Death in Vienna

One can never know for sure what goes into a decision to commit suicide, and there is still much too little known about the circumstances surrounding Freddie Mac chief financial officer David Kellerman’s suicide in the Washington suburb of Vienna, VA for me even to speculate. It does seem that he was under heavy pressure at work as CFO of a quasi-company-quasi-government-agency that lost $50 billion last year. I’ll just link to this WaPo story and this NYT story that offer a few more details than I’ve seen on various TV reports.

I'm not sure why seeing Kellerman's house on cable news struck me so hard, except that when I lived in the capital area, in Falls, Church, next door to Vienna, I spent a fair amount of time in Vienna, shopping, going to a particular bar, concerts at Wolf Trap, etc. I'm sure I drove through that neighborhood numerous times -- way above my price range then or now, but nice to look at.

It also reminded me that I can always say that I played in the pit orchestra for performances of a Franz Lehar operetta done by the Civic Light Opera Company of Vienna -- Vienna, Virginia, that is. Since I left there in 1980 to come home to California and the Register, it had to be 1978 or 1979. They recruited wind players from a community band I was playing in, and since I was the only bassoonist who showed an interst, I was in. The operetta was "Land of Smiles," and actually the music was pretty easy.

AIG: not too big to fail

I had a nice chat with Bill Niskanen, chairman of the Cato Institute, while writing this editorial for the Register on the decision to offer another $30 billion in bailout money from the taxpayers to AIG, the insurance behemoth. As he put it, when the gurus say a company is "too big to fail," the proper response is that it's too big to subsidize, because it has all the leverage over taxpayers. The ironic thing is that there are pieces of AIG that are nicely profitable, but it got caught up in exotic secondary mortgage market instruments like Fannie and Freddie (which should be cut up into little pieces and sold to the private sector instead of being given another $200 billion to squander).

Explaining Fannie and Freddie

A great deal has happened since this explanation of how Fannie Mae and Freddie Mac hit the wall was published, let alone written. The last week's developments challenge the designation as the "mother of all bailouts. But I think (after a whole week) it still stands up as an explanation of how these government-sponsored enterprises got into such serious trouble. I was flattered when I talked to Esmael Adibi, who heads the Anderson Center for economic research and forecasting at Chapman University, and he told me he had made copies for his MBA students to consult.

Fannie and Freddie need to be disassembled

Well, the stock market went up dramatically the day after the government announced the bailout of Fannie Mae and Freddie Mac, then plunged almost the same amount the next day. Gerald O'Driscoll, former chief economist at the Dallas Federal Reserve, whom I talked to for an article I'm writing for Sunday, told me it was the typical pattern after a bailout -- elation for a day, then sobriety as the implications sink in. He doesn't know why investors are so naive as to repeat the pattern again and again.

Anyway, here's the Register's take on it (at least initially, we'll have more to say on Sunday), recommending that the two be disassembled and sold to the private sector in small chunks. Having the GSEs be so predominant in the secondary mortgage market was never intended, and the result is that financial markets all over the world are at risk because the two have so much debt going sour and lots of institutions holding shares. The notion that only a government agency can handle this chore is a myth. After the recent accounting scandal, Fannie and Freddie's share of the market plunged to 14 percent in 2005 (it's about 42 now) and the mortgage market didn't even notice. Plenty of private companies are performing the same insurance and securitization functions, but more responsibly.

Japan's gridlock -- and the U.S. gets the disease

Wouldn't you know it! Last Friday, on the heels of the news that Japanese prime minister Fukuda was retiring, I did an editorial decrying the gridlock in Japanese politics and the fact that the cozy relationship between the government and big businesses leads to the "too big to fail" psychology when it would be a good idea to let some of those Japanese enterprises, especially a bank or two, fail. So over the weekend U.S. Treasury Secretary Henry Paulson demonstrates that the U.S. has the disease too, with the bailout of Fannie Mae and Freddie Mac. I'll have more on this as the week goes on and I have a chance to talk to a few more people, but it demonstrates just how socialized our economy has become, under both parties (remember Bush grew the government -- discretionary domestic spending, not just the war --faster than since the Great Society and maybe since the New Deal). The best bet now would be to break up these two mortgage buyers and fully privatize them, but the temptation of privatizing profits and socializing losses may still be just too tempting.

Fannie and Freddie get a lifeline

Here's a link to the Register's editorial on the decision to give Fannie Mae and Freddie Mac, the two giant "government-sponsored enterprises" that dominate the secondary mortgage market and are in trouble because of the increasing number of defaults during the housing downturn/ bubble-burst/whatever, the key to the Fed's discount window. I know the hope was that simply making it available would halt the stock price downturn and it wouldn't have to be used, but . . . As Peter Wallison of AEI, who was recommended to me by several people as one of the more knowledgeable people who keeps an eye on this part of the economy, the two are neither private fish nor government fowl. It's never been explicit but always implicit that the government wouldn't let them fail. Now that it's fairly explicit, the taxpayers could be on the hook big-time. The $150 billion to make depositors whole during the 1980s S&L crisis might start to look like chump change.