Thursday, November 27, 2014

Truth on paulson takeover of gse's

Too Big to Bail: The “Paulson Put,” Presidential Politics, and the Global Financial Meltdown 

The Shadow Bailout, however, had two additional components. One was dicey indeed: large-scale purchases by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, of home mortgages and mortgage bonds to stem declines in those markets and alleviate pressures on the balance sheets of private firms. 

As private lenders withdrew from the market in 2007, Fannie Mae and Freddie
Mac became virtually the sole sources for mortgage refinancing, as Figure 1 shows. In the face of mounting deterioration in subprime markets, the Bush administration, with the acquiescence of congressional Democrats, pushed to loosen standards. A new phase of the Shadow Bailout began: “Paulson wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks” (Becker et al. 2008). Accordingly, “the White House pitched in. James B. Lockhart, the chief regulator of Fannie Mae and Freddie Mac, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans” (Duhigg 2008).19
Annual reports and the firms’ accounting statements indicate that Freddie Mac’s financial position was substantially weaker than Fannie Mae’s. Their quarterly reports show both buying mortgages and issuing guarantees in the face of the steep market fall, when from a business standpoint they should have pulled back. But Fannie Mae’s response was much more extensive.

By July 2008, private mortgage firms had all but melted away. Fannie Mae and Freddie Mac were virtually the only players left in the U.S. secondary mortgage market. If they went south, no one would step up to take their place. Primary mortgage markets would soon lock up, bringing housing sales across the United States to a screeching halt. Housing prices, already falling like a runaway elevator, would go into a steeper tailspin, pulling national income—and the dollar—down wit

 Bankruptcy of AIG would leave these firms exposed just as financial companies were going down like nine pins. AIG’s biggest domestic counterparty (customer) just happened to be giant Goldman Sachs, the firm Paulson had formerly headed (see Walsh 2009). As officials deliberated on how to respond, only one private bank chief executive was in the room: Goldman CEO Lloyd Blankfein.42
Reeling from the Lehman shock, Paulson and Co. made a dramatic about-face back to single payer: Law or no law, they effectively nationalized AIG by taking warrants for the Treasury worth 79.9 percent of AIG’s stock in exchange for an $85

It only appeared to be about AIG. In fact, Treasury and the Fed were subsidizing the giants—including Goldman, Citigroup, Bank of America, Morgan Stanley, and other large European firms

19. Duhigg (2008) adds considerable detail that illustrates the real relationships between the GSEs and private lenders. The article also relates a story according to which Paulson later sent a deputy, Robert K. Steele, to urge restraint on the GSEs. But for reasons unexplained, Steele failed to convey the message. This part of the story has all the earmarks of a precau- tionary memo for the files. It is unlikely in the extreme that Steele, who worked closely with Paulson, would have failed to convey a message his boss thought was important. As Becker et al. (2008) demonstrate, the priority just then was the Shadow Bailout. 

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