With the takeover of AIG, the federal government has wangled its fourth major bailout and taken control of its very first insurance company.
Both McCain and Obama have called the bailouts of AIG, Fannie Mae, Freddie Mac, and Bear Stearns “necessary measures.” McCain blames greedy Wall Street tycoons while Obama blames failed GOP policies.
Most sensible folks agree that the government’s implicit guarantee to Fannie Mae and Freddie Mac were a license to lenders to run rampant. Fannie and Freddie were able to buy bundles of home mortgages and/or mortgage-backed securities in massive quantities without contemplation of the financial risks.
Some economists blame the regulators/regulations. I disagree. The financial industry is heavily regulated. It was the government’s guarantee of Fannie and Freddie that emboldened lenders to put together dicey loans and encouraged undisciplined financial endeavors.
Government policy laid the foundation of the mortgage crisis more than three decades ago when Congress passed the Community Reinvestment Act of 1977. The law forced banks to loan money to low-income borrowers in order to meet the “needs” of the local community.
No worries, though. The banks knew they could sell off those loans to Fannie or Freddie, and F & F knew they could buy those loans with little regard for the risk.
I’m reminded of the past weekend here in Las Vegas when a few enthusiastic friends (first time visitors) went out and hit the blackjack tables.
A young man playing two hands was dealt four sevens. A friend advised him to split and play four hands. Pondering the risks, he hesitated – but the helpful friend offered to cover his losses and let him keep all the chips if he won.
What do you suppose that young man did?
He behaved as anyone would: he played all four sevens. And, unfortunately, lost on all.
So it goes on the tables of Sin City. So too, in Congressional corridors and bank board rooms.
