This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Ironically, a free-market-loving Republican administration is presiding over the most ambitious intrusion of government into the market in almost anyone’s memory. But to what end? Bailouts, subsidies, and government insurance won’t help Wall Street because the Street’s fundamental problem isn’t lack of capital. It’s lack of trust.
— Clinton administration Labor Secretary Robert Reich, in a posting on his blog.
By deciding essentially to wipe out shareholders in Fannie Mae and Freddie Mac and acting even more harshly to the shareholders of Lehman Brothers this weekend, Mr. Paulson has sent the clearest possible message to investors around the world: do not buy shares in any bank or insurance company that could, under any conceivable circumstances, run short of capital and need to ask for government help; if this happens, the shareholders will be obliterated and will not be allowed to participate in any potential gains should the bank later recover…. The investors who were ‘punished’ by the loss of shareholder wealth in Fannie Mae, Freddie Mac and Lehman were not the speculators who encouraged and financed their reckless lending in 2004-06. They were value-orientated investors betting on a long-term recovery in the US economy and whose willingness to invest on the basis of such recovery could have prevented these companies’ collapse.
— Anatole Kaletsky, the Times of London
Sometimes the government can turn a mere windstorm into a full-fledged cyclone. The Treasury Department and the Federal Reserve don’t appear to be operating under any clear principles as they go about seizing or saving companies or refusing to. “I laid out — where do you stop? Where do you draw the line?” Senator Shelby of Alabama told reporters yesterday about his conversation with the Treasury secretary, Henry Paulson. “I was not satisfied with his answers,” Mr. Shelby told the Associated Press. “I said, ‘Mr. Secretary … you’re picking and choosing. You have to have a set policy.'”
What has become clear is that Mr. Paulson’s decision suddenly to seize Fannie Mae and Freddie Mac without so much as a shareholder vote or even a clear capital crisis hasn’t exactly inspired confidence in the rest of the financial sector. Rather than stopping the trouble, it spread it, so that Lehman Brothers failed, AIG cratered, and Merrill Lynch ceased to be independently viable.
But what does it mean for the rest of the insurance industry that the federal government may now own 80% of AIG? If you are Geico or Aflac or New York Life, how are you supposed to compete with a company that has the power of Uncle Sam behind it?
And what is the message sent about other big companies in the financial services industry that AIG has qualified as too big to fail? Then the other financial giants such as Citigroup, JPMorgan Chase, and Bank of America almost certainly fall into that category and now become implicitly federally backstopped institutions in their own right.
The Hill newspaper last night was quoting House Speaker Pelosi as disavowing any Democratic responsibility for the Wall Street downturn, but sooner or later all these newly nationalized institutions, from Fannie and Freddie to AIG, are going to end up in the hands of either a Democratic administration or Congress — or both. And who knows what political purposes the companies will be put to? Already Democrats are urging Fannie to ease up on foreclosures, in between debating which taxes to increase, and how fast to raise them, in the Obama administration.
We certainly weren’t rooting for the failure of Lehman Brothers or Bear Stearns or Merrill Lynch or AIG. All are valuable institutions that have contributed much to New York City. But there are ways other than government takeovers to keep such companies in business. One thing the Great Depression taught us is beware of government-manufactured uncertainty. The premium is on a government that acts according to understandable principles and a deference to property rights and the rule of law rather than improvising its way though a financial crisis.