Fannie and Freddie In Conservatorship. More Moral Hazard Ahead?

Since July 2007, the financial system has been an absolute mess. This of course has led to liquidity concerns among certain banks, and most recently to the virtual collapse of Fannie Mae and Freddie Mac. This is truly unprecedented. We now have two publicly traded companies (Fannie and Freddie) that were both "implicitly" backed by the U.S. Government, and due to the latest round of liquidity concerns and bad loans, the U.S. Government has made it an "explicitly" backed relationship.

While I decry bailouts and moral hazard, I honestly do not see any other options with this. And the lawyers actually made a smart move too, putting Fannie and Freddie into Conservatorship, rather than Receivership. Why is this important? Well, the distinction is that in receivership, a company continues operations until it completely winds down its commitments (i.e. this would have led to a run on the banks, institutions that trade mortgage backed products would have been destroyed, or in other words, the entire system would have frozen up). By putting these entities into Conservatorship, they continue operations with U.S. Government oversight, the Government backs the paper, liquidity continues, and the market for mortgage backed products continues, though sluggishly.

Famed investor Jim Rogers noted that "the U.S. has become more Communist than China". What he means is that we have virtually created a system where Risk has been Socialized for the benefit of wealthy people, and Rewards are still benefiting wealthy people. I absolutely agree with this assessment, and the risk premium is a big factor in investing. If investors and Wall Street types continue to have their risks socialized via de facto government bailouts, what's to stop them from taking even more undue risks in the future? This is just a reward for moral hazard in the system.