Dean, an argument for supporting shareholders can been seen here, referred to as the "Larry Summers school": banks need more capital to be returned to health, and equity investors will be reluctant to provide that capital if they see that shareholders are punished too severely. I don't think I endorse this argument -- it ought to be possible to somehow separate past investors from future investors, perhaps by giving future investors the largest share of the equity, but the argument exists.

NPR's "Power Breakfast" did an unbelievably awful segment in which it commented that some conservatives oppose bailing out shareholders as "socialism." What? Huh? Is this Planet Earth? Socialism is about giving tax dollars to shareholders? In which volume of Das Kapital does this appear? Conservatives may oppose the bailout for whatever reason, but handing tax dollars to shareholders does not correspond to any definition of socialism I've ever seen.)

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

Paulson was clear on this, see:

http://www.economicpolicyjournal.com/2008/07/miss-reading-of-treasury-plan-plan-wont.html

Since, socialism refers to various economic and political concepts of government whereby ownership and administration of property and the means of production are controlled by the state, the Treasury buying shares (ownership) and influencing the operations (adminstration)of Frannie and Freddie, sounds to me like NPR nailed the socialism call.

Re: Socialism.
It's just another example of the socialised of risk for private profit. Probably in Das Kapital, the New Testament;>

Presumably the government strategy is to support the stock price so that private capital can restore the balance sheets of Fannie and Freddie. Of course this approach is hardly infallible, and it could result in just throwing taxpayer money away if the stock prices continue to fall.

But really, it is socialism however you look at it - at the moment the policy seems to be corporate socialism (of the sort detailed in Dean's books and other works). Granted that Fannie and Freddie must be saved, there is a choice - the government could buy them out or otherwise take over, returning them to the status of a federal agency, or the government can pump money into the private economy as they seem to be doing now, resulting in a bailout of the people who caused the problem.

Chris Dodd's statements on NPR about the shareholder bailout were really quite lame. If the shareholder bailout was not his idea, and not even a good idea, how could the shareholder bailout make it through the Senate committee with jurisdiction over the bill? Especially given that Dodd chairs the committee.

The Democrats in Congress remain AWOL.

While my personal preference is that the stockholders be wiped out and the GSEs become government agencies (lose the quasi status) under the circumstances, I'm not bothered by a 25 billion dollar bailout. Considering the magnitude of the problem, that's chump change -- financial institution are projected to be one trillion or more.

It's been said many times, but it bears repeating -- this is the worst housing crisis since the 1930s, and the worst financial crisis since 1929 -- the worst financial crisis since 1929.

In that light, giving 25 billion to the GSEs is like throwing money in the ocean, hoping it will plug the hole in the Titanic. The goal is to keep the economic ship from sinking; how it is done is of secondary importance, and inappropriate lessons about moral hazards are irrelevant if the financial system collapses.

Yeah, in American politics "socialism" has come to mean pretty much anything the Right doesn't like.

@skeptonomist: I think the word you're looking for is something like "corporatism." Socialism is about capital being owned either by the workers using it or society at large. Strictly speaking, government doesn't even necessarily come in to it - some of the important socialist thinkers, such as Proudhon and Kropotkin, were anarchists.

To save the debt holders and flush the equity, Congress could authorize the Treasury to supply debtor-in-possession financing in the event of a bankruptcy. Such legislation could impose other conditions such as the departure of top management or the waiver of the preferential right to propose a reorganization plan. This option would make explicit the implicit federal guarantee of the debt.

Or Congress could authorize the Treasury to buy stock but set a low per-share price ceiling so that nothing will happen unless the GSE gets close to the edge of the cliff and then current shareholders would be vastly diluted (but not totally wiped out). The new shareholder (Treasury) should demand as quid pro quo the right to replace top management, control the board, etc., etc.--in other words behave like a tough private investor doing a bailout/workout.

In regards socialism: why not nationalize the companies and turn them into a puvlic corporation, building and financing huge amounts of houses for ordinary people. That could prove to be a "yardstick" for private enterprise.

We scoff at foreign countries in Europe and Asia for not writing down their over-valued companies. Economists and expert such as Greenspan have lectured us about the importance of following market discipline.

However, when market discipline drives down our own losses in Bear Stearn, Fannie, Freddie, etc, then it's a different story and requires a more gentle approach.

When conglomerate suffers, taxpayers need to bail them out (Chrysler).

When average people needing decent support (child health care), you can deal with the problem yourself.

"While my personal preference is that the stockholders be wiped out and the GSEs become government agencies (lose the quasi status) under the circumstances, I'm not bothered by a 25 billion dollar bailout"

You have no idea how they got that 25B figure do you?

Neither do the people who came up with that figure.

http://www.nakedcapitalism.com/2008/07/omb-comes-close-to-saying-it-made-up.html

Said Sen. Dodd: "there's a great risk that the people holding the debt are going to dump it. And it isn't just debt being held in this country; it's being held globally ... and if they decided to dump that debt tomorrow, you could have a collapse globally."

The NPR reporter should have but did not ask Dodd to explain how a dumping of bad debt would pull down the world economy.

Maybe two commenters above and Dean seem to understand what socialism actually is.

Bailing out investors with tax money is not socialism.

"banks need more capital to be returned to health"

Fannie and Freddie are not "banks".

"If the government allowed these bonds to default, not honoring the implicit guarantee, then investors would recognize that these bonds are far more risky than they had believed."

They WERE, riskier than people believed....

As evidenced by the needed bailout....

Let the equity holders AND debt holders reap the rewards of their own stupidity....

Yes mortgage interest rates will rise..... and they should
Loaning money for 30 years is a risky endeavor..

As some have now discovered..

If the mortgage market is profitable then participants will re-enter over time.. house prices will fall to some level of equilibrium where people's incomes match the price of the goods...

Bailing out a credit market gone haywire... Is a guarentee
that malinvestment will continue

"If the government allowed these bonds to default, not honoring the implicit guarantee, then investors would recognize that these bonds are far more risky than they had believed. This would raise mortgage interest rates for many years to come. "

Actually, it's the reverse that's true; unusually, you've been taken in by Wall Street rhetoric. Not letting the bonds default will cause interest rates to rise, since the real risk remains (either with a default in the bonds, or a guarantee by a government so awash in debt that Treasury interest rates rise). Letting the bonds default means that any new bonds will be far less risky.

The best time to lend money to an entity is *after* it defaults. Investors know this full well, but since they don't want to see the money they have lent go up in smoke, they always pretend the contrary.

The government/congress has to talk up fnm/fre stock if there is going to be any chance of issuing new (dilutive stock), which is extremely hard to do with singe digit stocks. This will, however not work, as the mkt knows they are already insolvent on a marked to mkt basis, and need massive new equity. Who would buy ahead of massive equity issuance? As soon as the Fed looks over their books and realize this...there will no choice but gov bailing them out....that's the reason the neede authority in advance!

follow the money is always the best answer for why things are happening. these donkey solutions are about as valuable as Russian predictions for 250 oil. if that wasn't the best sell signal of all time

The cost of socialism is much less than what was paid in the Great Depression. Avoidance or mitigation are worthy causes. As contrarians we want to buy Distressed Debt and want to talk to banks who feel that the cost of carry is getting probhibitive. wzweifler 973 763 5534 - wzweifler@zweifler.com

US Gov't buying Fannie and Freddie shares is a quiet way to prop these institutions up so without the song and dance and opprobrium of a full nationalisation (aka Northern Rock). Perhaps they think acquiring 20 or 30% of them leaving the rest as free float leaves FNM and FRE as "visibly" in the private sector.
This strategy is in the same vein as the TAF and PDLF and other market propping actions. Intervene in a major way with minimum public visibility.
In the long run this won't work. In the short run it might get them past Nov 4th, 2008, which is the primary goal now.

I don't see a clear case for guaranteeing Fannie's and Freddie's PAST bonds. Bondholders should not be made whole, just because they believed in some implicit guarantee that was explicitely excluded in the bond description. Bondholders got higher interest on the bonds than on treasuries, so now they should also bear the higher risk. Future bonds, however, need an EXPLICIT federal guarantee to avoid a collapse of the mortgage market. The difference between Past and Future will be many billion dollars that could be spent more fruitfully on the American people.

The more interesting conversation here seems to be the definition of "socialism".

In school, I always thought it just meant that the government controlled the means of production. But that was just the hard outer shell. The *purpose* of socialism was to give the benefits of labor to workers (rather than to management and investors).

In that respect, this is "reverse-socialism". The bailout is designed to give the benfits to investors and management instead of workers.

This is the perfect Republican Robin Hood, who robs from the poor and gives to the rich. The only thing that will make it better is when the managers of FNMA pay themselves huge bonus payments for managing the company through such troubled waters.

Stay tuned.

It's the reverse that's true; unusually, you've been taken in by Wall Street rhetoric. Not letting the bonds default will cause interest rates to rise, since the real risk remains either with a default in the bonds, or a guarantee by a government so awash in debt that Treasury interest rates rise.

supply vast kinds of styles handmade jewelry

http://www.fantastic-replica.net