Subscribe to Print Edition | Thu., July 31, 2008 Tamuz 28, 5768 | | Israel Time: 02:20 (EST+7) web haaretz.com   Back to Homepage Rosner's Domain Diplomacy Defense Jewish World Opinion National Print Edition Car Rental Books Haaretz Magazine Business Real Estate Easy Start Travel Week's End Anglo File

Last update - 12:15 28/07/2008 Why should Israelis care about American economic woes? By Guy Rolnik Tags: Israel, United States  Why should I, a reader in Israel, care about Fannie and Freddie, which are purely American companies? Because the American economy is still the biggest in the world, because the factor that affects Israel's economy the most is still America and because Fannie Mae and Freddie Mac are the reason U.S. treasury secretary Henry Paulson and Fed chairman Ben Bernanke are losing sleep at night. Why are they losing sleep? They're still new on the job. Is Fannie and Freddie's collapse their fault? Advertisement No, they inherited the real estate and mortgage bubble from George W. Bush and Alan Greenspan. But the last thing they need is for Fannie or Freddie or both to collapse on their watch. Why? Because Fannie and Freddie hold half of America's housing market, something around $6 trillion, and their collapse would trigger a financial Armageddon, a catastrophe on a scale that Wall Street has never seen. Financial Armageddon? Aren't you overdoing it? Not at all. If genuine doubt about their financial stability arises then investors holding their bonds will suffer losses that make the subprime crisis look like child's play. Subprime-related losses - on mortgages given to high-risk borrowers - are estimated to be about $400 billion. Fannie and Freddie's balance sheet is 15 times bigger. You said Washington would back them, that they're too big to be allowed to fail. It is, actually. Paulson said the federal government would do what it had to do to prevent their collapse, including temporary credit lines and buying their shares. So why didn't he spell it out, that he's nationalizing them? That they belong to Uncle Sam? Because saying that would deliver a really bad message to America's bankers and the entire investment and economic community - when the going gets tough, SuperFed will fly in with wagonloads of cash and solve all the problems. What's wrong with that? Isn't that what a government should do? No. If people think Washington will rescue privately-owned financial institutions every time trouble arises, it would undermine the foundation of the entire global capital-market system. Really. What's the foundation? Simple. The winners are also the ones who lose. Players who take risks must bear the consequences if the risks materialize. That's capitalism. And how is it undermined? In the case of Fannie and Freddie, there is concern that the profits were privatized and the risks nationalized. For years these two earned pots of money which went to investors and managers. But when the risks in their business became manifest, suddenly capitalist Fannie and Freddie turned socialist and reached for Uncle Sam. How? For years they raised money on Wall Street at a very low cost to themselves, because investors thought they were rock-solid and backed by the government - they'd been founded by the government and were supervised by the government. Because they could raise money so cheaply, Fannie and Freddie grew into monsters owning half the American mortgage market. Their rapid growth made their shareholders and managers very rich. Now after 10 years of meteoric growth, during which the American real estate bubble grew and grew too, they're simply too big to be allowed to fall. Didn't anybody notice they were growing into monsters? Plenty of people, but Fannie and Freddie had a strong lobby in Washington and nobody wanted to speak against companies lending money to millions of Americans to buy homes. Why are they suddenly faltering? Two reasons: U.S. housing prices are plunging and some of the mortgages are now bigger than the value of the assets underlying them. Didn't Fannie and Freddie think of that possibility? Fannie and Freddie did consider the possibility of some losses on high-quality mortgages. What they didn't think of was the sheer mass of losses on lesser-quality mortgages, the subprime type, extended to dubious borrowers. What? Did Fannie and Freddie grant subprime mortgages? I thought they only lent to quality borrowers. They could raise money at low cost and got greedy, and yes, they also poured some of that capital into shaky mortgages that offered higher interest rates. Why? For the bonuses, of course. For their executives. So now Washington is handing over billions upon billions to rescue a company whose managers took risks to get bonuses? Not directly: Washington will somehow guarantee Fannie and Freddie's debts, or buy the companies outright, dismantle them and sell their portfolios piecemeal. What's the risk? That history will repeat itself. That people in the capital market will learn that they can take foolish risks because when the crunch comes, Uncle Sam and his checkbook will be there. Maybe those greedy capitalists should be taught a lesson. That the taxpayer won't guarantee their gambling. Yes, but it's a problem this time. If the Fed lets Fannie and Freddie fall, Americans will have to lower their standard of living. For years the Chinese and Japanese have been financing the United States' huge trade and budget deficits by buying portfolios of American mortgages and bonds, including Fannie and Freddie's bonds, paying hundreds of billions of dollars. The Chinese alone own about $1.5 trillion worth of bonds in Fannie and Freddie and their ilk. So the Chinese and Russians and Saudis lose some money. Big deal. True, Paulson and the Americans don't care about that. But Paulson has to keep financing the giant American deficits, and the ones financing them are the Chinese, Japanese, Russians, Koreans and Saudis buying American bonds. They may figure that the American star is waning and seek investments elsewhere, or demand higher interest rates. Quite a headache for Paulson. Why do we Israelis care? One reason for the shekel's might against the dollar is the flight from dollar investments. Israelis aren't investing abroad and foreign investors are liking the shekel. Terrific. Not really. The U.S. crisis will cause a global slowdown and the fear on Wall Street will cause a global credit crunch. If it's dangerous to lend to institutions like Fannie and Freddie, all lending will suddenly seem more frightening. Maybe that's a good thing? Investors will start pricing risk more sensibly? The cheap money spree will end? Yes. The real solution to the borrowing madness and cheap money of the last five years is sobriety, reevaluation of risk and a lot of pain for investors, borrowers and all the rest who lived off the cheap money. In two or three years, things will be better. Before that, though, there will be a lot of soul-searching about how American capitalists led the Fed to force taxpayers to finance their failures. Bookmark to del.icio.us   Internal fighting Human rights groups say torture is widespread in Palestinian lockups. Danger looms Pentagon chief Robert Gates warns: War with Iran would be 'disastrous.'   1.   God bless the US Treasury`s printing presses 09:47  |  Clickfool 28/07/08   2.   Capitalism = The rich get richer, the poor get poorer 10:39  |  Natallie Durson 28/07/08   3.   did you have to be agenius to know the bubble would burst? 10:48  |  victor hardman 28/07/08   4.   WHY ??? 1.because US is an ally 2The US economy affects the world 13:08  |  PETER SM 28/07/08   5.   CFOOL Where did you see the printing of more money by the USA? 13:11  |  PETER SM 28/07/08   6.   Time for America to Die 00:46  |  El Che 31/07/08

Read & React Abbas vows to dismantle PA if Israel frees Hamas prisoners for Shalit Responses: 201 Palestinian boy, 11, killed during protest at West Bank fence Responses: 262 Haaretz TV: Hamas summer camp teaches Gaza kids to hate and kill Responses: 145 Barak: U.S. to provide Israel with defense systems against Iran strike Responses: 88 Olmert: I'll quit once new Kadima leader chosen Responses: 57 More Headlines 01:19 Olmert: I'll quit as PM when Kadima picks new leader 02:02 Peace talks to continue despite Olmert declaration, say PA and U.S 01:32 ANALYSIS: Crushed and battered, Olmert finally broke 22:20 Poll: Netanyahu is public's preferred choice for next PM 01:01 Report: Obama 'gets the feeling' Israel to strike Iran if sanctions fail 01:56 Palestinians: IDF troops wound 9 at boy's funeral in West Bank 23:38 Israeli defender Tal Ben-Haim signs with Manchester City FC 22:25 Background / Scandals linked to Olmert 16:46 Syria and Israel end 4th round of indirect talks, more set for Aug. 18:05 State panel of inquiry to probe treatment of evacuated settlers 10:51 Can a 14-year-old computer geek be the CEO of a startup company? 17:38 Study: Both Hamas and Fatah guilty of human rights violations 17:35 Court orders squatters to quit East Jerusalem property at once 19:10 German broadcaster shuts Gaza office to protest camerman's arrest Previous Editions Select Day 30 jul 29 jul 28 jul 27 jul 25 jul 24 jul 23 jul 22 jul 21 jul 20 jul 18 jul 17 jul

Special Offers Advertisement Fattal Hotel Chain Perfectly located hotels on best resorts of Israel. MBA in Israel in English APPLY NOW! Limited spaces available Israel's Premier Real Estate Website www. israel-property.com Yossi Avrahami Presents: New Luxurious Projects in North Tel Aviv & Eilat Your vacation starts here Israel Travel Center Guaranteed Lowest Rates Hebrew Summer courses From $39.95 ISRAEL BONDS Build Israel Israel bonds - a multi-purpose way to celebrate Israel's 60th Eldan Rent a Car Israel's leading car rental company offers you a 20% discount on all online reservations Junkyard Junk a car - get free towing nationwide and a tax-deductible receipt

Home | TV | Print Edition | Diplomacy | Opinion | Arts & Leisure | Sports | Jewish World | Underground | Site rules |

Real Estate in Israel | Travel to Israel with Haaretz | Hotels Israel | Restaurants Israel | Tourist attractions Israel | Shops Israel

birthright Israel | Search engine marketing

Haaretz.com, the online edition of Haaretz Newspaper in Israel, offers real-time breaking news, opinions and analysis from Israel and the Middle East. Haaretz.com provides extensive and in-depth coverage of Israel, the Jewish World and the Middle East, including defense, diplomacy, the Arab-Israeli conflict, the peace process, Israeli politics, Jerusalem affairs, international relations, Iran, Iraq, Syria, Lebanon, the Palestinian Authority, the West Bank and the Gaza Strip, the Israeli business world and Jewish life in Israel and the Diaspora.

© Copyright  Haaretz. All rights reserved