Another month, another bailout, and this one is a biggie.
Mr. Paulsonâ€™s plan begins with a pledge to provide additional cash by buying a new series of preferred shares that would offer dividends and be senior to both the existing preferred shares and the common stock that investors already hold.
The two companies would be allowed to â€œmodestly increaseâ€ the size of their existing investment portfolios until the end of 2009, which means they will be allowed to use some of their new taxpayer-supplied capital to buy and hold new mortgages in investment portfolios.
And not only have both CEOs been fired and replaced, but Treasury secretary Henry Paulson is also putting the two mortgage giants on the road to either becoming publicly traded or owned by the government. They will no longer be a hybrid at the end of this process.
[…] the plan calls for the companies to start reducing their investment portfolios by 10 percent a year, beginning in 2010.
The investment portfolios now total just over $1.4 trillion, and the plan calls for that to eventually shrink to $250 billion each, or $500 billion total.
â€œGovernment support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,â€ Mr. Paulson said. â€œWe will make a grave error if we donâ€™t use this time out to permanently address the structural issues presented by the G.S.E.â€™s,â€ he added, a reference to the companies as government-sponsored enterprises.
Honestly, as much as this angers me personally that this type of system has gone on for so long, I think this move was inevitable and will ultimately be seen as the most responsible that could have been done.
I know a lot of free marketers say “let them fail”, but that’s putting flawed philosophy above fiscal realities, and since this move has a lot more to do with making sure the housing and mortgage market don’t completely implode, it’s a good move for Americans.