I don't think the government intended to bring down the banking system on purpose. However, I think they saw it coming and have done a good job preparing for the fallout from the GSE's. In effect, they have paid absolutely nothing for a $6 trillion mortgage pool with a 10% interest rate. They are bringing in $600 billion a year in interest from FNM and FRE. They probably won't be ready to give their 80% interest in the 2 GSE's back to the market for a long time. Meanwhile, they convinced the public they have put taxpayers at risk for $100 billion for each GSE.
Going back to the last government intervention, I heard Bill Seidman talk about how the RTC worked. They basically inherited all of the bad loans from the S & L for free. A mortgage really is an asset if you have no skin in the game. Anyways, the RTC was very successful and the government made a lot of money slowly selling those assets back into the market over a long period of time.
Ironically, Seidman was complaining that it would be difficult to repeat the success of the RTC because the government might have to pay for all the bad bank loans this time around. Maybe he wasn't thinking about the GSE takeovers. Also, the FDIC is now carving up good bank bad bank deals for all the small community banks that are getting flushed out of the system. They find other banks to buy the depository base and absorb the mortgage assets into the FDIC.
I agree with Bill Seidman that it would take a long time to start another RTC by waiting around for all the IndyMac's of the world to fail. However, going back to the GSE's, those investments are worth much more than Paulson has admitted. I would like to see them keep the GSE's indefinitely, but I don't think the government wants to be the tax collector and the landlord.
I'm just not to worried about the systemic risk of this nationalization process. If one good thing comes out of this whole process, maybe the government will sit on the mortgages long enough to wind down a big part of the CDS market. Do we really want to be paying higher mortgage rates for credit insurance written by traders that will never be around to fulfill the other side of the contract. I think not. |
