Free Markets, Free People

Daily Archives: November 16, 2011


Freddie Mac and Fannie Mae execs bonus pay–seriously?

While the administration regularly takes Wall Street to task for what it calls excessive bonuses, especially to companies bailed out by taxpayer money, it has been relatively silent about the bonuses approved by its own Federal Housing Finance Agency for two quasi-government companies at the center of the housing market meltdown:

The Federal Housing Finance Agency, the government regulator for Fannie and Freddie, approved $12.79 million in bonus pay after 10 executives from the two government-sponsored corporations last year met modest performance targets tied to modifying mortgages in jeopardy of foreclosure.

Remember AIG and the huge uproar over the bonuses they were contractually bound to pay soon after the bailout?  Well these bonuses weren’t wrapped up in any contractual binding.  These have been approved since that time.  And to top it off, on average, they’re larger bonuses than AIG paid.

You’d think the FHFA would have a clue, wouldn’t you?  You’d think they’d understand the “optics” of this sort of a payout of taxpayer money, not to mention that the government is supposedly trying to cut spending.

But obviously they don’t understand that.  

Thankfully the Congress has thus far reacted to the situation in a swift and positive manner (for once):

The House Financial Services Committee, responding to lawmaker anger over compensation at Fannie Mae and Freddie Mac, approved a measure that would suspend the compensation packages for executive officers at the companies. The bill also would require employees of the two firms to be moved onto a pay scale that lines up with federal financial regulators including the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.

“Awarding lavish pay packages to the heads of these companies that have accepted $170 billion in taxpayer cash can’t be defended,” Representative Spencer Bachus of Alabama, the panel’s chairman and sponsor of the bill, said today.

We will see if they carry it on through and actually get something passed, but even Barney Frank, who initially opposed the bill is now supporting it.  And when Freddie and Fannie have lost Barney, they’re in trouble:

Representative Barney Frank, the top Democrat on the Republican-controlled panel who initially opposed the measure, voted for the bill because of what he described as “insensitivity” by the companies in continuing to award bonuses.

“I had hoped that they would use restraint on their own because I think it’s better that we not intervene,” Frank, of Massachusetts, said today. “But they did not.”

Again, the “insensitivity” wasn’t something the companies did, although they likely requested the bonuses.  It was the FHFA, a governmental agency, which approved the bonuses.  It is business as usual among the bureaucrats who are obviously “insensitive” to the situation and continue to lavish taxpayers money where ever they decide it is deserved.  If you want a clue as to why the federal government’s spending remains out of control, this is a good example.

Bureaucracies are forever it seems and they become the unaccountable drivers of government action.  It is there which, if any meaningful reform is ever to be undertaken with shrinking the size and cost of government is to be done, where reformers must start.

~McQ

Twitter: @McQandO


Economic Statistics for 16 Nov 11

Today’s economic statistical releases:

Like the PPI yesterday, the CPI softened last month, down -0.1%, and up 3.6% year over year. The core rate rose 0.1% last month and 2.1% last year.

The Mortgage Banker’s Association reports that mortgage application dropped sharply in the latest week, down -12.2%.

Industrial production was up sharply, rising 0.7% last month, while capacity utilization rate rose to 77.8% in the nation’s factories.

The Housing Market Index rose to 20, the 3rd consecutive 3-point jump, and the highest reading in 18 months.

~
Dale Franks
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Public opposes further defense cuts which may jeopardize national security

As the Supercommittee’s deadline quickly approaches and their ability to reach an agreement diminishes, a new Battleground poll reveals the public’s strong opposition to more defense cuts.  Already under the gun to make $450 billion in cuts, the failure of the Supercommittee to reach agreement would mean additional across the board cuts in all areas of the Department of Defense.

When asked for their opinion about further cuts, 82% were strongly or somewhat opposed to those cuts (59% strongly opposed).

There is, it appears, a dawning realization that we as a country are again about to put ourselves in serious trouble if we don’t maintain our military edge that has served us so well since WWII.

Recently, in a reply to an inquiry into the effects of the across the board cuts that will be mandated by a Supercommittee failure, Senators McCain and Graham asked Secretary of Defense Leon Panetta to detail them.   In his reply he noted some very disturbing results of further cuts.  The mandated cuts would amount to about an additional 20%.  According to Secretary Panetta, that sort of reduction would mean major weapons systems, designed to ensure our national security for decades to come, would have to be cut:

•         Reductions at this level would lead to:

          o         The smallest ground force since 1940.

          o         A fleet of fewer than 230 ships, the smallest level since 1915.

          o         The smallest tactical fighter force in the history of the Air Force.

All exceedingly dangerous developments.  All developments which would limit our ability to respond to a national security crisis and certainly effect our ability to deal with more than one.  Reducing our levels to those cited by Panetta would be extraordinarily short-sighted.

For instance, reducing our tactical Air Force to record levels puts one of our major force projection (along with the Navy) means in a position of not being able to fulfill that role.   Today the tactical airframes our pilots fly are decades old and worn out.   They’ve reached the end of their service life.  It is critical that the next generation of fighters continue to be developed and fielded.  In a letter to Rep. Randy Forbes, 7 retired Air Force generals of the Air Force Association outline the risk:

The Air Force now finds itself in a situation where another acquisition deferment will lead to the eventual cessation of key missions. Accordingly, while the recapitalization list is generally considered in terms of systems, it really comes down to a question of what capabilities the nation wants to preserve. Does the United States want to retain the capacity to engage in missions like stemming nuclear proliferation, managing the rise of near-peer competitors, and defending the homeland?

Leaders need to fully consider the ramifications of the decisions they make today as they seek to guide our nation through this difficult period. Just as our legacy fleet has enabled national policy objectives over the past several decades, our future investments will govern the options available to leaders into the 2030s and 2040s. Investing in capable systems will make the difference between success and failure in future wars and between life and death for those who answer the call to serve our nation. When viewed in those terms, failing to adequately invest in the Air Force would be the decision that proves "too expensive" for our nation.

Those two paragraphs outline the criticality of the need for continuing to fund the weapons systems of the future.   We may be able to get away with not doing so right now, but we guarantee that our options will be severely limited and our national security capabilities degraded significantly 20 to 30 years down the road if we do so today.

And there’s another reason to resist the temptation to make further cuts at DoD that is particularly significant at this time.  Professor Stephan Fuller of George Mason University testified before the House Armed Services Committee that the cancellation of weapons systems would have a profound negative effect on both the economy and unemployment such as:

– A loss of 1,006,315 jobs (124,428 direct, 881,887 indirect)

– Raise the unemployment rate by .6% (9% to 9.6%)

– Drop GDP growth by $86.46 billion (25% of the projected growth in 2013)

No one is arguing that DoD is or should be a jobs program.  But it is obvious the impact would be severe not only among DoD prime contractors but even more so downstream.  Ironically, one of the reasons our politicians justified their bailout of the auto industry was downstream job losses in a time of economic turmoil.  That turmoil still exists today.

If the cited poll is any indicator, the public has come to realize the dangerous waters we’re navigating with these possible cuts.   They’re realizing that what guarantees our peace is our strength and our strength is maintained by keeping the technological edge over potential enemies and developing weapons systems to deploy that technology.  Without that ability to guarantee our national security, all the other things we treasure are jeopardized.  Additionally, our military demise will only encourage the bad actors in the world to increase activities which are detrimental to both peace and our national security.

While it is certainly a time to look for all legitimate means and methods to cut government spending, sequestration as demanded by the Supercommittee’s failure to reach agreement isn’t one of them.  Mindless cuts into that which guarantees our safety today and in the future will come back to haunt us if we allow them.

~McQ

Twitter: @McQandO