More Fan-Fred Questions than Answers

The talk of the town on Wall Street is the Treasury bailout of Fannie and Freddie. The most important development is that all the bonds are now totally covered by the U.S. government. So stocks soared this morning by over 300 points, though the gain is only 160 as of this writing.

Basically, the feds are taking Fannie and Freddie over in a conservatorship, which is less than a receivership and full nationalization, but does cut out private investors by dissing the common-stock and preferred-stock shareholders.

But this whole package raises more questions than it answers. It still leaves open the longer-term possibility that the flawed GSE model of private profits combined with taxpayer losses is a recipe for disaster and a ticket to France rather than American-style free-market capitalism.

Treasury man Paulson side-stepped any long-run decisions on the bad Fan-Fred business model. So Bailout Nation is alive and well, with the auto business waiting in the wings for its own federal money. Meanwhile, taxpayers could be on the Fan-Fred hook for $200 billion, or even more, if their internal portfolios implode. By the way, those inside hedge funds are set to expand in the next year before they contract. Very curious.

Opinions on all this are divided. Long-time GSE critic Peter Wallison, a former high Reagan official, thinks Paulson should have gone to a full receivership to clamp down on Fan-Fred and take out all the common stockholders. But former Fed governor Wayne Angell, also a Reagan appointee, prefers a larger role for private capital in order to reduce taxpayer exposure.

Meanwhile, it’s hard to connect the GSE bond bailout with distressed mortgage owners. The real issue is a pro-growth economic recovery plan. Drill, drill, drill and more energy supplies will bring down gas prices at the pump and help all mortgage owners, consumers, and the banks that own the paper. Additionally, lower marginal tax rates for businesses and individuals — especially middle-income folks — would give the whole economy a shot in the arm. In other words, grow the economy back into prosperity. That’s the key.

And it’s even harder to understand why Treasury is letting the GSE CEOs get $15 million severance payments as they are ushered out the door. And surely a Democratic Congress will defend the Fan-Fred business model till death do they part.

However, credit Treasury with a provision that eliminates all GSE political contributions and lobbying. I wonder — maybe Sarah Palin has the answer. Just put Fan and Fred on eBay and sell ’em.

Speaking of Ms. Palin and her sidekick John McCain, polls are showing a huge Big Mac surge. Even Intrade shows a virtual dead heat. Maybe that’s what drove stocks up today.