Fannie Mae bailout: Taxing America’s poorest citizens to help the richest

The federal government is soon to be ladling out tax dollars to bail out Fannie Mae. Who will pay for this? Joe Sixpack, a guy who works hard at two jobs, rents an apartment, and tries to support a couple of kids. Who benefits? Stockholders in Fannie Mae. Holders of bonds issued by Fannie Mae. The 5,000 employees of Fannie Mae, including the CEO who helped himself to $13.4 million in salary this year. What do the stockholders, bondholders, and employees have in common? They are all richer than average Americans and they are all going to be sucking down tax dollars paid by poorer than average Americans (plus some tax dollars from the rich, of course).

Joe Sixpack might have been thinking that he could finally afford to rent a nicer apartment or maybe even buy a place. But now Congress is giving the states $4 billion to buy up property in crummy neighborhoods. Joe won’t be getting any bargains because he will have to compete with the government when he goes home-shopping. Suppose he remains a renter? Higher real estate prices will result in higher rents, which aren’t going to be too affordable for Joe because he is about to be laid off from one of his jobs.

In Roman times the employees of Fannie Mae would be decimated, i.e., they would draw lots and 90 percent of them would beat the unlucky 10 percent to death with clubs. What would be a modern equivalent? At the very least taxpayers should have the satisfaction of seeing the highest paid 100 Fannie Mae employees fired with two weeks of severance pay (it can’t be that hard to find replacements given that the current staff’s primary achievements have been accounting fraud and then insolvency). The newspapers say that it is important for foreigners to have confidence that the U.S. will pay its debt. Let’s pay foreign bond holders in full then, using tax dollars as necessary. After all, a guy in China could not be expected to understand that a bunch of crummy houses in Cleveland were not worth $250,000 each. Let the domestic shareholders get 10 cents on the dollar and let the domestic bondholders get whatever the bonds are actually worth.

Poor Americans already subsidize wealthy homeowners through the home mortgage deduction. Do they need to subsidize incompetent managers who have already been paid $billions? Do they need to subsidize rich guys who bought Fannie Mae bonds? Do they need to subsidize shareholders who didn’t realize that the easy money from Fannie Mae couldn’t last forever?

[More: Wall Street Journal op-ed]

34 thoughts on “Fannie Mae bailout: Taxing America’s poorest citizens to help the richest

  1. The rich pay an inordinate share of the tax burden, so they will feel it much more than Joe Sixpack. The entire bottom 50% of income earners in America paid less than 3.1% of the total revenue generated from collecting Federal income tax:

    I am against bailouts, but I don’t think they hurt the poor. In fact, I think they have very little direct impact. Rather, they more directly affect the upper-middle class and wealthy who are fiscally responsible and are conservatively invested.

  2. Scott: Agreed that poorer Americans don’t pay that much in income tax, but they still contribute to government treasuries by paying sales tax, gasoline tax, social security (14% of their wages), import duties, alcohol tax, tobacco tax, and probably a bunch more fees and taxes. The tax man leaves no one unscathed 🙂

  3. Not to mention these Trillions and Trillions that are sloshing around imply big inflation around the corner. Unlike the 1970’s, Joe’s wages probably won’t go up to match real inflation, and so instead of paying off his credit c

    And let’s not estimate life-course income mobility. Joes’ cousin Brad Sixpack may have finally worked his way up to a decent-paying job after taking on massive student loans and then paying high living costs while working entry-level jobs.

    So now Brad has a “rich” person’s income, but most of it goes to taxes & interest on his debts.

  4. Sorry; first point got cut off: Joe’s truly biggest asset (even as a homeowner) is his future income stream. Inflation devalues it.

  5. Scott: do a Google search on the term “marginal utility of money.” You’ll find that taking 20% out in taxes of a guy who makes $40k a year is much, much, much more painful than taking 70% out of the income of a guy who makes $4m a year.

  6. Don’t forget the part of the “housing” bill that requires a copy of everyone’s credit card, pay-pal, and eBay transactions get sent straight to the IRS. That’s equally awesome, no?

  7. There are many taxes other than the federal personal income tax. Honest. If you add them all up, everyone does pay “at least some tax,” and the overall distribution is only modestly progressive. Taxpayer making $100,000 to $200,000 now pay a greater share of there income in income and payroll taxes than those making more than $10 Million.

    So the tax system is moderately progressive until you get up to the 5,000 richest people in the country, at which point it becomes regressive.

    However, this includes only federal income tax and payroll taxes. It doesn’t include excise taxes, state income taxes, sales taxes, or property taxes. If you add in all that stuff, things get even flatter. And Given that SS payroll taxes apply to only the first $97,500, it is hard to believe that the overall distribution is even “modestly progressive.”

  8. Scott: Yes, but the bottom 50% only earn 12% of the total AGI, much of which is used for basic needs like food, shelter, and transportation. When looks at how much tax people pay relative to how much money they have left after they pay for their most basic needs, the burden numbers would look quite different.

  9. Well said. I’m especially angered to see the ineptness of this massively overpaid people at the top. If the poor were that incapable of doing their job, they would be fired and we’d see them in the streets and tell them to get a job.

  10. Phil: I agree that everyonegets hammered by the tax man, but the numbers clearly show that those who make more pay a disproportionate amount into the system. Moreover, many of the taxes you refer to (i.e., non-income taxes) either go to the state governments instead of the federal government or are already earmarked for other programs and will be used to bail out failed speculators and government agencies embroiled in this real estate mess.

    This is another case where the upper middle class and wealthy will have to pay through the nose. Politicians will say that it’s time the rich pay their fair share, which is bunk, of course. Taking California as an example. To help make up their budget shortfall the legislature is proposing to add two new tax brackets on the high end.

    Sure, everyone, including the poor will feel the pain from this recession and mismanagement from our government, but I think it folly to proclaim that the poor will be taking it on the chin without failing to mention that many many other people will also be in a similar, if not worse situation.

  11. I come from that lower echelon of society. I think more specifically, I’m nearer to middle-class. I work terribly hard for the dollars that I make and I watch as roughly 24% of my check is whisked away for taxes before I ever see it (Single and living in Portland, OR). I’m then barraged with considerations for retirement, insurance of various types, transportation, rent, food, and the list goes on and on.

    On a salary of slightly under $30,000/yr, I’m having a terrible time making ends meet. I can’t afford to pay for my college education. I don’t take the insurance, I don’t have a 401(k), I ride a bicycle to work daily (20 mile round-trip commute) and I meter out every dollar that gets spent. I own a car, but I can’t afford to continue paying for the gas and so it sits thus reducing gas and insurance cost.

    The average cost of living has gone up faster than my payscale (I’ve seen a 2% total increase over 3 years). Likewise, I’ve seen the rent on my apartment jump dramatically and I’ve taken a roommate to make those ends meet.

    I scrape by with very little wiggle room. I live in fear that I may be injured or something may happen to my bike because I will have no way of paying for it. I have a very difficult time with additional tax increases because when I’m looking at my bottom line, I’m watching as I’m slowly walked to the edge of a cliff with no option but to eventually take a plunge in failure.

    I understand that the rich pay a large portion in taxes, but how much impact does that actually bare of their ability to live? Consider the actual impact on lifestyle. Will someone rich be that bad off taking one less trip, or buying a little less clothing, or putting a little less money into other commodities and amenities? Is it being taken into consideration that tax increases on those of us near failure already is just setting us up for imminent failure?

    I’m getting by. I currently pay all my bills and I live a spare lifestyle. Buf for how much longer can I maintain that lifestyle?

  12. A bailout will lower the value of the dollar (printing more money). That’s a hidden tax on the poor and everyone else. With inflation, the poor are hurt more than any other class for basic goods and services.

  13. Scott: The numbers you look at don’t tell the whole story. The rich may pay a larger piece of the total tax revenue, but:

    – what do they pay as a percentage of their income?

    – what impact do their tax payments have on lifestyle? If a family of 4 has net income of $40,000 and pays $400/month for food, that’s 12% of their take-home. If a family with $1,000,000 of income also spends $400/month, that’s %0.48.

    – per philg, you don’t take into account the regressive nature of sales and other taxes. Money not spent is money not taxed, so money in investments, trusts and bank-accounts is not hit with these taxes (and in fact, may be earning money with delayed taxes). How many $40,000 families can shelter money in investments or overseas?

    – taxes are what we pay toward a collective good. Money spent bailing out investors is money that is not spent on infrastructure, debt reduction, or other services, services and needs that will probably impact the middle and lowers classes far more than the rich. Yes, I know that the failure of Fannie Mae with have wide repercussions, so a bailout would help everyone at some level, but it’s sad that “the market” has brought us to this. A market, by the way, made up of the “wealthy who are fiscally responsible and are conservatively invested”. Really?

    – Finally, the rich are the only ones who are gaining ground. See and for better discussions.

  14. Most wealthy people have inflation-adjusted investments, such as stocks and real estate. The super-wealthy are able to lobby the government for favors, which means they effectively pay a negative taxation rate. If the government gives you $1B and you pay $300M in taxes, is that a raw deal?

    The tax that hits poor people the hardest is the inflation tax. Most poor people don’t have salaries that rise with inflation. Their savings, if any, is in a checking account.

    The people working in the financial industry do no actual work, but they are paid huge salaries. Where does that money come from? It comes out of your pocket via inflation.

    Whenever one person earns a dollar without working for it, someone else did a dollar’s worth of work and was unpaid.

    See my blog for more details. (

  15. Eric, that is incorrect, as that 70% of $4 million would otherwise have been invested in the economy, supplying the jobs that mr. sixpack needs. You are implicitly assuming that government expenditures are productive, while in general, they are not.

  16. If the Government is going to bail out these businesses (tax dollars). Then the businesses should run by the Government with regulations until the money is paid back to the American people. All the employees should all have there jobs reclassified like they do with say the Forest Service and readjust all the wages based on the current Government pay scales. If you need the tax dollars to keep your doors open then you should also be required to be regulated by the people who are bailing you out. All there employees should paid in line with our service men, forest service, and or our public officials.

  17. The American tax system is so broken, alot of Americans don’t even pay taxes or are involved in any way. All these broken systems coexist in a very strange entanglement of mass theivery. Those with morals, values and an honest work ethic will be the ones on the hook, but then again, who do you rely on?

  18. “Yes, I know that the failure of Fannie Mae with have wide repercussions, so a bailout would help everyone at some level, but it’s sad that “the market” has brought us to this.”

    Fannie Mae and Freddie Mac are “government sponsored enterprises”. The market didn’t bring us to this, our government did. Read Thomas Sowell’s last two columns on this topic.

    Even Phil seems to have missed the fact that part of the reason for this mess is that housing is artificially expensive in the U.S. thanks to excessive land use restrictions. Mike Sixpack, Joe’s brother who took a risky loan and defaulted, would have never taken such risks if housing prices had been stable and affordable. Which they would probably be minus our excessive zoning restrictions.

    People respond to incentives. Land use restrictions drive up prices and create roller coaster markets, attracting speculators. Government regulations pushing for more loans to compensate increase risks. Government is responsible for this mess in more ways than one, and now they are going to make it even worse.

  19. I think the solution to this situation isn’t that difficult. They should have let Fannie and Freddie collapse. They should have used the 800B to 1T to bailout all homeowners in the following manner.

    [B}This would be an entirely volutary program.[/B]

    All primary residences would be appraised by trained real estate personnel. They would set the value at what the home could truly sell for today. I am talking about pricing a property so it would move within a week.

    If the homeowner decided to participate in the program, the government would pay off their entire mortgage debt and all seconds, HELOCs etc. The government would then issue the homeowner a mortgage at 80% of the appraised value at a 7.5% fixed rate with the term set by using a conservative ratio like 25% of gross pay. Some may have a 15 year note and some a 30 year. If you entered into this program, you could only get out of it by selling your home. You could not refi out of the government program. You would also be ineligible to take any additional loan secured by your property or where the value of your property is used to issue credit….no second mortgages, no HELOCs etc. Your other unsecured credit would be limited to 25% of your gross income based on your 2007 tax filing. This would be adjusted annually based on your income changes. Remember, this is entirely a voluntary program.

    Whenever you sell your home, the government would get all proceeds from the sell over the original amount financed prior to all fees being withdrawn (real estate fees, closing costs, escrows etc), you would get 33% of all appreciation. Let me show you an example….
    Let’s say you owe 150K on your home. This total includes your first mortgage and all other notes secured by the property. Of course, this would be all notes secured prior to Jan. 1, 2008. Now the appraised value is set at 120K. The government would issue you a loan for 96K. They would pay off all the 150K debt. Now fast forward to 2011. You sell you home for 126K. You own 92K on your note. The government would take 24K off the top (120K-96K) + 4K of the appreciation (126K – 120K*.67). The homeowner would have 4K (96K – 92K) and 2K from the appreciation (126K – 120K*.33). The homeowner would have to pay all fees out of their ‘revenue’. The government would always get their money first.

    The government could then bundle these mortgages together and sell them or even better hold them and make the interest. All proceeds from this program would go to pay down the debt and reduce taxes for everyone. If you failed on a government loan, your future tax returns would be taken to pay any deficit.

    At the same time, mortgage regulation would have to change. One major change would be all loans would require full docs. Buyers would have to have a 10%, six month seasoned down payment to qualify plus meet the 25% front end ratio.

    Let’s bailout homeowners instead of corporations who made poor lending decisions.

  20. I forgot to add, the Fannie and Freddie bailout will lower everyone’s home values even more while increases taxes. We will have to pay this off at some point.

  21. The common expectation seems to be that home ownership should be a zero-risk endeavor. “Heads I win, tails you lose,” and for any time horizon.

    As a taxpayer who elected not to buy property because the risk didn’t cover the seemingly-high valuation (relative to historical appreciation and simply to renting), had I purchased a home, I would have been ready to take the risk of not making money hand over fist, and even of losing money. The risk of, get ready for it, ownership.

    Nouriel Rubini’s essay is worth reading. Excerpted from his superb RGE Monitor:

    Those of us who actively avoided overextending ourselves will stay locked out of housing, first by valuations, now by bailouts, and eventually by mortgage interest rates.

    The best example I’ve heard yet is a mortgage holder who, having never been late on a payment, is now unable to qualify for the sweetheart re-fi/reappraisal/rate lock deal offered to those who are 2 months delinquent. Gone from “moral hazard,” to flat-out rewarding irresponsibility.

  22. Scott,

    Can you show me the numbers?

    I am confident that I pay more as a percentage of my income than I will would if I earned $500,000. I pay Social Security tax on nearly 100% of my 105,000 income. A person making 500k will pay Social Security tax, on only 20% of his income. That is the 1st $102,000. This regressive tax, adds approx. $12,700 to my tax bill and $12,700 to his.

    When all taxes are considered, it is easy for me to see that I am paying more than the ultra rich. Warren Buffet reported that he pays a lower tax rate than his secretary. If you are correct, his secretary must be very, very well paid.

  23. It is always glad to have people like Scott Mitchell. They have such Pleasantvillle idea. Scott-dude, live in an apartment and then you will realize. You are paying you landlord the biggest chunk of your income. You are hoping that the prices of housing will go down and finally (yes, FINALLY) you (the dog) will have your day to buy your own house. The BIG EVIL EMPIRE (US GOVERNMENT) comes in, takes your money(TAXES), and again makes buying homes unaffordable. Would you like that? In a free market, gains should belong to the investor, losses should belong to the investor. Why are then losses being socialized? What if the renter refuses to pay his/her taxes as his hard earned money goes to buy expensive homes for rich people This just does not make sense. This is worse than communism. This is OLIGARCHY.

  24. Why is it imperative that we bail them out? Why were our government officials so keen on doing this? If we let Fannie and Freddie fail, our current underwater government would become even more apparent.

    We are prolonging the pain of the housing market leveling itself back to fundamentals (based on wages). We are creating “Japan” like conditions, where even people with good credit will not be able to afford a mortgage or home ownership.

    Let us not forget that we aren’t just paying back on housing, we will be paying back for this “war” as well.

  25. Consider this:

    Over 70 percent of taxes are paid by the wealthiest 10 percent of the population… and it still has almost NO IMPACT on their lifestyle.

    The only way that the wealthy would suffer is if they paid prices for ALL ITEMS in proportion to their wealth. But none of them have to pay $10000 for a gallon of milk. Even with inflation, fixed prices means that money works EXPONENTIALLY for the wealthy… that’s why a $20000 car represents 20 percent of the income of someone making 100K a year but only 2 percent of the income of someone making 1mil a year, .2 percent of someone making 10mil a year, etc. So even at inflated tax brackets, the wealthy pay less in taxes, not only propotionally, but because EVERYTHING they purchase is actually cheaper based on proportionality based on fixed costs. So, not only do the wealthy have more money, everything to them is actually CHEAPER from a mathematical standpoint.

  26. Everything Dan K. said, plus general venting from my personal outlook: I’m in Portland, Oregon as well, I’m a cashier at Safeway, and I live in a tent in the woods. I already have a university education in computer science, but that has turned out to be irrelevant; it’s been decided (by whom I don’t know) that the economy doesn’t need the quaint notion of ‘jobs’ any more. The idea instead is that some of us get rich designing iPods, while the rest of us fight tooth-and-nail to earn enough money to buy those iPods. Sooner or later it will be discovered that this arrangement is not sustainable, but until then, the Rest of Us are supposed to suffer in silence, I guess.

    I may be a squatter but I am not a freeloader. So I have had it up to here with right-wingers. They say the minimum wage is evil. Who are they to talk? When they’ve had to worry about getting enough to eat each day, then they can talk about abolishing economic regulations. Some of them even say “taxation is theft.” I don’t mind taxation in itself. What I do mind is seeing 20% of my earnings go to — not health care for me, not shelter for me, but to fund a bunch of frivolous financial and military adventures that line the pockets of the already-rich. Maybe I’m the only one who’s annoyed at this? Well, ‘they’ had better hope I’m the only one, because otherwise there’s major inter-class trouble brewing in America.

  27. People took out home loans they couldn’t afford to repay over the long term. I’d imagine many borrowers were aware of the risks but erred on the side of optimism. Some were speculating. Mortgage lending companies tossed their lending standards out the window because they’d identified bigger suckers than themselves who would buy pieces of the loans and assume the risks. No doubt there was some fraud that went on. If it’s not the business of government to properly regulate these markets, then why is it the business of government to bail out the losers when the chips don’t fall their way, especially when the losers consist of some very economically well off individuals? This is compassionate conservatism in all its glory.

    One sizable component of the taxable income of many rich folks is unearned income from capital gains from investments. This is currently taxed at 15% for investments held longer than 18 months. Joe Sixpack may have some retirement investments and so forth, but I doubt he’s got an income stream from investments, let alone the tax-free municipal bonds that are probably in the portfolios of older rich folks. In short, rich people’s investments are a hedge against inflation and also buy them time, keep them from having to take on debt to deal with tough times. Joe Sixpack doesn’t have that cushion.

  28. This kind of class whining is so intellectually bankrupt.

    The poor pay almost no taxes. The bottom 35% of American’s pay ZERO Federal tax. And the other taxes (sales, etc) they pay are essentially zero on a relative basis. Making a case that the poor subsidize anyone, on a monetary basis, is folly. One could make an argument about economic fairness and inequitable wealth concentrations – but when the top 50% of Americans essentially pay ALL of the taxes, any argument about how they benefit embarrasses the person making that argument.

    Fannie and Freddie made mistakes – no doubt. But, if you want to understand the REAL reason Fan/Fred are bleeding right now – you need to meander through Fannie’s balance sheet. Take a look at which loans are going bad and which loans are performing well.

    You’ll quickly realize that Fan/Fred made a lot of loans where the borrower put no money down, had very high debt ratios and had iffy credit. They also made loans to people without verifying their income.

    These loans are almost 100% responsible for the losses that Fan/Fred are taking. The old fashioned, 30 year fixed with a 10% downpayment to people with a job history are performing perfectly.

    So, why did Fan/Fred lose their way? (They only starting making the riskier loans in the past six or seven years). Answer – congress.

    The Office of Federal Housing Enterprise Oversite (OFHEO), which regulated Fan/Fred would give Fan/Fred annual “housing goals” to meet. These numbers were pushed HARD by liberal Democrats (and some Republicans as well because, after all, who would ever say no to housing…)

    So, not only did Wall Street get greedy – our government got greedy as well. Bush pushed hard for ever-increasing homeownership goals and the Democrats pushed extremely hard to get more and more minorities and “underserved” into homes.

    How do you get more “underserved” into homes? You dramatically loosen credit standards.

    It’s popular now to blame the lenders for having the gall to give people six figures so they could own a home – but it’s an absolute truism, when it comes to Fan/Fred, to say they had no choice.

    I have friends in senior positions at Fannie. They would often marvel that the OFHEO goals for homeownership EXCEEDED the market. In other words, the goals forced them to create loans for people who had no business owning a home.

    So, feel good about your Socialist story – but know that it’s dead wrong.

  29. When are we going to stop spending our children’s money?

    The national debt will destroy the dollar, and destroy this country.

  30. I too am sick of all the whining from the “so called poor”. Let me tell you what I see…I see a lot of people with tricked out cars, and cells phones and cable and ipods etc. They have every maginable thing and have credit cards to the max. Then they want to tell me that they can’t afford health insurance or that they can’t afford the house payment. That’s crap!!! Get rid of some of the other non essential stuff. I worked 3 jobs to pay for college then when I bought my house I had to put downs 15%, which by the way took years to save. I did not have cabel or a cell phone until I could afford to pay for them. I do not think I should have to now pay for those people who made bad lifestlye choices. They certainly don’t want us telling them how to live, but don’t mind having us bail them out. Most “so called rich” worked their butt for it, and we are tired of paying for those who don’t!!

  31. I am one but I join the millions of of others who disapprove of the bailout of the thousands of others who bought real estate knowing they could not afford it. I compare the problem is the same as someone buying stock and when the stock tanked, want their money back. All gambled and lost and I certainly will not chip in to save them. Get real people!

  32. Bob in 29 post is wrong about Fannie Mae. Under Franklin Raines, Fannie Mae manipulated their accounting books to make a $6 billion dollar loss appear as profit in which they had to restate their books. Did Mr Raines Have to pay back his $140 million compensation? The answer is no. He paid a small fine of a few million dollars. Bob is right that Fannie bought a lot of loans as mortgage back securites that failed, but you left out the fact that your friends at Fannie were paid millions in compensation that they never had to pay back.

  33. How does IBM get to be a special mortgage servicer for Fannie Mae when they have no real experience in the mortgage industry. I know IBM purchased LBPS, however LBPS never handled the volume they are now getting and can not effectively handle it without asking Fannie for more funds.

    It sounds like a lot of waste and poor management.

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