More Bad Government and Idiot Politicians

Yesterday, the FDIC closed down Indymac S&L. This institution was a spin-off of Countrywide Financial several years ago and they focused on the large mortgages that Fannie and Freddie could not buy. This failure will cost the the FDIC between $4B and $8B, or about 10% of its assets according to the WSJ. How did this happen? Well turns out that the loud mouth Senator from New York, Chuck Schumer, sent a letter to the Director of the Office of Thrift Supervision saying the S&L would fail. This essentially created a run on the bank's deposits. Failure was imminent.

But government involvement does not end there. It gets worse, much worse. By design, the Federal Government stands behind two institutions that have lost over 90% of the value, FannieMae and FreddieMac. Combined, they hold over $5T in assets. That should scare all Americans.

From the Financial Times:

The real problem, demonstrated in the tumbling prices of their equity, is that their capital is insufficient to support their liabilities, given the scale of possible losses. William Poole, former chairman of the Federal Reserve of St Louis, argued only this week that Freddie Mac would be insolvent if the value of its assets were marked to market.

If either of these entities goes belly-up, the US economy could be in for a serious jolt. So how could these entities go so far off course? After all, there is an army of government bureaucrats that watch over them. Taken from the Office of Federal Housing Enterprise Oversight (OFHEO):

OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). OFHEO works to ensure the capital adequacy and financial safety and soundness of two housing government-sponsored enterprises (GSEs) -- Fannie Mae and Freddie Mac.

OFHEO's oversight responsibilities include:

Conducting broad based examinations of Fannie Mae and Freddie Mac; Developing a risk-based capital standard, using a "stress test" that simulates stressful interest rate and credit risk scenarios; Making quarterly findings of capital adequacy based on minimum capital standards and a risk-based standard; Prohibiting excessive executive compensation; Issuing regulations concerning capital and enforcement standards; and Taking necessary enforcement actions.

and more:

The Federal Housing Enterprises Safety and Soundness Act of 1992 gives OFHEO a broad range of supervisory tools that the agency may employ not only to address Enterprise problems in a remedial fashion but also to take actions to prevent such problems from developing. The agency’s use of those authorities helps mitigate systemic risk by reducing the risk of failure of Fannie Mae and Freddie Mac.

We have a Federal agency that is tasked with the sole purpose of monitoring two companies and they have watched 90% of the market value of these corporation evaporate! Even worse, there is talk these two corporations will fail? How could our government be so irresponsible? This situation is no different than any other bureaucracy. There is no punishment for failure as the taxpayer will bail out the defunct businesses. This is exactly why the government has to stay out of commercial matters like these. Government and business cannot co-exist as there is no profit and loss incentive to guide behaviors and provide consequences.

I fully expect this to be a disaster of enormous proportions because the government, especially the enormously bloated US Federal Government, cannot handle a task that the free market could be dealing with effectively.