Major Bailout for the rich and well connected

I have been following the "big shitpile" as Atrios calls it and with today's news about the bailout of FannieMae and FreddieMac, I wanted to share a critique of Henry Paulson's plans.

This line of criticism is all over the market/macro finance blogs that I follow:

• Operation "Rescue Fannie" Underway - Paulson a Blatant Liar

• Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

• How to Avoid the "Mother of All Bailouts"

Nouriel Roubini, discussed the apparent insolvency of both Fannie and Freddie earlier this weekend, laying out the various policy options that were available. Roubini speculated on what would be done:

The creditors/bondholders of Fannie and Freddie should not be made whole, i.e. bailed out, once the insolvency hole of these institutions emerges .... Will this optimal policy solution - an haircut for bondholders - be undertaken? Most likely not as the political economy of housing, mortgages and of “privatizing profits and socializing” losses may dominate the policy outcome.

It seems that Paulson has chosen the worst of all options. Roubini reacted earlier tonight:

Sunday evening update:

The Sunday statement and plan by Secretary Paulson to rescue Fannie and Freddie is the ultimate implementation of socialism for the rich and the well connected. Under the plan the U.S. government would become a major shareholder in the two GSEs (the unofficial figure being rumored is $15 billion for each institution); it would massively extend the Treasury line of credit to the two institutions that is now only $ 2.25 billion for each of them (the unofficial number being rumored is one of a line of credit as large as $300 billion per each institution); finally while marxist comrade Paulson (to borrow the term used by Willem Buiter) waits until Congress passes this legislation comrade Bernanke is providing the two GSEs with access to the discount window on same terms as commercial banks. So the lender of last resort support of the Fed - that was already extended via the PDCF to the non-banking primary dealers - is now officially extended also to the two GSEs: this is "quasi-fiscal recapitalization of two insolvent institutions" as Willem Buiter has correctly argued and imposing a potentially large burden on the U.S. taxpayer without a formal act of Congress.

Congress should not bail out Fannie and Freddie, at least not without wiping out equity holders and giving a "haircut" to debt holders. By the way, the largest foreign holders of this debt are China and Japan. Pimco's Bill Gross who recently tripled his bet on mortgages will be a huge beneficiary of this move

This all sounds like a US-taxpayer funded bailout of irresponsible investors. Moral hazard anyone?

The reactions roll in.

~BT