Bill Fleckenstein

Contrarian Chronicles8/11/2008 12:01 AM ET

Crybaby capitalists whine for more

Freddie Mac's CEO collected $38 million while the company he ran fell into a financial morass. He's just one example of corporate chiefs who want taxpayers to bail them out.

By Bill Fleckenstein

It would be reasonable to expect that reckless behavior begets negative consequences. But on Wall Street, the rules are different. Especially if you are CEO Richard Syron of Freddie Mac (FRE, news, msgs). Financial trouble turns to disaster under your irresponsible watch, and for your efforts, you get to keep your job and earn $38 million.

Syron says: What, me worry?

That's the surreal theme of a story in last week's New York Times titled "At Freddie Mac, chief discarded the warning signs" (registration required). The subtitle wasn't "Gee, who'd have guessed?" but it should have been.

To wit: "Mr. Syron received a memo stating that the firm's underwriting standards were becoming shoddier and that the company was becoming exposed to losses. . . . David Andrukonis (Freddie's former risk officer) recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that 'would likely pose an enormous financial and reputational risk to the company and the country.' "

So a company that was one of the buyers of last resort for some of this ridiculous mortgage paper that many of us were writing about at the time knew that it was no good and still kept doing it. (Last week, Freddie Mac wound up posting losses that were quite a bit worse than expected. And amid fears that subsequent losses may be larger than forecast, Freddie suspended its guidance for losses.)

Now our government wants to bail out the same people and keep them in command. Chances are, whatever amount it winds up giving and Freddie sibling Fannie Mae (FNM, news, msgs) initially won't be sufficient. In all likelihood, they'll be back asking for more somewhere along the way. Case in point: Northern Rock (NHRKF, news, msgs), which has already been bailed out by the U.K. government. Last week, Chancellor of the Exchequer Alistair Darling said that Northern Rock is in need of another $6 billion in capital.)

Alms for the poor

And it's not just Fannie and Freddie that feel entitled to a bailout. As reported by Bloomberg last week, Mark Mobius, a very successful investor and wealthy man, believes the Fed should cut interest rates to 1% in order to fuel growth.

Now why -- with inflation running at somewhere between 6% and 10% a year in this country and raging higher around the globe (even if oil has backed off its 18% pace) -- would any sane person advocate that sort of policy, especially given what happened the last time the Fed drove rates to 1%? The answer is: Because his closed-end fund is down about 17% on the year. (I don't mean to single out Mobius. He's just a recent example of a long list of folks advocating similar policies.)

It is just despicable that under the guise of capitalism this kind of behavior is permitted. Multimillionaires whine for bailouts and get them. CEO Daniel Mudd at Fannie Mae has pocketed $42 million since he took over in 2004. That, of course, doesn't count what ex-CEO Franklin Raines and his crew in the previous regime skated off with.

Blemish-free Franklin Raines

Apparently, Mr. Raines remains clear of conscience. Last Tuesday, The Wall Street Journal accorded him op-ed privileges, which he used to defend his tenure at Fannie (and the company's behavior generically). Raines noted that an investigation by Warren Rudman's law firm found no evidence that he knew the company's accounting practices departed from generally accepted accounting principles, or GAAP, in significant ways. Read the op-ed here (subscription required).

This is a complete whitewashing of the problem. If you didn't know the facts when reading this op-ed (as Raines must have assumed that most Journal readers would not), you'd be tempted to believe that Fannie and Freddie have done nothing wrong and in fact are in perfectly wonderful shape.

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So the atmosphere surrounding the housing bubble, the economy and the stock market continues to be surreal. To quote a friend who captured this: Treasury Secretary Henry Paulson "begs for money, and authorities help him save the GSEs (Fannie and Freddie), then says he has no plans to use the money . . . and hires Morgan Stanley (low bidder at $95,000) to help him understand the authority he has received. If all the foregoing weren't so pathetic, it might actually be funny."

Lunacy shapes a landscape

When historians look back at the summer of 2008, they will find the mind-set even harder to comprehend than the goings-on of the summer of 2007, when there was so much denial about the deflating of the housing bubble in the first place. (It was, of course, originally deemed to be just a subprime problem).

One individual decidedly of another persuasion is economist Nouriel Roubini. In the Aug. 2 issue of Barron's, he predicted that before all is said and done, the financial sector might be facing $2 trillion in write-downs because banks have not yet factored in the losses that have extended beyond subprime. (Read Barron's interview with Roubini here.)

Roubini also believes that the consumer credit side of the banks' business -- specifically HELOCs, home equity lines of credit -- might turn out to have insufficient reserves. He thinks that hundreds of banks will go bust -- the implication being that other banks will become scared, credit will further contract and business will get worse. That process feeds on itself, and it's all part of what happens as the real-estate and credit bubble collapses and affects the economy.

Shhh! Crybaby capitalists at work

Tough truths for those who plead for a bailout because it's good for their business. Bailouts are terrible for the country and terrible for everyone's kids. Why should the reckless make millions along the way, then have the public pay for their mess?

I for one think it's about time that people started acting like adults. I know that wanting something to happen is certainly not going to make it happen, but I find the whole scene simply galling.

I keep searching for the right phrase to describe what our present environment has become, and my current favorite remains "crybaby capitalism."

Chat live online with Bill Fleckenstein

Contrarian Chronicles columnist Bill Fleckenstein will take reader questions on stocks, the market and the Fed in a free online chat at InvestorPlace Blogs on Wednesday, Aug. 13 at 2 p.m. ET. Participation is limited to 100, so click here today to sign up and reserve your spot.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

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