Via Philly.com

Two giant mortgage companies get into hot water over risky investments. The government steps in to throw them a lifeline should they need it.

Hundreds of thousands of Americans buy homes more expensive than they can afford. Congress approves a rescue package.

Troubles erupt at a Wall Street investment firm that made bad bets on mortgage investments. The Federal Reserve steps in and provides financial backing for the company’s takeover.

Meanwhile, tens of millions of people pay their mortgages on time, don’t max out their credit cards and put money into retirement funds. They may even save a little extra on the side.

In return, they get rates on their savings that don’t even keep up with inflation. They also are witnessing the horror of their nest eggs shrinking as the value of their homes plummets and the stock market tumbles.

Washington policymakers seem more focused on rescuing those who behave badly by putting at risk taxpayers who’ve played by the rules and shunned the get-rich-quick schemes of Wall Street croupiers.

If the government can toss a lifeline to troubled mortgage underwriters Fannie Mae and Freddie Mac, they why won’t they do something for Americans who save their money?

Continued after the jump…

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From Bloomberg.com (emphasis added):

July 31 (Bloomberg) — The Federal Reserve will be able to lend more easily to failed banks under government control because of a provision in legislation that bailed out Fannie Mae and Freddie Mac.

In the rescue signed into law by President George W. Bush yesterday, the Fed will no longer have to pay penalties on loans it makes to institutions taken over by the Federal Deposit Insurance Corp.

The measure may mean more use of the central bank’s balance sheet to prop up the U.S. financial system, after the Fed began lending to investment banks in March, analysts said. The FDIC has taken over seven banks this year, with 90 on a watch-list of troubled firms as lenders are hit by the surge in credit losses.

“We are pushing forward the line on what the government will backstop, and what the Federal Reserve will backstop,” said Vincent Reinhart, former director of the Fed’s Monetary Affairs Division who is now at the American Enterprise Institute in Washington…

The Federal Reserve Act’s Rule 10B penalizes the Fed for loans to undercapitalized institutions exceeding specific time periods. The original provision was aimed at preventing the central bank from keeping failing banks open.

FDIC Request

The exemption in the new law, which was requested by the FDIC without objection by the Fed’s Board of Governors, was aimed at making clear that once banks are taken over by the FDIC, capital rules no longer apply because they are effectively owned, operated and in liquidation by the government…

For some, the exemption opens up the Fed to more political pressure to lend to government agencies, instead of forcing Congress, the FDIC, or the Treasury to explain to taxpayers why they need more money.

“Once the Fed starts lending to a bridge bank, or indirectly to the FDIC, where is the incentive to ever stop?” said Walker Todd, a former Cleveland Fed attorney and visiting research fellow at the American Institute for Economic Research in Great Barrington, Vermont.

The FDIC had $52.8 billion in its deposit-insurance fund as of March 31. The FDIC could raise more money by tapping a $40 billion credit line it has with the U.S. Treasury, increasing assessments on its members, or turning to Congress…

‘Costly and Difficult’

“Why should they be doing it?” said Robert Eisenbeis, former Atlanta Fed research director and now chief monetary economist at hedge fund Cumberland Advisors LLC. “The whole idea” of the rules in the Federal Reserve Act is “to make it costly and difficult to support an insolvent institution.”

This month, the Fed board voted unanimously to allow direct lending to government-sponsored housing agencies Fannie Mae and Freddie Mac “should such lending prove necessary,” at the request of U.S. Treasury Secretary Henry Paulson.

The bailout continues… Why can’t the FDIC raise its fees according to the risk that each member bank holds? The more leveraged the bank, the higher it costs them to participate in the program? Send in the auditors!