Bernanke's Plan to Pick Your Pocket

Federal Reserve Chief Ben Bernanke has had some pretty stupid ideas lately. He's been pouring money into the economy via cheap rates and other injections, despite evidence that -- outside housing -- things are moving along OK. That has decimated the dollar, and it wasn't enough to rescue Wall Street, since markets have been getting pummeled daily ever since the last cut.

But yesterday, in his testimony to congress, Bernanke floated a truly atrocious idea: Stick taxpayers with a federal bailout in the jumbo mortgage market. His plan would allow Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) to buy giant mortgages, and have taxpayers guarantee them, taking on the credit risk.

Main Street bails out Wall Street
The Wall Street Journal (subscription required) has the story. Here's the crux: "He suggested that Congress could consider allowing the companies, known as 'government sponsored enterprises,' buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors." That would leave taxpayers to make good on these loans once they're sold off to investors.

Let me be the first to ask: What have you been smoking, Ben?

First of all, Fannie and Freddie have proven woefully undeserving of their quasi-public status, having ruined what was one of the sweetest deals in the history of banking with crooked, cookie-jar accounting to smooth out earnings. Some of that reportedly took place solely to guarantee the cigar-smokers in the executive suites their bonuses. Oh, and if the New York Attorney General's suspicions are correct, these two may recently have been dabbling in the arcane art of inflated appraisals, too. If there are two companies less deserving of an increase in public trust, let alone taxpayer support, I can't think of them.

Twice bitten
Yet taxpayers are already on the hook for any mess-ups at these two government-sponsored entities, given that they're simply too large to fail. Heck, they're too large even to draw the scrutiny they deserve, at least from the political weathervanes on Capitol Hill. Back in the bad old days of the accounting investigations, Congress was wary of exercising too much oversight, lest it hurt the housing market. So now the gang that feared reeling in those financial loose cannons is being asked to let them take aim at taxpayers yet again?

If Bernanke's congressional brain fart becomes law, taxpayers will no longer just be serving as the backstop for private companies charged with assisting in the national goal of expanding affordable housing. (That was the original mission of Fannie and Freddie, as pointed out by the good folks at Housing Doom, who brought this story to my attention.) Nope, if Ben gets his way, you and I will be forced into the business of guaranteeing loans for Americans who simply have to have that 4,500-square-foot McMansion.

It shouldn't surprise anyone that Sen. Chuck Schumer (D-N.Y.) thinks this is a peachy idea. Chuck -- who, of course, said absolutely nothing about the problems and excesses in lending while the housing bubble was inflating -- has been making hay about the correction for months. That's understandable. After all, his Wall Street constituents -- Citigroup (NYSE: C  ) , Merrill Lynch (NYSE: MER  ) , Morgan Stanley (NYSE: MS  ) , and Wachovia (NYSE: WB  ) -- need a major metaphorical Heimlich to save them from choking on a diet of bad-loan dog food of their own making. A taxpayer-sponsored plan to let Fannie and Freddie buy up big loans would certainly help them out, providing the "liquidity" that real investors -- quite rightly -- are loath to provide these days.

Foolish final thought
Bernanke and Schumer need to be disavowed of this horrible idea immediately. Fannie and Freddie's history plainly shows that the government's meddling in mortgage markets can have amazing unintended consequences. It's not just unfair to ask taxpayers to provide the financial muscle for the next unforeseen blowup -- it's completely unnecessary.

Credit is tight now, but that's the knee-jerk reaction to half a decade of terrible lending. Banks are anxious to make money, and that means that once things settle, there will be plenty of demand for good, money-making mortgage loans -- of all sizes -- as well as the debt instruments based on them. Let investors determine when that happens, and how much those mortgages are worth. The rest of us shouldn't have to mop up Wall Street's mess, simply so politicians like Bernanke and Schumer can score points with their patrons.

For more on bad mortgage banking and bailouts:

Read/Post Comments (0) | Recommend This Article (144)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 540026, ~/Articles/ArticleHandler.aspx, 10/27/2016 11:13:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 3:59 PM
FMCC $1.60 Down -0.04 -2.44%
Freddie Mac CAPS Rating: ***
FNMA $1.69 Down -0.03 -1.74%
Fannie Mae CAPS Rating: ***
C $49.93 Down -0.08 -0.16%
Citigroup CAPS Rating: ***
MER.DL2 $11.64 Down +0.00 +0.00%
Merrill Lynch & Co… CAPS Rating: *
MS $33.82 Up +0.43 +1.29%
Morgan Stanley CAPS Rating: ****
WB.DL2 $5.54 Down +0.00 +0.00%
Wachovia Corp CAPS Rating: **