Investors in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) must be applauding the government bailout. To my knowledge, it is unprecedented for the government to trade this openly in the stock of a private company. It is as if the government has become Goldman Sachs Group Inc. (NYSE: GS) which is not surprising since the Treasury Secretary, Hank Paulson, used to run Goldman.
Based on what has happened it looks to me like the Administration is trying to prove just how incompetent government is so we will agree to cut its budget. There are two possibilities: either the government knew how bad things were and did nothing or it didn't know. If it did know how bad things were, it should have done something to fix the problem, such as requiring Fannie and Freddie to raise more capital a year or two ago.
Perhaps it knew last week how bad things are and did not release data supporting its claim that they were in good shape because such data did not exist. If they were in good shape, the government should have been able to release comforting data and the problem would have gone away. The need to announce the bailout plan as a way to save them suggests an amazing lack of insight into their ability to cover their liabilities years or a realization that they were bankrupt and needed to be bailed out.
If it did not know how bad things were, that's even more shocking. In either case -- it knew and did nothing or it didn't know -- the government is exhibiting gross dereliction of duty. But I think its incompetence is demonstrating the need for really capable and empowered regulators. I am hoping America will realize how important regulation is for the effective operations of a free-market economy.
In pre-market, Fannie and Freddie are up 23% and 21% from their Friday close. I am not sure how much this bailout will cost us taxpayers. But I think the executives who were supposedly running these companies and the regulators who were supposed to be keeping them out of trouble should pay a price. Why should innocent taxpayers pick up the tab for their mistakes?