America is holding its collective breath today. The Bush administration made the gutsy decision late last Friday to say enough is enough: There will be no Bear Stearns-style rescue for Lehman Brothers, which is teetering on the brink of failure. This time, a venerable brokerage firm, a pillar of the financial sector for well over a century, will be allowed to fail.
The decision is certain to send the markets reeling until a new, more transparent equilibrium is found. Already reverberations are rocking Wall Street. Lehman appears headed for bankruptcy. Still viable but ailing, Merrill Lynch, the domino otherwise likely to fall next, is selling itself to Bank of America for $44 billion. As the
Wall Street Journal editors aptly
observed this morning, even as Wall Street is being “remade,” we are “getting a Category 5 test of our financial levees.”
If fiscal sanity is to be restored, Treasury’s decision was urgently necessary. For the economy’s long-term health, buyers and sellers, borrowers and lenders, transacting parties have to understand that they are responsible to their own behavior.
And now it’s time to strike another blow for sanity through transparency: Put Fannie Mae and Freddie Mac on the government’s books.
Fannie and Freddie, of course, are the mortgage giants seized by the government a week ago. How much is that going to cost American taxpayers? Well the political class, which created the disaster that is Fan and Fred and seems desperate to preserve them, has decided that small detail needn’t concern us.
As Democrats continue to champion these “quasi-government” entitles, the Bush administration quietly
announced on Friday (as all eyes were on Lehman) that though the government is now running the mortgage giants — and thus all of us are officially on the hook for their liabilities — it sees no need to incorporate their balance sheets and the business operations in the federal budget.
Does that sound familiar? It should. When managers who don’t happen to run the United States government decide to park their losses and liabilities off the books, we call that corporate fraud. When they did it at Enron (in a scam involving a pittance of what we’re talking about here), the execs went to jail for a long time. Even their accounting firm was prosecuted, causing countless employees who had nothing to do with the scheme to be put out of work.
Fannie and Freddie are a cautionary tale against the Left’s idée fix of private-public “partnerships.” Their sordid history of book-cooking and slush-fund earnings-management allowed top executives — in the main, political cronies of Democrat power-brokers — to qualify for millions in bonuses even as the behemoths were rotting from within.
What could court disaster more than a system in which profits are tucked in the pockets of an anointed few (who then, naturally, donate goodly chunks of same to their political benefactors) while risks and losses are borne by American taxpayers? Doing more of it, that’s what.
In the last several months, we have seen the government bail out Bear Stearns by guaranteeing nearly all of the $30 billion in bad debt assumed by Bear’s buyer, J.P. Morgan. There followed the federal housing bill, in which hundreds of thousands of people facing foreclosure were rescued — thereby rewarding their reckless gambling while artificially inflating the true value of homes that might otherwise be available to responsible buyers. Then Treasury saved Fannie and Freddie, whose operations are now being managed by the Federal Housing Finance Agency (FHFA).
What has followed is exactly what you would expect: House Democrats are licking their lips at the prospect of a $25 billion “rescue package” for the auto industry — just in time for an election in which Michigan and Ohio, bastions of the Democrat-friendly unions that have made the industry structurally unsound, will be crucial to the outcome. And if Barack Obama is elected president, there stands to be an unprecedented blurring of the line between public and private that separates free-market vibrancy from the stasis of a command economy.
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