by hilzoy
The NYT:
"Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
In a separate announcement, the Federal Reserve said that it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”
An official said the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion."
Good. I'm glad the government stepped in. That said, I agree with Dean Baker that it should have stepped in with conditions:
"Apparently the government is going to hand Fannie and Freddie bucket loads of taxpayer dollars, no questions asked. The NYT reports that they will be given access to $300 billion of government loans at below market interest.
That's nice. Shareholders who would have lost all their money if matters were left to the market, may instead walk away with billions of dollars. Similarly, the top executives of these companies, who earn salaries in the millions and tens of millions of dollars, will keep collecting their paychecks.
We should all be thankful that the government intervened. After all really rich people and investment fund managers can't be expected to be able to handle their investments on their own. They need the helping hand of the government when they really screw up.
Similarly, we don't want the fate of highly paid executives to be left to market. If this happened, some might lose their vacation homes and private jets.
Some people say that we had to hand tens of billions of dollars to the country's richest people to prevent a financial collapse. This is simply not true.
We had to keep Fannie and Freddie in business, but we could have done this by putting conditions on the bailout. The government uses conditions all the time when it offers help to low and moderate income people. Unemployment insurance, TANF, food stamps, and even student loans come with all sorts of conditions.
It is only when it comes to giving money to extremely rich people that we find it impossible to impose conditions. Again, we could have told Fannie and Freddie that no executives will get more than $2 million a year in total compensation. We could have told their shareholders that they are out of luck, because that is what is supposed to happen when you invest in a bankrupt company.
Instead, we told the people who work as truck drivers, school teachers, and fire fighters that they will have to pay more in taxes to help some of the richest people in the country escape the consequences of their own stupidity. While kicking the poor is always fun for politicians, neither the Bush administration nor Congress are prepared to tell the very rich that they are on their own."
There are two reasons to take steps that both prevent Fannie and Freddie from going under and make shareholders and executives take serious hits. The first is that this is the only way to avoid moral hazard: people's tendency to take unnecessary and stupid risks when they are not going to wind up paying for them. If shareholders actually lose their money, and executives have to be content with -- sniff! -- two million a year, that might just do the trick. (Note: I'd be fine restricting compensation limits to people who are presently on board, not new hires. It's the people who got us into this who need to pay some sort of price, so that the next time around, people might think twice. I'm also open to the idea that Baker's particular suggestions are wrong. It's the principle of holding investors and executives accountable that I care about, not any one particular idea about how best to do this.)
The second is basic fairness. One of the things that really bothered me about the FISA bill was the fact that so many people who don't think twice about the fate of ordinary people under our criminal justice system were suddenly horrified at the thought that those poor telecoms, with their in-house lawyers, might be responsible for knowing what the law is, and, if in doubt, erring on the side of caution. A kid who acts as a lookout for a robbery that goes bad can be charged as an adult with felony murder, whether or not he had any idea that the law makes this possible. If he participated because he didn't want to say no to the bigger guys with guns, that might or might not get him off the hook, depending on whether his court-appointed lawyer had too many other cases to notice, whether the judge was paying attention, whether the jury didn't believe him because they thought he wore the wrong kinds of clothes (aka 'looked like a gangbanger'), and so forth. In this way, a kid who has no previous record of violence, who committed no act of violence on this particular occasion, and whose offense was having failed, on one occasion, to stand up to people who actually were violent, and who lived in his neighborhood and knew his name, can be sentenced to decades in prison.
Yet, oddly, most of the people who were sticking up for the telecoms do not have a history of caring about this sort of thing. Stranger still, the people who thought it was fine for Scooter Libby's sentence to be commuted rarely get exercised about kids like this. In fact, many of them regularly go on about how important it is to get tough on crime. And yet there they were, talking as though the fact that Scooter Libby thought he was acting in the nation's interests, and the telecoms were scared to stand up to the people who give them contracts, was enough to let them off the hook.
News Flash: A lot of people who break the law think that they have some reason for doing so. Sometimes those reasons are pretty comprehensible: a kid who deals crack because he wants to buy his kid sister some clothes that don't have holes in them, for instance, or because someone in his family has to buy groceries. But we normally think that this should not get you off the hook. Unless, of course, you happen to be a major corporation or a well-connected Washington insider. Then, of course, everything is different.
Same here: when families are losing their homes -- families they don't know, at any rate -- some people are happy to say: well, that's the price they pay for financial irresponsibility. Admittedly, some of the people who will lose everything might have been eighty year olds with mortgages that were almost paid off before that nice young man convinced them to sign those papers, but hey: people make choices, and they should have to live with them. Unless, of course, they happen to be well-paid executives. Because, of course, that's different.
I can see treating ordinary people more leniently than the powerful and well-connected. Ignorance of the law, as they say, is no excuse, but if it is to be one, surely it should be an excuse for ordinary people, not for large corporations with their own legal staffs. People need to actually lose when they make bad choices -- surely, if one were to make exceptions to this rule, one would want to start with the people who can least afford the loss, and were least equipped to understand why their choices were bad. Which is to say: you'd want to let people who signed on to mortgages that even their brokers didn't understand escape the consequences of their choices before you let off people who are paid large sums of money for their alleged expertise, and who have the wealth and connections to make sure they understand exactly what they're doing.
But there's no sense at all in doing it the other way round: insisting on full accountability when you're dealing with someone who trusted his real estate broker's assurances about what he was signing, and who really didn't have anyone else to ask, but not when you're dealing with someone who took millions in compensation from Fannie Mae or Freddie Mac when things were going well, and who had the resources and the knowledge to know that getting too deeply into risky mortgages was a stupid thing to do.
Honestly, the only reason I can think of why lawmakers and people who set policy would advocate these sorts of double standards is because they don't want accountability for people like them. Which is no reason at all.