Thursday, July 24, 2008

Half-Baked Baker

Dean Baker , whose shtick is bashing the media for poor economic analysis, over at his blog, Beat The Press, has apparently made a doozie of an error, himself.

Over two posts and an additional comment, Baker is either guilty of poor writing, or poor writing and not understanding what the Treasury is attempting to do in the Fannie Mae/ Freddie Mac rescue.

In a post yesterday, Baker wrote:

There is a clear rationale for making good on Fannie and Freddie's bonds... .

But what interest does the public have in protecting the share prices of Fannie and Freddie stock? Don't stockholders understand they take a risk when they buy stock? In this case, the stockholders made a bad investment. They are supposed to lose their money (possibly all of it), right?

I have yet to hear any explanation from anyone as to why the government is supporting the share price...

NPR's "Power Breakfast" did an unbelievably awful segment in which it commented that some conservatives oppose bailing out shareholders as "socialism." What? Huh? Is this Planet Earth? Socialism is about giving tax dollars to shareholders? In which volume of Das Kapital does this appear? Conservatives may oppose the bailout for whatever reason, but handing tax dollars to shareholders does not correspond to any definition of socialism I've ever seen.

I replied to this in the comment section:

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

Paulson was clear on this, here.

Since, socialism refers to various economic and political concepts of government whereby ownership and administration of property and the means of production are controlled by the state, the Treasury buying shares (ownership) and influencing the operations (administration) of Frannie and Freddie, sounds to me like NPR nailed the socialism call..

Late yesterday, Baker posted again with more sloppy writing and confusion:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

This is as much a bailout as if Treasury just sent a multi-billion dollar check to be
divided among the shareholders. This is exactly the sort of nonsense that Treasury invents so that it can do a bailout without owning up to it. Reporters are supposed to catch this sort of deception and inform the public of what is really going on. Paulson is betting that the U.S. press corps is sufficiently incompetent that the public will not realize that they are being taxed to reduce the losses of Fannie and Freddie shareholders.

--Dean Baker

I have not seen, anywhere where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.

Further, this particular part of his post :

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level
is just total nonsense. Treasury has never ever said they would step in to buy stock if the share price of Freddie or Fannie drop to a certain level.

At best, in the following ,we can possibly say that only the sloppy writing comes in, when Baker states the Treasury " prepared to buy shares if the stock of Freddie and Fannie fall below a certain level..." He does not state at all that the Treasury is only going to buy newly issued shares from the Treasury. I wonder if he really understands this? His writing can clearly lead to the impression that the Treasury may well go into the open market to buy stock, which is completely not the case.

Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

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