Similar emergency recapitalizations occurred

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Similar emergency recapitalizations occurred throughout Europe (Fortis in Belgium, Luxembourg, and the Netherlands, Commerzbank in Germany, and Anglo Irish bank and the Bank of Ireland in Ireland). For instance, with its banking sector particularly exposed to real estate debt and suffering from collapsing real estate prices, Ireland was the first European Union country to create a “bad bank”: the National Asset Management Agency (NAMA) in November 2009. It bought 77 billion euros in toxic real estate loans from Irish banks for about 50 cents on the dollar. These loans were purchased by issuing additional government debt, explicitly accounting for the cost on the budget. The low prices, compared to the book values of these assets, caused new capital shortfalls in the summer of 2010. And the saga continues… Many large banks of Western European countries are either explicitly owned by the government, are being run as “bad banks” of this crisis, or are living only due to oxygen provided by asset or debt guarantees from the government. Will these institutions in due course sow the seeds of the next financial crisis? More likely than not. For now, the proportion of finance that is controlled by Western European governments – just like the GSEs in the United States – is only rising. Even if global economic growth rebounds to propel us out of the economic malaise, this footprint of the government interventions may come to haunt us, and every effort should be made to erase it in good times.
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101 Chapter 8: How to Reform a Broken System “[A]s the housing and mortgage markets recover, the Fed’s support for the GSEs will end, and private capital will return. Fannie and Freddie should not then be allowed to revert to their old form, crowding out private competition and putting taxpayers on the hook for failure while shareholders benefit from success… At a minimum, the GSEs should be restructured to eliminate the systemic risk they posed. An easy way to address this is to shrink them by reducing their investment portfolios – and their huge debt loads. I also believe that their mission should be curtailed significantly to reduce the subsidy for homeownership that helped create the crisis. It is important to leave room for a robust private-sector secondary mortgage market that serves the taxpayers and homeowners equally well. - Henry M Paulson, Jr., ex-Treasury Secretary, in On the Brink, 2010, Business Plus. While Chapters 5 and 6 provided the pros and cons of having the GSEs as a policy tool in the midst of a crisis, this chapter focuses on how we envision fixing the GSEs in the long run. It is clearly a formidable task; but, as the various quotes in this book have reminded us, many minds have thought about the problem for more than a decade – in relatively quiet times and also in turbulent ones – and arrived at common solutions. They seem to suggest a retrenchment of the government role in mortgage finance in order to enable private markets in securitization to grow and flourish.
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