If the bailout deal for Fannie Mae and Freddie Mac was hard to understand for a finance veteran like New Jersey Governor Jon Corzine, a former CEO at Goldman Sachs, then try explaining it to the average American.
Corzine, who was in the studio for an interview with Cramer Monday, said that even Washington’s fix for the Fannie-Freddie problem wasn’t clear. Anyone who said they have it all figured out is probably “overdoing it.”
“I thought it was complicated,” Corzine said, “and I’ve lived in this world.”
“I think this is very hard for people who are not involved in finance deeply, don’t understand securitization and a lot of those issues.”
But the governor called the deal “necessary,” because the housing and mortgage markets were only going to get worse. There was also a good likelihood, Corzine said, that countries like Russia and China, which held a lot of Fannie and Freddie paper, told the U.S. government that they refused to buy anymore and were pushing for an immediate solution to the problem. Cramer noted how interesting it was that foreign governments seemed to hold more sway over Washington than the American homeowner.
Corzine was unwilling to put the blame on any particular political party, saying that issues with Fannie and Freddie had been going on for a long time. His gripe was that the government waited as long as it did.
“Earlier action would have caused, I think,” Corzine said, “a lot less distress in the financial markets.”
That lack of action gave banks plenty of time to collect more and more bad loans, so it’s going to be some time before the write-offs end.
“It took long to get here,” Corzine said, “so a lot of financial institutions are in trouble and they need to keep shrinking their balance sheets.”
Another problem is that the Fannie-Freddie bailout might have used up the government’s one “get out of jail free card.” When the next great crisis comes along – Cramer mentioned Ford and General Motors – it will be that much harder for the government to step in.
“I think it’s going to make it very hard to have multiple, back-to-back kinds of bailouts that you’re having here,” Corzine said.
Then there’s the fact that many banks were encouraged to buy the two mortgage giants’ preferred stock, the dividends on which have been suspended now, before the bailout.
“This has got a lot of secondary implications,” Corzine said. “I think [they’re] going to be pretty hard on the system.”
In the end, though, homeowners should feel at least a little bit better about this development. Maybe they won’t right away, he said, but there’s a chance next spring’s buying season could be stronger than previously expected. And while there’s still plenty of housing supply, declining job growth and lower household incomes to contend with, Corzine seemed confident that the Fannie-Freddie deal was positive overall.
“The people that are actually benefiting the most in the long run, if this program works,” he said, “will actually be the homeowners. But that will take time.”
Jim's charitable trust owns Goldman Sachs.
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