Combine a housing meltdown with election-year politics and the results
were not going to be pretty. Add a crisis in confidence in Washington's
favorite quasipublic companies and what we're getting is a rout for
taxpayers, especially those who kept their heads during the housing
mania.
The House yesterday passed a housing bailout by 272-152. The White
House has thrown its reservations overboard and is begging to sign this
boondoggle, despite the less-than-veto-proof majority. A few brave
souls in the Senate are threatening a filibuster, which is where the
last hope lies for stripping the most egregious and expensive
provisions from this monster.
Even conservative estimates by the Congressional Budget Office say the
cost for this bailout will run to $41.7 billion, with $16.8 billion
offset by higher taxes. No one has any idea of the real cost. The most
expensive provision gives the Treasury temporary authority to pour
money into Fannie Mae and Freddie Mac. The CBO says this could cost
$100 billion, or it could cost "nothing." So it threw a dart at the
wall and assigned a $25 billion price tag to the Fan and Fred bailout.
Likewise, the bill's $300 billion to refinance and insure distressed
loans through the Federal Housing Administration will supposedly cost
just a few billion dollars. That assumes few homeowners and lenders
will sign up for the program because lenders will have to take a 10%
haircut to be eligible. If no one needs this program, why is it there?
If lenders do take advantage, they're bound to dump their worst loans
on the feds. So as with the Fan and Fred bailout, the FHA guarantee
will be either superfluous or much more expensive than we're led to
believe.
Alongside these big-ticket items, we suppose the $4 billion tax credit
for first-time home buyers, or the $4 billion in "community
development" pork grants, or the $180 million for housing counseling
are merely routine outrages.
On the other hand, the kid-glove treatment of Fannie Mae and Freddie
Mac is very much worth worrying about. On the floor of the House
yesterday, Democrats argued that this bill was the least Congress could
do "for the people," given the way the government had "helped" Bear
Stearns. The cost borne by Bear Stearns was having its shareholders all
but wiped out and half its employees pink-slipped. Countrywide was
likewise sold at a fire sale price. Not so these two
government-chartered giants.
Fannie and Freddie may well be too big to fail, as Treasury Secretary
Hank Paulson keeps reminding us. That is true in large part because
they were allowed -- no, encouraged -- to grow like Topsy while
Congress shielded them from oversight. At a minimum, the cost of a
lifeline ought to include some accountability and assurance they cannot
get into such a fix again. Instead what we have is a promise that
Fannie and Freddie will pay us Tuesday for an explicit taxpayer
guarantee today. The Treasury will get unlimited authority to
recapitalize the mortgage giants, effective immediately, while a new
regulator will have to run a gauntlet of confirmation and Congressional
hazing over the companies' portfolios of mortgage securities the way a
Supreme Court nominee has to handle Roe v. Wade.
This delay will give Fan and Fred time to consolidate their political
position and fend off attempts to shrink them to a less risky size. At
the same time, the $600 million "affordable housing" fund that the bill
would skin off the hide of the two firms gives Washington a permanent
stake in preserving their dominant market position. If Fannie and
Freddie can't be brought to heel politically now, when weeks ago their
very survival was in doubt, not even a newly empowered regulator will
have any hope of reducing their claims on the public fisc once the dust
settles.
Mr. Paulson might have kept an eye on the taxpayer's interest here by
insisting that any money put into the companies come with some upside,
as the Chrysler bailout in 1979 did. Instead we are left to trust that
Mr. Paulson or his successor will have the political nerve to resist
the companies and their friends on Capitol Hill. Any money given to
Fannie and Freddie should have been conditioned on receivership,
including clearing out the management and boards that made this mess.
Mr. Paulson argues that the new regulator will have the Federal
Reserve's clout behind it, adding firepower to its ability to rein in
the not-so-dynamic duo. But the Fed is also subject to Congressional
sway, and no Fed Chairman is going to risk losing his running room on
monetary policy to corral Fan and Fred.
For proof of how powerful they remain, even in their straitened
circumstances, look no further than Majority Leader Harry Reid's
refusal even to allow a vote on an amendment proposed by South Carolina
Republican Jim DeMint to bar the two from lobbying in the future.
Senator DeMint has threatened to filibuster if his amendment isn't
aired. By itself, the antilobbying provision won't save the taxpayer
from Fan and Fred, but it's a start.
Democrats are rushing this bill through because of the favors for Fan
and Fred and new spending for left-wing activists like Acorn. But the
reluctance of many Republicans to look out for taxpayers is harder to
comprehend. They'll get little credit this year for letting the
majority Democrats say they did something for "housing," and GOP voters
will blame them for rescuing the irresponsible.
Meantime, the White House and Treasury are betting that this bill will
put a floor under the housing market and buoy bank stocks, and thus
avoid a deeper financial downturn. The rescue will only delay a housing
market bottom, and it may or may not help bank stocks. The one
certainty is that taxpayers are assuming a huge new risk.
