How you spent $200 billion

Congratulations! In the past few weeks you have bought a few multi-billion dollar multi-national corporations. Yes, I’m talking to you, Mr. or Ms. College Student who’s currently debating whether to eat ramen noodle or ravioli for dinner tonight. Ravioli tastes better, but it costs 55 cents, whereas ramen only costs 30 cents. Is the better taste really worth the extra quarter?

While you debate this, your fate is being sealed as part owner of conglomerates Fannie Mae, Freddie Mac and AIG. You’re probably scratching your head wondering, how the heck did I buy these….and not even remember? Well, you didn’t buy them per se. Your government bought them for you. But don’t be thinking it’s a gift, it’s really a curse.

On Sept. 7, the federal government agreed to a $200 billion bailout of Fannie Mae and Freddie Mac, the largest in U.S. history. You’re probably thinking to yourself, “I don’t have $200 billion”, and neither does the government, which is over $9.6 trillion in the hole according to the U.S. Treasury Department. Add that to another $85 billion that the U.S. plans to spend to bail out AIG. The total cost to help get three companies back on their feet is well over a quarter of a trillion dollars.

Before we decide whether the government is right or wrong, we should examine how it came to this. Fannie Mae and Freddie Mac are the two largest mortgage backing companies in America.

You probably remember hearing about a sub-prime mortgage crisis that started in late 2007 and led to a record number of home foreclosures. It turns out that the collapse of sub-prime mortgages also caused the collapse of Fannie and Freddie.

Who is responsible for the sub-prime mortgage crisis? Bill Clinton. I’m not trying to be partisan here. According to the White House’s own press releases in 1995, Clinton enacted a program called Community Reinvestment Act. The premise was simple, many minorities and low-income families in America could not buy a house because their credit was so bad the banks wouldn’t give them a mortgage. Clinton wanted to do a good thing, so he created sub-prime mortgages for people who have sub-prime credit. And then he mandated that banks offer these mortgages.

The Treasury Department states that sub-prime mortgages increased 39 percent over the coming years, while traditional loans increased just 17 percent. President Bush in later years would boast the strength of the economy by saying in many speeches that home ownership was higher than it has ever been. Who would have had the foresight to know that that would come at such a high cost?

Actually, John McCain.

In 2006 McCain cosponsored a bill named the Federal Housing Enterprise Regulatory Reform Act, which would regulate Fannie Mae because they “deliberately and intentionally manipulated financial reports to hit earnings targets.” McCain continues to discuss, in his May 25, 2006 speech on the Senate floor, the mismanagement perpetrated by former Fannie CEO Franklin Raines, who is currently a Barack Obama advisor. Senator McCain concluded, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” It’s almost eerie how accurate McCain was in his speech from nearly two a half years ago.

McCain’s bill ended up stuck in the Committee on Banking, Housing and Urban Affair, which Democrat Chris Dodd is chairman. Dodd, who has received more campaign contributions from Fannie Mae than any other Congressman or Senator, according to a Sept. 18 CNN report, opposed McCain’s bill. Which politician has received the second most funding from Fannie Mae? According to the same CNN report, it is Obama who accepted more than $120,000 in his short Senate career. Obama has been in office four years and has taken roughly $30,000 per year from Fannie Mae. This is compared to McCain who has been a Senator for about 20 years and has taken less than $21,000 from Fannie Mae.

It’s easy to point fingers at the politicians in Washington and not looking out for your interests. But, unfortunately it doesn’t help us now. As for the current crisis, I’m not sure whether or not federalizing Fannie, Freddie and AIG is the right move. On principle, I oppose the measure. It is nothing short of disgraceful for the federal government to be sending our children and grandchildren hundreds of billions of dollars further in debt. A high cost for a problem created by a former president and executives like Raines.

But if the government doesn’t bail out these companies and federalize them, it’s highly unlikely they’ll ever recover and the market might spiral even farther out of control. The idealistic part of me is saying no bail out, but the realistic part of me is saying that the bail out is necessary for there to be any hope of the market recovering in the near future.

Ultimately, the decision is not mine or yours. This decision has already been made for us by our elected representatives who supported the bailouts and federalization. Let’s hope they made the right one.

Posted by Colonnade Archives on Sep 26 2008. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry