FEEL BETTER NOW?

Feel better now?

President Bush, Henry Paulson and Congress have cooked up their $300 billion housing rescue package. Perhaps this may help you, or your neighbors (if your lender cooperates and if the numbers still make sense for hanging onto a house rather than walking away from it).

Or as a taxpayer, perhaps you are bemused. You, the taxpayer, and your government, now explicitly guarantee Freddie Mac and Fannie Mae and
are responsible for propping up their stock price. Public guarantees for
private risk taking enterprises. The times, they are a’changin….

One commentator, Bert Ely, was quoted as saying “We have two gigiantic hedge funds out there that now are almost wards of the federal government”.

It’s part of the “too big to fail” philosophy that seems to have taken root in Washington.

It got me thinking about CIGA, the California insurance Guarantee Association. CIGA is funded by surcharges on solvent insurers. CIGA pays the California workers’ comp liabilities of insolvent carriers. Although financially stressed a few years ago when several insurers were liquidated , CIGA came through the crisis.

Could a CIGA-like system be designed where mortgages were surcharged to create a national bailout fund to deal with the kind of crisis we’re seeing? Perhaps not. I’m no mortgage industry expert.

But taxpayers-and renters-are now on the hook. The potential exposure is absolutely astounding.

It’s also a generational issue. Gen Next kids may be holding the bag for the foibles of Baby Boomer and Gex X folks. Go buy a copy of Christopher Buckley’s “Boomsday” for your August read on the beach.

The Fannie and Freddie bailouts create a precedent for other bailouts that is disturbing. Big banks may fail. It’s not likely, but what if a large insurer should fail? CIGA will cover the California comp liability, but then there’s always Uncle Sam.

You and me.

Julius Young
www.boxerlaw.com

Category: Political developments