Vice Presidential hopeful Sarah Palin had the biggest coming out party that any former-beauty pageant contestant could imagine at the Republican National Convention last week. Despite some who noted that Alaska is close to Canada and Russia, it is quite obvious that Governor Palin was not chosen for her foreign policy expertise -- Senator McCain has that pretty much taken care of, thank you very much.
Ms. Palin was added to the ticket to serve a number of purposes: she is a woman, which may help win over some more conservative Hillary supporters; like McCain, she is considered a maverick, willing to take on even her own party; she appeals to the conservative base on social issues; and she may be able to draw the “Sam’s Club Republicans” into the GOP tent. (To read more about this valuable voting group, see the 9/4/08 article -http://www.strategicpoint.com/spov/article_viewer.jsp?articlePath=/docman/Companies/SPIA00/webcontent/guest/spov/articles/2008/09/spov09042008.xml It is the “Sam’s Club Republicans” that interest me most.
Obama’s campaign is going after the 80% of Americans who earn less than $118,000 per year by advocating a middle-class tax cut. But in my non-scientific analysis (mostly conducted on an East coast beach), I have found that many folks who earn $100K or so are not wowed by Obama. While they do not want to pay more in taxes, that is not their hot button issue. Rather health care, energy policy and general fiscal discipline seemed to dominate their priority list, which is another way to say that people want to be healthy, wealthy and wise. I think that McCain may be able to bring over some Sam’s Club Republicans, Democrats and Independents with simple and direct solutions.
Every American agrees on one point: we need our health care system to operate better. Obama’s approach is to expand government-provided health care and create a form of “managed competition”. Obama supports expanding SCHIP and Medicaid eligibility, but does not support a health insurance mandate for adults (he does support a mandate for children and young adults 25 or under). Obama’s plan would be centered on a “pay-or-play” mandate, where all but the smallest employers would be required to provide health insurance and those who didn’t would be compelled to pay into a national fund covering these uninsured workers.
McCain wants to move towards more individually-provided health insurance, rather than expansion of government participation. His main policy initiative is a $2,500 health insurance refundable tax credit for individuals ($5,000 for families). The goal is to make health insurance more affordable, but make individuals incur the full cost of “better” health insurance at the margin. McCain is also considering risk-rating these vouchers so that individuals with severe health problems will receive a larger voucher. McCain would also allow individuals to buy health insurance from any state.
It appears Obama’s proposals will decrease insurance choice, increase regulation, and increase public funding of healthcare, which means it will be far more expensive than McCain’s, which would shift to individual–rather than employer-provided–health insurance accompanied by a decrease in regulation. That said, if it were to work, it would probably be a more comprehensive and lasting solution. The problem that I see is that most people do not have the patience to dig through the differences and so if McCain can present his plan as a simple “next step”, that may be enough for now.
On energy, McCain favors a gas-tax holiday, while Obama notes that it is a gimmick that most economists agree would not have any long-term effect. Palin’s addition to the ticket could help McCain because she lives in an oil-rich state that has negotiated both with big oil and environmentalists. Palin has advocated drilling in the Arctic National Wildlife Refuge, which has been a popular solution among Americans, although McCain had previously opposed drilling there.
The differences between the two on energy policy are clear: McCain would mandate reductions in greenhouse gasses, then largely rely on the free market to spur conservation, while Obama would tax oil companies and use the money to help low income people. He would also restrict greenhouse gasses, but charge more for companies to pollute and use the money to fund renewable energy research.
Finally, on the wisdom of politicians to spend more wisely, both parties have failed miserably over the past eight years. As always, in the campaign, both sides will argue that we need more discipline, but success will be determined after-the-fact, so don’t even try to guess who will stick to this promise.
Friday, September 12, 2008
Thursday, September 11, 2008
Time Out
The Olympics! The Conventions! The Fannie/Freddie bail-out -- is Lehman Brothers next? TIME OUT! Today is the seventh anniversary of the terrorist attacks of September 11, 2001 and instead of using the day as a political video or even a teaching tool about the hazards that we can’t anticipate, I want to call a time out and reflect on that day, what it meant to me then and how I try to make sense of it seven years hence.
I remember September 11, 2001 vividly—it’s as if I can relive it in slow motion, starting with a morning run on the treadmill in my house in Providence, RI. CNBC reported that an airplane had hit one of the World Trade Center towers. I jumped off the treadmill, ran upstairs and made a bunch of phone calls. You see, my connection to New York is deeper than simply being born there—I actually worked at 4 World Trade Center, one of the smaller buildings adjacent to the Twin Towers and home for many years of the Commodity Exchange of New York where I got my start on Wall Street.
I quickly ran through a mental rolodex—“who works nearby? What firms are actually in the WTC?” I was able to make a few early calls to make sure that my closest relatives were OK, but then we lost contact. There were bits of data points that got through in the beginning—Mark in London had learned that three other friends were not in the building, but traveling on the West coast. An old trading buddy living in Florida said that our former clerk had been in the subway one stop away from the site. Then there was an eerie silence and like most of the world, my only connection was through the endless coverage on television.
The randomness of the event hit home when my father called, weeping…there were children of his friends who likely perished and all he could say was, “that could have been you and Evan (my brother-in-law, who also worked on the Commodities Exchange).” Evan and I used to eat breakfast at Windows on the World atop of the financial world, before the start of the trading. 4 World Trade Center had been destroyed by the end of the day.
In many ways, the events of 9-11 reminded me how connected I was to New York and in fact, led me to return there on a more permanent basis. Seven years later, I still tear up when I ride my bicycle down the West Side Highway and pass what was the site of the World Trade Center. I think of how desperate those people must have been during those terrible hours as well as the random acts of heroism that were recounted by so many of the survivors. I also understand that most of the country and the world have moved on from 9-11, healing from the brunt of the massive wound, but acknowledging that life will never be as it was previously. Here in New York, we too have healed, but perhaps not quite as smoothly. When planes pass overhead, I notice heads turning. When the police run random training drills and sirens are screaming, we are not so nonchalant about it all. And when we pass the massive construction site at the tip of Manhattan, most of us can’t help but tear up in remembrance of that fateful day.
I remember September 11, 2001 vividly—it’s as if I can relive it in slow motion, starting with a morning run on the treadmill in my house in Providence, RI. CNBC reported that an airplane had hit one of the World Trade Center towers. I jumped off the treadmill, ran upstairs and made a bunch of phone calls. You see, my connection to New York is deeper than simply being born there—I actually worked at 4 World Trade Center, one of the smaller buildings adjacent to the Twin Towers and home for many years of the Commodity Exchange of New York where I got my start on Wall Street.
I quickly ran through a mental rolodex—“who works nearby? What firms are actually in the WTC?” I was able to make a few early calls to make sure that my closest relatives were OK, but then we lost contact. There were bits of data points that got through in the beginning—Mark in London had learned that three other friends were not in the building, but traveling on the West coast. An old trading buddy living in Florida said that our former clerk had been in the subway one stop away from the site. Then there was an eerie silence and like most of the world, my only connection was through the endless coverage on television.
The randomness of the event hit home when my father called, weeping…there were children of his friends who likely perished and all he could say was, “that could have been you and Evan (my brother-in-law, who also worked on the Commodities Exchange).” Evan and I used to eat breakfast at Windows on the World atop of the financial world, before the start of the trading. 4 World Trade Center had been destroyed by the end of the day.
In many ways, the events of 9-11 reminded me how connected I was to New York and in fact, led me to return there on a more permanent basis. Seven years later, I still tear up when I ride my bicycle down the West Side Highway and pass what was the site of the World Trade Center. I think of how desperate those people must have been during those terrible hours as well as the random acts of heroism that were recounted by so many of the survivors. I also understand that most of the country and the world have moved on from 9-11, healing from the brunt of the massive wound, but acknowledging that life will never be as it was previously. Here in New York, we too have healed, but perhaps not quite as smoothly. When planes pass overhead, I notice heads turning. When the police run random training drills and sirens are screaming, we are not so nonchalant about it all. And when we pass the massive construction site at the tip of Manhattan, most of us can’t help but tear up in remembrance of that fateful day.
Wednesday, September 10, 2008
Big Gov
Last week I discussed why this election year may find some success in appealing to a populist sentiment that is brewing among many middle class voters. But even before the election, the regulatory environment has shifted in a significant way to meet the challenge of the housing and credit crises. After three decades of a “hands-off” approach that lauded privatizing and deregulating much of the economy, the 2008 economy has forced the government and the central bank into the free market lock, stock and barrel in an effort to stave off a deep recession and a financial system freeze-up.
The trend is moving beyond the more conventional tools of monetary and fiscal action (Fed rate cuts and $168 billion of tax rebates) into direct intervention into the inner-workings of financial institutions. The JP Morgan takeover of Bear Sterns was engineered by the government and announced a new era where the treasury is now willing to extend credit against shady mortgage-related collateral. The next iteration of government’s new role was seen in last weekend’s plan to rescue Fannie and Freddie, which may cost taxpayers north of $200 billion when all is said and done. (It is estimated that the Fannie/Freddie bailout will not be as expensive as the $124B S&L bailout, which due to the magic of inflation, amounts to approximately $300B today.)
To many, this is a dangerous expansion of the government’s role in the financial system and increases the likelihood of moral hazard as other institutions assume that Uncle Sam’s safety net will be there when the next crisis emerges. The problem is that when pushed to the edge, government officials did not believe that there was a choice. As former Fed Chairman Paul Volcker said in April, “Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.” In other words, the free market could not save the financial system from near-collapse.
However, Volcker went on to point out this is unchartered territory. “Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank. As custodian of the nation’s money, the Federal Reserve has the basic responsibility to protect its value and resist chronic pressures toward inflation. Granted a high degree of independence in pursuing that responsibility, the Federal Reserve should be removed from, and be seen to be removed from, decisions that seem biased to favor particular institutions or politically sensitive constituencies.” In the last sentence, Volcker appears to give a nod to the problems of the politically-connected Fannie and Freddie or a major Detroit auto manufacturer.
It does not appear that the Treasury and Fed have acted due to political motivation. Government interventionist is not a role that either Ben Bernanke or Hank Paulson would have ever cast himself. Yet faced with potential catastrophic failures of risk management in the private and public sectors, swift and dramatic action had to occur. Perhaps the failures will be addressed via increased regulation with tougher controls and better enforcement, i.e. “bigger government,” and then of course when the next upturn occurs, the pendulum will swing back towards a looser, more “hands-off” approach.
The trend is moving beyond the more conventional tools of monetary and fiscal action (Fed rate cuts and $168 billion of tax rebates) into direct intervention into the inner-workings of financial institutions. The JP Morgan takeover of Bear Sterns was engineered by the government and announced a new era where the treasury is now willing to extend credit against shady mortgage-related collateral. The next iteration of government’s new role was seen in last weekend’s plan to rescue Fannie and Freddie, which may cost taxpayers north of $200 billion when all is said and done. (It is estimated that the Fannie/Freddie bailout will not be as expensive as the $124B S&L bailout, which due to the magic of inflation, amounts to approximately $300B today.)
To many, this is a dangerous expansion of the government’s role in the financial system and increases the likelihood of moral hazard as other institutions assume that Uncle Sam’s safety net will be there when the next crisis emerges. The problem is that when pushed to the edge, government officials did not believe that there was a choice. As former Fed Chairman Paul Volcker said in April, “Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.” In other words, the free market could not save the financial system from near-collapse.
However, Volcker went on to point out this is unchartered territory. “Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank. As custodian of the nation’s money, the Federal Reserve has the basic responsibility to protect its value and resist chronic pressures toward inflation. Granted a high degree of independence in pursuing that responsibility, the Federal Reserve should be removed from, and be seen to be removed from, decisions that seem biased to favor particular institutions or politically sensitive constituencies.” In the last sentence, Volcker appears to give a nod to the problems of the politically-connected Fannie and Freddie or a major Detroit auto manufacturer.
It does not appear that the Treasury and Fed have acted due to political motivation. Government interventionist is not a role that either Ben Bernanke or Hank Paulson would have ever cast himself. Yet faced with potential catastrophic failures of risk management in the private and public sectors, swift and dramatic action had to occur. Perhaps the failures will be addressed via increased regulation with tougher controls and better enforcement, i.e. “bigger government,” and then of course when the next upturn occurs, the pendulum will swing back towards a looser, more “hands-off” approach.
Monday, September 8, 2008
Bailout Bingo
The aggressive and dramatic government intervention of the nation’s two largest mortgage finance companies brings with it a foregone conclusion to the 2008 game of Bailout Bingo. The music did not stop due to any specific event, rather Treasury Secretary Henry Paulson was forced to acknowledge that without government help, credit and equity markets would be left twisting in the wind, or worse. So now that the bailout of Fannie Mae and Freddie Mac is official, it’s time to break down the plan and identify the winners and losers.
By placing the GSEs into “conservatorship,” the government is basically allowing them to complete a much-needed reorganization where they will be recapitalized. While the initial commitment by the Treasury is $1 billion, Paulson has committed as much as $100 billion to each company to provide a backstop in capital shortfalls. Under the terms of the plan, the government will be able to buy the companies outright at a small cost. The structure that will enable that process includes:
· The plan does not eliminate the common and preferred shares of either institution, but the companies will stop paying dividends on existing common and preferred shares. In essence, common stockholders will likely be wiped out eventually and preferred stockholders will take a massive haircut on the value of their shares.
· Senior Preferred Stock will be issued to the government, which will take precedence over all other types of equity.
· The Treasury will purchase $1 billion of preferred stock from each GSE. The stock will pay a dividend to the government of 10%, which can rise to 12% if either company misses its dividend payments.
· The Treasury will receive warrants that will entitle it to ultimately own 79.9% of each company.
· The government plans to buy significant amounts of mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month.
· Beginning on March 31, 2010, the GSEs will pay what is essentially a management fee to the Treasury for all of its past efforts. The fee may be paid in cash or in additional issues of preferred stock.
Beyond the capital restructuring, the top brass at each company is OUT, replaced by the Federal Housing Finance Agency (FHFA). Two veterans of the industry will be brought in to run the companies during the reorganization. The new CEO of Fannie will be Herbert Allison, Jr., the former chairman of TIAA-CREF, succeeding Daniel Mudd and David Moffett, the recently-retired CFO of U.S. Bancorp, will replace Richard Styron of Freddie. Suffice to say that losing their jobs is not close to what should happen to these two, whose “stewardship” has been laughable. If they are able to collect their severance, retirement benefits or deferred compensation, it would be a travesty. Mudd has already taken home $12.4 million in cash since taking over Fannie in 2004 and Styron has pocketed $17.1 million in pay and stock options since 2003. That seems to be plenty, thank you very much!
Winners and Losers:
So who wins and losses under this vast plan? Let’s start with the Biggest Losers—US! Yes, the good ol’ American taxpayer is going to be on the hook for all of this debt, most of which was not our doing. It is unclear how much this clean up will cost—early estimates put the number at $200 billion, but until the housing market finds a bottom, we will not know the real damage. Until then, sit tight and try to imagine how the next administration is NOT going to raise taxes.
The common and preferred stock holders are going to lose—big time. Of course, this point seems silly now—common shareholders have already lost approximately 90% over the past year. This group includes some storied value mutual fund managers, like Bill Miller of Legg Mason, David Dreman and Martin Whitman, all of whom held and in some cases, increased, their holdings in both Fannie and Freddie. Among the preferred shareholders are some fairly large regional banks, like Sovereign Bancorp, which holds approximately 13% of its tangible capital in GSE preferred stock, and Midwest Banc Holdings of Illinois and Gateway Financial Holdings of Virginia and North Carolina.
The next loser is the free market. I don’t want to get all crazy on this one, because once the system went so completely awry, there were not a lot of good choices. Again, let’s not kid ourselves: the owners of Fannie and Freddie made a ton of money on the way up and now the government is socializing their losses. Of course, Wall Street, the bastion of “heads we win and tails you lose”, is happy with the deal, because it allows the institutions to continue operating. By keeping Fannie and Freddie afloat, the government will likely restore over a billion dollars worth of fees to the Street, which should help the big firms claw their way back into the black.
Other winners include those who are shopping for a mortgage (it is estimated that the plan will allow mortgage rates to decline by .25% or so); Bill Gross, the CIO of PIMCO, which owns $500 billion worth of mortgage-backed securities (wasn’t that Bill who last week squawked that the US had to bail out Fannie or Freddie or risk a financial system melt-down?). Yesterday, US equity owners were winners, although the reaction could be a one-day wonder, but heck, in this environment, we’ll take it! Finally, the former Fannie and Freddie CEOs, as noted above, have reaped the most amazing benefits, even as the music stopped in our game of Bailout Bingo.
By placing the GSEs into “conservatorship,” the government is basically allowing them to complete a much-needed reorganization where they will be recapitalized. While the initial commitment by the Treasury is $1 billion, Paulson has committed as much as $100 billion to each company to provide a backstop in capital shortfalls. Under the terms of the plan, the government will be able to buy the companies outright at a small cost. The structure that will enable that process includes:
· The plan does not eliminate the common and preferred shares of either institution, but the companies will stop paying dividends on existing common and preferred shares. In essence, common stockholders will likely be wiped out eventually and preferred stockholders will take a massive haircut on the value of their shares.
· Senior Preferred Stock will be issued to the government, which will take precedence over all other types of equity.
· The Treasury will purchase $1 billion of preferred stock from each GSE. The stock will pay a dividend to the government of 10%, which can rise to 12% if either company misses its dividend payments.
· The Treasury will receive warrants that will entitle it to ultimately own 79.9% of each company.
· The government plans to buy significant amounts of mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month.
· Beginning on March 31, 2010, the GSEs will pay what is essentially a management fee to the Treasury for all of its past efforts. The fee may be paid in cash or in additional issues of preferred stock.
Beyond the capital restructuring, the top brass at each company is OUT, replaced by the Federal Housing Finance Agency (FHFA). Two veterans of the industry will be brought in to run the companies during the reorganization. The new CEO of Fannie will be Herbert Allison, Jr., the former chairman of TIAA-CREF, succeeding Daniel Mudd and David Moffett, the recently-retired CFO of U.S. Bancorp, will replace Richard Styron of Freddie. Suffice to say that losing their jobs is not close to what should happen to these two, whose “stewardship” has been laughable. If they are able to collect their severance, retirement benefits or deferred compensation, it would be a travesty. Mudd has already taken home $12.4 million in cash since taking over Fannie in 2004 and Styron has pocketed $17.1 million in pay and stock options since 2003. That seems to be plenty, thank you very much!
Winners and Losers:
So who wins and losses under this vast plan? Let’s start with the Biggest Losers—US! Yes, the good ol’ American taxpayer is going to be on the hook for all of this debt, most of which was not our doing. It is unclear how much this clean up will cost—early estimates put the number at $200 billion, but until the housing market finds a bottom, we will not know the real damage. Until then, sit tight and try to imagine how the next administration is NOT going to raise taxes.
The common and preferred stock holders are going to lose—big time. Of course, this point seems silly now—common shareholders have already lost approximately 90% over the past year. This group includes some storied value mutual fund managers, like Bill Miller of Legg Mason, David Dreman and Martin Whitman, all of whom held and in some cases, increased, their holdings in both Fannie and Freddie. Among the preferred shareholders are some fairly large regional banks, like Sovereign Bancorp, which holds approximately 13% of its tangible capital in GSE preferred stock, and Midwest Banc Holdings of Illinois and Gateway Financial Holdings of Virginia and North Carolina.
The next loser is the free market. I don’t want to get all crazy on this one, because once the system went so completely awry, there were not a lot of good choices. Again, let’s not kid ourselves: the owners of Fannie and Freddie made a ton of money on the way up and now the government is socializing their losses. Of course, Wall Street, the bastion of “heads we win and tails you lose”, is happy with the deal, because it allows the institutions to continue operating. By keeping Fannie and Freddie afloat, the government will likely restore over a billion dollars worth of fees to the Street, which should help the big firms claw their way back into the black.
Other winners include those who are shopping for a mortgage (it is estimated that the plan will allow mortgage rates to decline by .25% or so); Bill Gross, the CIO of PIMCO, which owns $500 billion worth of mortgage-backed securities (wasn’t that Bill who last week squawked that the US had to bail out Fannie or Freddie or risk a financial system melt-down?). Yesterday, US equity owners were winners, although the reaction could be a one-day wonder, but heck, in this environment, we’ll take it! Finally, the former Fannie and Freddie CEOs, as noted above, have reaped the most amazing benefits, even as the music stopped in our game of Bailout Bingo.
Fan/Fred I Are Dead: Long Live Fan/Fred II!
Why is it that they always drop the bomb after the close on a Friday? That’s what the panel of Fox Business’ “Bulls and Bears” noted during a commercial Friday at about 4:15 pm, after Wall Street Journal writer Deborah Solomon joined us after breaking the story of the government bail-out of Fannie Mae and Freddie Mac.
I opined that the “on-the-record” rationale was that the parties involved needed a weekend to iron out the details (as if they have not been working on this massive endeavor for months!), while the not-so-subtle benefit was that the news would make the hedge funds crazy and potentially cost them some money. Regardless of the timing, the group agreed that action was necessary, if not wholly desired on an intellectual level.
At the time of this writing (Saturday afternoon), the details of the plan were not fully known, but it is believed that the US government is about to make its backing of mortgage giants Fannie Mae and Freddie Mac from implicit to explicit. According to people briefed on the secret discussions, the companies are likely to be into government conservatorship of their regulator, the Federal Housing Finance Agency; the current executives and boards of the two companies will be replaced; common stockholders (and potentially preferred shareholders) would be virtually wiped out; and the companies will continue to function because the government will now be standing behind the debt on their balance sheets. In essence, the government will temporarily run the companies, probably by injecting capital on a quarter-by-quarter basis.
For those who thought the government’s role in Bear Sterns was a big deal, fasten your seatbelts—according to Solomon, this “would represent perhaps the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago.” This makes everyone seethe, including me. But once the barn door was open on the situation, I am not sure what the alternative could have been. After all, Fannie and Freddie own or guarantee more than $5 trillion of mortgages and given the state of the already depleted housing market (Fan/Fred are now responsible for nearly 70% of new loans), it was simply untenable to allow them to fail and for the mortgage market to completely seize up.
Treasury Secretary Paulson knew as much, which is why he sought and eventually gained the authority to intervene in the two companies at the height of fear in July. Since then, federal officials have been working with bankers at Morgan Stanley (they are only charging Uncle Sam for overhead, not their customary consulting fees) to figure out how to untangle the mess. The answer is now becoming clearer— Fan/Fred will continue to operate as the government cleans up and restores their balance sheets. How do we all participate in this fiasco? Well, US taxpayers will be on the hook for the huge potential liabilities of the companies, which some estimate to be somewhere in the $40-$50 billion range. This is why we should invoke the old English mantra: Fan/Fred I Are Dead: Long Live Fan/Fred II!
I opined that the “on-the-record” rationale was that the parties involved needed a weekend to iron out the details (as if they have not been working on this massive endeavor for months!), while the not-so-subtle benefit was that the news would make the hedge funds crazy and potentially cost them some money. Regardless of the timing, the group agreed that action was necessary, if not wholly desired on an intellectual level.
At the time of this writing (Saturday afternoon), the details of the plan were not fully known, but it is believed that the US government is about to make its backing of mortgage giants Fannie Mae and Freddie Mac from implicit to explicit. According to people briefed on the secret discussions, the companies are likely to be into government conservatorship of their regulator, the Federal Housing Finance Agency; the current executives and boards of the two companies will be replaced; common stockholders (and potentially preferred shareholders) would be virtually wiped out; and the companies will continue to function because the government will now be standing behind the debt on their balance sheets. In essence, the government will temporarily run the companies, probably by injecting capital on a quarter-by-quarter basis.
For those who thought the government’s role in Bear Sterns was a big deal, fasten your seatbelts—according to Solomon, this “would represent perhaps the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago.” This makes everyone seethe, including me. But once the barn door was open on the situation, I am not sure what the alternative could have been. After all, Fannie and Freddie own or guarantee more than $5 trillion of mortgages and given the state of the already depleted housing market (Fan/Fred are now responsible for nearly 70% of new loans), it was simply untenable to allow them to fail and for the mortgage market to completely seize up.
Treasury Secretary Paulson knew as much, which is why he sought and eventually gained the authority to intervene in the two companies at the height of fear in July. Since then, federal officials have been working with bankers at Morgan Stanley (they are only charging Uncle Sam for overhead, not their customary consulting fees) to figure out how to untangle the mess. The answer is now becoming clearer— Fan/Fred will continue to operate as the government cleans up and restores their balance sheets. How do we all participate in this fiasco? Well, US taxpayers will be on the hook for the huge potential liabilities of the companies, which some estimate to be somewhere in the $40-$50 billion range. This is why we should invoke the old English mantra: Fan/Fred I Are Dead: Long Live Fan/Fred II!
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