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John Wayne's Holster: The United States of America: the Land of Privatized Profits & Socialized Losses
John Wayne's Holster
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Wednesday, September 10, 2008

The United States of America: the Land of Privatized Profits & Socialized Losses


Bankers Take the Money & Run

As I am sure you all heard over the weekend, the government announced the take-over of Fannie Mae and Freddie Mac (hereafter, F&F). While the ultimate cost is not yet known, financial analysts estimate that is could be somewhere in the neighborhood of $100 to $500 billion.

It’s the biggest bail-out in the history of the US!

We all knew it was coming! The audacity of the move is shocking nonetheless.

You can read all about Treasury Secretary Paulson saying the move protects the taxpayer , or that it puts them first.

Sounds great! Now I can sleep at night knowing the government has come to the rescue. On second thought, maybe I should sleep with one eye open...

Here’s how the government's bail-out works. When reading this, please keep two things in mind. When they say the “government” bailed-out F&F, they don’t really mean the government. It was really the you and me - the taxpayers. And when they say the Federal Reserve Bank, be wary. If they are referring to the taking of profits, then they do actually mean the Fed; however, if they are talking about covering losses or picking-up the tab, once again they mean you and me - the taxpayers. Got it?

The Fed pumped about $100 million in capital into each company to keep them solvent. In return, they received $ 1 billion in senior preferred stock. In the process, common and preferred stock holders were essentially wiped-out.

What does all this mean? For starters, the Fed didn’t have the money to cover all the bad loans. However, that is not a problem when you hold the purse strings of the treasury and have control of the printing press. The required money was simply printed, effectively transferring the cost to the taxpayer. I guess that’s what Paulson meant when he said the deal put the taxpayer “first”.

The deal also means big profits for the Fed and its member banks, such as Citibank, Chase Manhatten, Morgan Guaranty Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers Trust Company, National Bank of North America, and the Bank of New York.

How do they profit? That’s where the senior preferred stock comes into play. One needs to keep in mind that not all the loans F&F made were bad ones. In fact, most were good loans, with borrowers who continue to pay on time. Holding senior preferred stock means that the bankers can continue to collect the interest on these loans.

That’s right, the bankers will continue to collect the interest on the good loans! The taxpayers cover the losses for the bad loans.

When you boil it all down, the bail-out is nothing more than a socialist scheme where earnings are privatized and losses are socialized. It’s the modus operandi of the Federal Reserve System. It’s the same thing that happened in the Penn Central Railroad bail-out, the Chrysler bail-out, the Continental Illinois Bank bail-out , the Lockheed Aircraft bail-out and the New York City bail-out, just to name a few. In all these cases, the taxpayer was forced to foot the bill for the irresponsible businesses practices of corporate America.

Does that sound like free-market capitalism or democracy to you?

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