Keith Fitz-Gerald

How I Would've Handled the Bailout Fiasco

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I was speaking to a standing-room-only crowd at a North Carolina investing conference recently when a sharply worded question soared over the group from a gentleman seated in the back row -- and who was clearly agitated by my analysis of the whole bailout-plan situation.

"How would you have handled it differently, Mr. Smarty-Pants?" he asked, in a challenging voice.

What I'm about to say is academic because -- when it comes to the bailout plan -- "Bernanke, Paulson & Co." has already made up its mind.

Missed Opportunities

I believe Paulson actually missed a historic opportunity to remove the U.S. taxpayer from further financial troubles rather than lump more debt on them, just as I believe Bernanke missed several opportunities earlier this year.

By appointing the Federal Housing Finance Authority (FHFA) as a conservator, U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. has essentially assigned the FHFA to be the legal guardian of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). And that's good, since conservatorships are typically established when a company can't take care of itself and is considered incapable of handling its own affairs.

In this instance, both Fannie and Freddie qualify as not only being incapable, but perhaps even criminal as well, after hemorrhaging capital over the past 12 months. And this situation was even more complicated than it initially appeared, since there were global implications.

As Money Morning detailed in a special report, it was pressure from foreign bondholders that finally forced the U.S. government's hand.

Unfortunately, conservators can rarely do anything more than keep the lights on. As the term implies, they're intended to "conserve" assets and property, until they can return the entity to solvency.

So, despite Paulson's fancy plans and the $200 billion capital infusion he's lined up, he may have handed hollow authority to an agency that cannot, for all intents and purposes, assign, strip, liquidate or materially alter how either Fannie or Freddie operates. Nor can conservators typically take possession of assets, which is a critically important distinction in this instance.