Wall Street Socialism (Robert Borosage)

 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 Fannie Mae and Freddie Mac, the government created but privately owned, profit-making housing finance companies that hold or guarantee nearly half of the U.S. 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."

 {xtypo_quote_right} 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. {/xtypo_quote_right}

Perfect. The two institutions have always been more fowl than fish. Created by the government in the 1930s to help lubricate the U.S. mortgage market by buying mortgages from the banks so they would have the cash to make more mortgages, Fannie and Freddie 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 shares fell 33 percent. Nice work if you can get it.

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