Friday, February 15, 2008

Movement grows to nationalize US bank debt

Worried Bankers Seek to Shift Risk to Uncle Sam (WSJ)
The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

Last fall, the government backed a plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities, but it fell through. More recently, a hotline set up with Washington's support for troubled borrowers has helped only a small fraction of those in need.

Politicians and bankers are now abuzz with talk about broader ideas

Just a few months ago, such proposals would have been considered far-fetched, but these and other unorthodox ideas are gaining credibility.

Senior Treasury Department officials have been wary of proposals that could expose taxpayers to losses and bail out lenders, but they have been willing to entertain most ideas. Some congressional Republicans are becoming worried that as more bad news and data are released about the housing market, some proposals could expose taxpayers to severe losses.
The latest coordinated moves to have the US taxpayers take the hit from the bad debts created by Wall Street banks was flagged by Howard P. Milstein, the chairman and chief executive of New York Private Bank and Trust, a few days ago. See, More Wall Street socialism.

Guambat remains unimpressed.

PS: Naked Capitalism is also blogging about the "New Socialists"
We've often observed that the reason to keep the banking industry (and Wall Street, now that some firms are too big to fail) on a short leash is that it plays with the public's money: gains go to employees and shareholders but losses are socialized.

No one seems to be learning the lesson playing out before our very eyes from the bond insurers: guarantees can become very costly when entered into casually. The promises of various government sponsored enterprises, such as Fannie Mae and Freddie Mac, live in a dubious never-never land, where they are nominally private enterprises but everyone expects that if things got ugly and their mortgage guarantees were to look questionable, the GSEs would be supported by the Federal government.

James Hamilton, at the Fed's Jackson Hole conference, pointed out that Freddie and Fannie were undercapitalized and overextended; this was before their ceilings were raised to include jumbo mortgages. Now we are gong to add even worse credits to the burgeoning pile of government guaranteed paper.

When I was much younger, I took a business school course taught by Henry Cabot Lodge, Jr. He said that he could remember the day in 1968 when he realized that there were limits on what the US could do, that it could not simultaneously combat poverty, fight a ground war in Asia, and send a man to the moon.

It's 40 years later, and most of Washington seems unable to accept what Lodge saw back then, that America is no longer so powerful and economically dominant that it can have whatever it wants.

What is particularly disturbing about this latest salvage operation is that it involves no penalty to the firms that created this mess. Of course, that's one of the beauties of the originate and distribute model: there are so many parties in the food chain that it is hard to parse out culpability.


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