Wall Street Socialism

Robert Borosage, HuffPost
This weekend, Treasury Secretary Henry Paulson, former head of the Goldman
Sachs investment house, provided us with a perfect demonstration of Wall Street
socialism.
He announced that the Bush administration would seek congressional approval
to bail out Fanny Mae and Freddy Mac, the government created, but privately
owned, profit-making housing finance companies that hold or guarantee nearly
half of the US
mortgage market -- some $5 trillion in debt. Paulson seeks and will get an
unlimited line of credit to guarantee their debt, as well as authority to
purchase their shares to supplement their capital base. The Federal Reserve
announced it was ready to provide lending while waiting for Congress to act.
Paulson said the new subsidies were designed to sustain the two institutions in
"their current form."
Perfect. The two institutions have always been more foul than fish. Created
by the government in the 1930s to help lubricate the US mortgage market by buying mortgages
from the banks so they would have the cash to make more mortgages, Fanny and
Freddy were able to borrow money at a discount because of a widely shared
assumption that the government would stand behind their debts if push came to
shove. Their operations were regulated, limited by laws detailing what
mortgages they could assume (They were essentially prohibited from diving
directly into the subprime muck). But as they grew and profited, their
executives pocketed lavish salaries and bonuses -- giving them an incentive to
grow even more (and as we discovered earlier this decade, to cook the books).
Last year, for example, the Chair of Freddie Mac took home a cool $18,289,575.
Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in pay to $13.4 million in 2007
while the company lost $2/1 billion and its shared fell 33%. Nice work if you
can get it.
Now with the bursting of the housing bubble, push surely has come to shove.
Foreclosures are soaring, the two institutions have sustained billions in
losses, their shares have plummeted, and, according to former St. Louis Federal
Reserve President William Poole, one and possibly both would be bankrupt if
their assets were marked down to their current market value.
So now the Bush administration proposes to make the federal guarantee
explicit and even to offer taxpayer money to help recapitalize the two banks if
needed. Everything has been nationalized -- except the profits and the pay
scales of the bank's executives.
That's right. If the guarantees work, private speculators, having driven the
stock down, will clean up on the upside. And the bank's CEO's will continue to
pocket the multi-million dollar salaries that are de rigueur on Wall Street.
Call it Wall Street socialism. Their losses are socialized; their profits are
pocketed. You and I will pay for their failures. And if conservatives have
their way, their families will pocket their successes, without even having to
pay a tax for the transfer of the estates we've helped to create.
These enterprises are operating on our tab now -- completely. Why not just
nationalize them, as even that font of economic convention, Sabastian Mallaby
suggested yesterday in the Washington Post. Sure, we'd have to add the $5 trillion in debt
to the federal balance sheet, but we could add the assets also. And after
Paulson's announcement, global investors are already toting up their debts onto
the federal balance sheet.
Why pay dividends to shareholders when they are essentially playing with our
money? Why pay managers of public enterprises the bloated pay packages of Wall
Street speculators? Why allow them to finance lobbyists to shield them from
accountability? The fiction of their separate existence has been exploded;
let's save the dough and run them efficiently.
Fannie Mae and Freddy Mac are only the most recent and extreme version of
Wall Street socialism. The Bush administration has done essentially the same
for private providers of college loans. The Federal Reserve has made taxpayers
the guarantor not simply of the banks that it regulates, but the shadow banking
system of hedge funds and investment houses that it doesn't regulate. After the
bailout of Bear Sterns, they basically are gambling with our money. The Federal
Reserve has now traded more than $500 billion in federal bonds for the toxic
paper of private banks and investment houses, some $200 billion of it in
mortgage backed securities, worth dimes on the dollar. This massive subsidy --
justified as necessary to keep the banking system afloat -- is not accompanied
by limits on what gambles the speculators can make, how much debt they can take
on, what rewards they can pocket. They are playing with house money -- not exactly
an incentive for prudence.
Republicans seem ideologically committed to these kinds of arrangements. In
Medicare for example, conservatives have demanded that the government subsidize
private insurance companies to compete with public Medicare, even though
Medicare provides healthcare much less expensively. When Bush and the DeLay
Congress drove through the prescription drug bill, they included a provision
that PROHIBITS Medicare from negotiating cheaper prices for drugs, effectively
turning the bill from a benefit to Seniors to a multi-billion subsidy to
private drug companies (not surprisingly, after Wall Street, the drug companies
finance one of the most lavish and powerful lobbies in Washington).
Now it makes sense to me for the government to subsidize housing mortgages
and college loans. Encouraging home ownership and higher education are central
to sustaining the broad middle class that is America's triumph. But I can't
imagine why we need to let bankers and investors pocket the upside, when they
are playing with our money and we're covering their losses. Public enterprise
may be staid and bureaucratic, but it's a lot cheaper and more efficient than
the perils of Wall Street socialism.