As long as we're discussing Phoney & Fraudie this morning, I'm adding this clip of Charles Lemonides from TechTicker. Lemonides' thesis is the bailouts of the mortgage giants were important and necessary, and that the decision not to stand behind the preferred shares of both firms worsened the banking crisis.
I agree but I have little sympathy.
- We had no choice but to honor the debt of both GSEs. China and Japan gave us no other option, and we need them to continue funding our never-ending profligacy.
- The regional banks loaded down with Fannie & Freddie preferred shares deserve their fate. It's fitting punishment for their lack of investment stewardship. These shares should have been jettisoned from their portfolios the day after Bear Stearns failed (and really much sooner had they been paying attention.). Stupid should not be an acceptable excuse.
From Tech Ticker:
The rescue of Fannie and Freddie was the biggest mistake of 2008 for several reasons, Lemonides says:
- Fannie and Freddie were put into conservatorship in September 2008, hurting the credibility of policymakers like Hank Paulson, who had declared the GSEs to be solidly financed and solvent just weeks prior.
- While holders of Fannie and Freddie debt - notably many global central banks - were made whole by the government's actions, preferred shareholders were effectively wiped out.
"What happened at Freddie and Fannie took what were conditions that could make a financial panic and made a financial panic," says Lemonides.
While that's debatable, his broader point that many community banks were impaired by the Federal government's action isn't. In September, the American Bankers Association reported that 27% of the nation's 8500 banks held preferred shares in Fannie and Freddie in their investment portfolios; 85% of the affected institutions were community banks, estimated to hold between $10 billion and $20 billion of the GSEs preferred shares.
Citing Midwest Banc Holdings as an example, Lemonides says many community banks "went from being healthy and well capitalized to the brink of insolvency -- not because the loan portfolios went bad but because they owned that preferred stock."