When Is a Bailout Not a Bailout?

When the President says so. "I don't think it's a bailout," insisted George Dubya last week as Congress was putting the finishing touches on a bill that would provide a financial backstop for mortgage lenders Fannie Mae and Freddie Mac. The President's reasoning? "The shareholders still own the company."

The Prez seems confused on two points. First, when he said "bailout," he probably meant takeover. After all, a major criticism of the mortgage-relief package is that it would be the first step toward nationalization of Fannie and Freddie, a government takeover of two distressed companies that cooked the books and rewarded top executives handsomely while taking on huge risk. Gains were privatized; losses will be socialized. Such an outcome must not sit well with our Capitalist-in-Chief.

Make no mistake, the owners are getting bailed out. The bill passed by the House of Representatives yesterday enables the Treasury Department to extend an unlimited line of credit to Fannie and Freddie. This obviously adds value to the franchises; witness the tripling in share prices in FNM and FRE over the past two weeks. If it walks and talks like a bailout, it must be one.

And it might, in the end, be a takeover as well--the other point of Dubya's confusion. Not only will the U.S. Treasury lend boatloads of capital to the GSEs, but it will buy their stock (or accept it as collateral for the loans). You might call it the Paulson Put, a taxpayer-funded option that protects shareholders from further downside. Republicans are choking on the idea, but heck, it's an election year. Besides, the President at the last minute has changed his mind about a veto, a sign that confusion and desperation reign supreme.