Fannie and Freddie Bailout

So the Fannie Mae, Freddie Mac bailout finally happened. I am certainly not surprised, but I definitely had not fully considered the ramifications of such a move. Many of the comments on discussion boards that I have read express anger on the part of the U.S. taxpayer. At least in this circumstance, anyone stupid enough to own common or preferred of either company is getting thrown under the bus with the taxpayer. I still have yet to read enough to fully understand the details of the bailout (and will update when I do), but I think that it reinforces a worrying precedent which was set with the bailout of Bear Stearns. Essentially the heavy weights in the financial industry can be managed in whatever way is necessary to ensure big bonuses for upper management, and if the risks taken prove to be too extreme, the government will step in to "save the system" and the CEO will walk with millions in severance pay (not to mention his bonuses he earned before that). Such bailouts cost taxpayers billions, representing another way that the rich are reinforcing the class barriers that the last few generations worked so diligently to break down.

What taxpayers fail to recognize is that the cost of not bailing out these enormous companies is much greater than the cost of doing so. If Fannie and Freddie were simply allowed to fail, there would be an accelerated flight to capital and no one would get any mortgages (the two companies have been responsible for 70% of mortgages originated in recent months), and the housing market would literally free fall as a result of zero demand, not to mention the plethora of secondary effects that such a failure would cause. The government realizes the above and acts accordingly, but a new system must be devised.

Some sort of regulation which prevents firms from taking on too much risk while still allowing them freedom of operation must be enacted, otherwise bailouts of this magnitude, costing into the hundreds of billions of dollars, will become part of the financial, economic and political landscape of the future. Such a landscape would offer perverse incentives to managers of huge financial institutions, and cost the common taxpayer.

The market will inevitably rally, but the long term implications are yet unknown. One other final thought: why are the bondholders ensured while the equity holders are shafted?