Hank Gets Spanked

Apparently I'm not the only one who didn't like Paulson's lame Fannie/Freddie bailout plan. In fact, I don't know of anyone who did like it, except Hank.

Congress pretty much handed Hank his arse on this one, from both sides of the aisle. Seems they just don't have enough faith in Hank to want to write him a blank check - and that's a pretty sad note, when a bunch of free-spending pork-happy crooks don't trust you with money that isn't theirs anyway.

Sen. Richard Shelby (R-AL) said, "I think you are risking taxpayer dollars here." And Sen. Robert Menendez (D-NJ) added, "How is it that we can tell the taxpayers that there is no way (they) are going to be put on the hook here?" (I'm frankly surprised that Hank didn't just shrug and respond, "Lie to them - it always works for me.")

But the best exchange came between Hank and Kentucky Republican Jim Bunning:

Bunning: "When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. You want an unlimited amount and some of us at this table don't like an unlimited amount of federal dollars. Do you really think we can believe exactly what you are saying, Secretary Paulson?"
Paulson: "I believe everything I say. I've been around markets for a long time." (Note: just because Paulson believes everything he says is no reason the rest of us should be so naive.)
Bunning: "So have I. Where will the money come from if, in fact, we have to use the backstop?"
Paulson: "From the government."
Bunning: "And who is the government?" (Note: this reminds me of the classic line, "And what is the magic word, Dr. Venkman?" from "Ghostbusters.")
Paulson: "The taxpayer." (Owned.) Paulson goes on to tell Bunning if he doesn't like the plan, he should vote against it.
Bunning: "I will do everything I can to stop it."
Paulson: "And maybe you can come up with a better plan."

The situation is so screwed up that President Bush finds himself having to rely on Democrats to get the plan pushed through. The Dems see an opening there, and are going to attach it to their pet housing bill, adding in the part that has led Bush to threaten a veto: $4 billion to fix up homes in foreclosure to help them - and other homes in their neighborhoods - sell. Bush has argued, correctly, that the money would be a windfall to the lenders that own the homes, not to homeowners themselves.

So we'll see what the final bill looks like, and whether it gets passed. My guesses on those two questions are "Frankenstein" and "no."

I've already weighed in on why I think extending more credit to Fannie and Freddie is stupid, so I won't subject you to more of that rant. But on a related note, Paulson has said the government would use the backstop funding and buy the companies' stock "only if necessary."

Give me a break, for crying out loud.

To use my earlier analogy, if you tell a crack addict you have more crack available, he's going to make sure he gets it. Fannie and Freddie will simply leverage themselves further, ensuring the "necessity" of additional credit. Giving these guys more credit without raising their capital requirements is borderline criminal. Granted, they couldn't raise more capital if they tried (without the government providing it, of course) - which is exactly why they should be allowed to fail.

And what if they did? Well, yes, mortgage credit would get a lot more expensive. Banks would have to accept the risks of the loans they underwrite, because they'd hold them on their books. In hindsight, given the subprime debacle, that would be a good thing.

For banks to be able to live with that risk, they'd hold more capital themselves. That would also be a good thing. And they'd tighten their underwriting standards - another good thing.

Tighter underwriting standards and higher credit cost would mean a decline in homeownership, which Washington views as a bad thing. But what it would mean is that people would save more and keep their credit records cleaner, and be more responsible with their money, and that only those responsible, thrifty people who'd saved for a reasonable down payment and could afford the monthly tab would become homeowners.

And that's a very, very good thing. More on that later.