The governments bailout of the Fannie Mae and Freddie Mac is yet another example of the privatizing of profits and socializing of loss- a.k.a Republican deregulation that John McCain again advanced on Thursday.
Paulson made all the right noises- but like so much put out by the Republican party there is more noise than substance. He is proud of the fact that equity holders will absorb the first losses and the preferred stock holders the losses after the equity investors have been wiped out. Proudly proclaims that the Treasury will only have to put in Preferred equity as "needed" and will receive equity warrants as well. At first blush it makes it appear that this is a good deal for tax payers- but it isn't.
As it stands right now absent any kind of Treasury support Fannie and Freddie will not be able to fund themselves. (If that was inaccurate then the Treasury actions would be unnecessary) Under those circumstances it is clear that both GSE would have to file for some kind of bankruptcy protection. Under those circumstances given were MBS are currently trading there is no question that both equity and preferred debt holders would have been wiped out.
Under the Treasury proposal if markets imporve and losses turn out not to be as bad as projected both the Equity and preferred holders will benefit from the turnaround. It is true that they would benefit more if the Treasury didn't have its senior preferred or equity warrants but nonetheless they would have something worth more than if the Treasury did nothing. On the hand if the losses turn out to be worse we the taxpayers will face all the costs and the equity and preferred holders would be no worse then they currently are.
That in my business is known as a free option and a giveaway. Time for both authentic conservatives and liberals to stand up and fight the terms of this deal.