of 2001, when I was working as a member of the editorial board at The Wall Street Journal, Franklin Raines, then CEO of Fannie Mae, dropped by for lunch...Raines told us about his great work to provide affordable housing. We listened, and then Susan and I objected that his scheme put taxpayers on the hook. Raines said it would not cost the taxpayers a dime. We argued that there was an implied taxpayer guarantee. Credit here goes to Susan, who took the lead in this discussion, and followed up with stellar reporting (more on that here) on the horrors lurking inside Fannie.

What sticks with me in particular, though, is the final scene of that long-ago lunch. The conversation got heated enough so that we continued arguing after Raines rose from the table to go. He was touting his achievements at Fannie Mae; we were fretting that his promises were too good to be true. Susan and I walked out of the conference room together, and watched Raines walk down the hall to the closet where he’d left his coat. We watched him fish out of that closet one of the most gorgeously well-tailored raincoats I’d ever seen. He put on that ultimate designer-job of a raincoat and walked out the door, and as he went, I asked Susan, “How much do you think that raincoat cost.” The gist of her reply (I do not remember her exact words) was: Plenty, and we’re going to pay for it.

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