Stealth Buyout for Countrywide Financial
I saw an article today on CNN about Sen. Chuck Schumer's (D-NY) questioning of an unusally high loan given by the Federal Home Loan Bank in Atlanta to Countrywide Financial, the nation's largest mortgage lender. Even in the wake of Vice President Dick Cheney statement that "there will be no bailouts", Countrywide has borrowed $51 billion this year from a federally secured lender.... and these loans entail a disproportionately high risk of default. These are not the type of loans that are given to troubled companies.
To quote the recent AP piece:
"At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk," Schumer said in a prepared statement Monday, citing Countrywide's emphasis on so-called "payment-option" mortgages, a loan in which the borrower has the option to allow the principal balance to increase."
and later in the same piece:
"Like mortgage finance giants Fannie Mae and Freddie Mac, the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis."
In laymen's terms:
Countrywide got itself in a bind by offering subprime loans to people who weren't particularly able to pay them once their rates reset. Now they have been offered $51 billion in loans by a federal bank to offset the losses from loan defaults. If Countrywide defaults on the loans, it will mean that the US taxpayers will bailout a business that engaged in risky lending practices. If we allow businesses with unethical and destructive practices to privately derive all the benefit but socialize the risk onto society, we are essentially subsidizing unethical business practices and corporate stupidity.
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"Capitalism without failure is like religion without sin" says Allan Meltzer professor of Politcal Economy at Carnegie Mellon and visting scholar at the conservative American Enterprise Institute.
"The answer to excessive risk-taking is "let 'em fail."
UPDATE 1/8/08
Looks like the word on the street is that Countrywide is about to declare bankruptcy. The loser? The American taxpayer.
To quote the recent AP piece:
"At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk," Schumer said in a prepared statement Monday, citing Countrywide's emphasis on so-called "payment-option" mortgages, a loan in which the borrower has the option to allow the principal balance to increase."
and later in the same piece:
"Like mortgage finance giants Fannie Mae and Freddie Mac, the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis."
In laymen's terms:
Countrywide got itself in a bind by offering subprime loans to people who weren't particularly able to pay them once their rates reset. Now they have been offered $51 billion in loans by a federal bank to offset the losses from loan defaults. If Countrywide defaults on the loans, it will mean that the US taxpayers will bailout a business that engaged in risky lending practices. If we allow businesses with unethical and destructive practices to privately derive all the benefit but socialize the risk onto society, we are essentially subsidizing unethical business practices and corporate stupidity.
____________________________________________________________________________________
"Capitalism without failure is like religion without sin" says Allan Meltzer professor of Politcal Economy at Carnegie Mellon and visting scholar at the conservative American Enterprise Institute.
"The answer to excessive risk-taking is "let 'em fail."
UPDATE 1/8/08
Looks like the word on the street is that Countrywide is about to declare bankruptcy. The loser? The American taxpayer.