Friday, October 3, 2008

The Wall Street Boogeyman

Sarah Palin repeated the phrase “greed and corruption on Wall Street” at least three times last night during the debate.

Joseph Biden said we let Wall Street “run wild” with deregulation a couple of times.

“Wall Street” makes a great political target but “they” are just a small part of the puzzle.

What neither candidate dared talk about last night was the problem of Government Subsidized Enterprises or GSEs. Fannie Mae and Freddie Mack are the real source of the economic meltdown. And the real regulation problem is with those GSEs, not the market in general.

Ask any accountant or auditor and you will get an earful about the strict accounting rules imposed on private enterprise after Enron. But in the infinite wisdom of Washington GSEs played by a different set of rules.

It is the accumulated exposure the GSEs racked up that created this mess. But if a politician goes after GSEs he/she is labeled a heartless racist for taking homes and dreams away from the poor and minorities who benefit from them.

The vague "Wall Street greed" gets blamed for DC dumb.

So, why am I so hard on GSEs? Here’s how it works. Fannie and Freddie go wild with loan terms that are unrealistic in an effort to allow poor people to buy houses. The loans are unsecured…EXCEPT they are guaranteed by the government.

That’s good enough for investors and these bad loans get bundled and sold because they are “secured by the full faith and credit of the United States Government.” That’s the only reason these folks assumed the risk, because Uncle Sam was behind them.

The terms to describe these GSEs are quasi-public corporations or public/private partnerships or community partnerships. And they are sacred darlings as we found out in the 2004 hearings on Fannie Mae. In fact, failure gets you promoted. When you look at the past leadership of Fannie and Freddie, they land on their feet with the bonuses and new positions.

So, I think the private sector is taking some punches they don’t deserve, and both parties are doing the slugging. That’s OK, except it does nothing to fix the real problem.

1 comment:

  1. Wall Street didn't cause this mess. It was the poor management of Freddie and Fannie. People like Mudd, Gorelick, Franklin Raines, and James A. Johnson pirated Freddie Mae. In the 80's Freddie almost went out of business from investments in mortgage backed securities and investments in real estate.