American Comintern: Readers Respond

Wed, Sep 10, 2008 | Jared Woodard

Economy, Fed, Politics

We got a lot of positive and interesting feedback in response to yesterday’s American Comintern.  Below are some selected remarks from readers:

American Comintern…it’s also well to remember that honoring debts held by foreign bondholders is an imperative of the imperial project. Were debts of various government sponsored entities to be reneged on, then foreign national funding for American wars and bases would vanish.

From your “comintern” post, I can see that we agree on the politics of the current situation. I think the great undertold story so far is the central role played in deregulation at various levels by Phil Gramm and his darling wife Wendy. Beginning in the 1990′s, their combined roles in Washington (Senator and CFTC Commissioner) and in the private sphere (lobbyist and board member) have had enormous impact on what we, the non-elite, are now about to pay for. And, I would imagine, with enormous positive impact on their statements of personal worth. I believe Wendy played a crucial role in keeping the CDS market over-the-counter; how much do you think Wall Street has paid for that?

OK, we have now heard the term socialist all over the press and airwaves now. What I have yet to hear is the nuts and bolts practical ramification that the federal government now holds the note on 50% of all residential real estate in the country through FNMA and FRE, had already controlled x% (lets say 25% through FHA and VA). Add in all federally owned lands and what do we have – a monopoly on US land. Regardless of rich or poor – sooner or later socialism gets ugly for everybody when working for the boss and his rules for ownership. Now add federal subsidies for non-producing farmland and the control gets scary. “I owe my soul to the company store”. Just my bright thought for the day.

Congress has always been free to change underwriting standards. In fact, the program was all about easier underwriting for targeted borrowers. If there were any ultimate losses, that was the cost of serving those borrowers. To date there have been only profits and the program has ‘cost’ the government nothing. With tsy funding and a review of underwriting standards the program could have continued as before, which it might still do.

The entire episode was a panic over a possible liquidity crisis due to the possibility of the Tsy not doing what it did, and what should have been done at inception. I don’t think the Tsy getting 79.1% of the equity after making sure it took no losses and got a premium on any ‘investment’ it made served any non political purpose. There was no reason current equity holders could not have gotten the ‘left overs’ after the govt. got its funds and a premium also determined by the govt. Equity IS the left overs, and could have been left alone. (It wouldn’t surprise me if some of the shareholders challenge this aspect of the move.)

Yes, holders of direct agency securities were ‘rescued’ but they were taking a below market rate to buy those securities due to the implied govt. backing and lines of credit to the govt. I don’t see it as a case of ‘market failure’ but instead poorly designed institutional structure with a major flaw that forced a change of structure.  It’s a failure of govt. to do it right the first time, probably due to politics, and much like the flaw in the eurozone financial architecture (no credible deposit insurance- another form of allowing the liability side of the banking system to be subject to market discipline), also due to politics. As for compensation, that too was ultimately under the control of Congress, directly or indirectly.

If you’re a news & commentary junkie, Barry is keeping an updated mega-list on the Frannie story here.  One point we didn’t discuss in the original post was the question of executive compensation for FRE/FNM bigwigs – only because the appropriate action is too obvious to need mentioning.


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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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