Broke-Ass Student

Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s.

Volcker Says Finance System `Broken,’ Losses May Rise
The Bloomberg News
September 5, 2008

This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down,” Volcker said today at a banking conference in Calgary. “Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation.”

The former Fed chief projected “a lot” more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators.

“It is the most complicated financial crisis I have ever experienced, and I have experienced a few,” said Volcker, who ran the Fed from 1979 to 1987, and engineered an increase in interest rates to 20 percent to quell inflation that exceeded 10 percent.

U.S. growth has averaged 2.3 percent so far this decade, down from 3.4 percent in the 1990s. The current growth rate is the weakest since at least the 1940s, when the government began compiling figures on quarterly gross domestic product.

Oh yes, and in other news. The U.S. Treasury announced a take-over of Freddie Mac and Fannie Mae this weekend - a historical federal rescue operation and bailout when these two mortgage giants collapsed into insolvency under the strain of billions of dollars of losses during a housing crisis that shows no signs of improving.

And taxpayers should be truly worried as they will be responsible for Freddie’s and Fannie’s considerable and expected losses. The Congressional Budget Office predicted in July that a bailout could cost between $25 billion and $100 billion, reports the Los Angeles Times. The two companies lost about $14 billion last year and such steeping numbers coupled with our current national deficit guarantees future generations to be shackled with enormous debt.

Few Stand to Gain on this Bailout, and Many Lose
The New York Times
September 7, 2008

But even after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out.

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

Fannie Mae and Freddie Mac have enriched their top executives for years. Mr. Mudd’s predecessor at Fannie Mae, Franklin D. Raines, took home more than $52 million while he was chief executive from 1999 to 2004, according to Equilar data.

“This is completely outrageous,” said Richard C. Ferlauto, the director of corporate governance and investment for the American Federation of State, County and Municipal Employees, a large pension fund. “It is really a slap in the face to shareholders and homeowners whose loans are at risk and taxpayers footing the bill for a bailout.”

I agree with Volcker, the financial system is hopelessly broken. And as I gaze into my baby niece’s expressively promising eyes, the moral impact of these maddening decisions overwhelms me.  This bailout will directly affect every American wallet sooner or later, while the departing heads of Fannie Mae and Freddy Mac are entitled to $9 million and $14 million in severance pay, respectively.

September 7, 2008 will be now historically be remembered as the day the U.S. government took over the mortgage market, a move that has no other precedent in history.

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