The US Government Bails Out Freddie and Fannie

[editec]

NO, bailing them out and borrowing and printing money to pay for it all is going to do too much damage. How many banks are you willing to pay for out of your pocket?

I am seldom consulted on this matter.

But I expect the government will bail out fifteen publically traded banks, just like they did that bank in CA yesterday and Freddie and Fanny today.

How much are you willing to pay for a loaf of bread? A gallon of gas? When does the madness finally stop? There has to be a point where we say no more, because we simply can not afford it.

Now you beginning to understand why I suggest a massive bout of inflation to offset the massive amount of infaltion we're paying for by bailing out the banks.

I'm suggesting we flood the market with greenbacks such that people's existing mortgages are insignificant expenses.

Infuse the system with dough, pay off our extrernal debts with fiat dollars.

We'll crash out credit, of course, but when you're broke, crashing you credit is meaningless.

You say we owe these rich bastards $9,000,000,000,000?

I blow my nose in their general direction

Inflate the dollar's ubiquity until that's the price of a decent lunch.



[/quoteThe government has been such a shining example for the rest of consumers. It's why idiots take out new debt to pay off old debt. A never ending vicious cycle of lunacy.[/quote]

You know what they say, Paulitics: The compound interest is mightier than the sword.

The snake that eats itself.

Government is merely a handmaiden to the beast.

 

[Shogun]

If there were a depression, maybe Liberals would flee to Canada, Cuba and Venezuela?
Maybe that's just wishful thinking.

If there is a depression maybe chicken necked free market capitalists can insist that it's just a figment of our imagination. I mean, we have microwaves and carpet flooring, you know! What Ethiopian wouldn't see that as a KINGDOM?

 

[Paulie]

I am seldom consulted on this matter.

But I expect the government will bail out fifteen publically traded banks, just like they did that bank in CA yesterday and Freddie and Fanny today.



Now you beginning to understand why I suggest a massive bout of inflation to offset the massive amount of infaltion we're paying for by bailing out the banks.

I'm suggesting we flood the market with greenbacks such that people's existing mortgages are insignificant expenses.

Infuse the system with dough, pay off our extrernal debts with fiat dollars.

We'll crash out credit, of course, but when you're broke, crashing you credit is meaningless.

You say we owe these rich bastards $9,000,000,000,000?

I blow my nose in their general direction

Inflate the dollar's ubiquity until that's the price of a decent lunch.

I'm going to assume this was meant as a joke.

 

[Charles_Main]

I'm going to assume this was meant as a joke.

You know what they say about assumptions right

 

[gonegolfin]

Perhaps this is a little cold, but who the fuck cares about Fannie and Freddie and their mortgages, when it means we as taxpayers have to YET AGAIN foot the bill?

There is one thing that I have not seen mentioned on this board that will probably upset folks even more. But first, let's be clear about what the Treasury is back-stopping. All figures below are as of end of Q1.

First, Fannie and Freddie have roughly $1.6 trillion of agency debt issued. This debt is issued to fund the mortgages loans and mortgage-backed securities it holds on its balance sheet. This agency debt is held all over the world, most notably by Central Banks (China is the largest holder). Russia also holds a significant amount. Fannie and Freddie also have approximately $3.7 trillion of off-balance-sheet mortgage backed securities issued and guaranteed. These off-balance-sheet guaranteed MBSs are also spread throughout the world, including many Wall Street banks and investment houses. This puts their book of business at about $5.3 trillion (I suspect this is over $6 trillion now).

American mortgage holders have been paying a risk premium to investors of agency obligations (currently about 100 basis points above long term treasuries). But a risk premium for what (assuming a bailout is in the cards)? Conducting a bailout of the creditors will result in not only mortgage holders paying more than they should have, but it will milk the US taxpayer as well. That is, the US taxpayer would be subsidizing the risk taken by these investors (many of them foreign). At the very least, this subsidy should be removed from the amount of the bailout (foreign investors should not receive more than the long term treasury rate if they are in fact being backstopped by the US government). If the creditors of Fannie Mae and Freddie Mac do reap the benefits of a bailout, it will be interesting to see the public reaction to the foreign investors being rescued at the expense of the public.

Brian

 

[BaronVonBigmeat]

Why the Bail Out of Freddie Mac and Fanny Mae is Bad Economic Policy

The fact remains that like every financial bubble in history starting with England’s South Sea Bubble and France’s Mississippi Bubble in the 1710s nearly three centuries ago, today’s bubble has been sponsored by the government. Forget the “madness of crowds” free-market propaganda. Insiders and enabling politicians always try to blame the victim. The reality is that Fannie, Freddie and the FHA gave a patina of confidence to irresponsible lending and outright fraud. This confidence game led them to guarantee some $5.3 trillion of mortgages, and to keep $1.6 trillion more on their own books to back the bonds they issued to institutional investors. Their strategy has been to issue bonds paying fairly low interest rates, and use the proceeds to buy mortgages yielding somewhat higher rates. This kind of interest-rate arbitrage is what the S&Ls did in the 1980s – a relevant parallel, as I will discuss below.

The myth is that Fannie’s and Freddie’s role is simply to spread homeownership by making it affordable for more of the population. Fannie Mae was established in the Depression, in 1938 as part of Roosevelt’s New Deal, and privatized in 1968. Freddie Mac was established two years later, in 1970, to buy up S&L mortgages and give “liquidity” to their mortgages, by developing markets beyond the banks and S&Ls that originated these loans. But this turned out to be the “original sin,” so to speak. Non-bank investors were obliged to place their trust in the mortgage originators – banks, S&Ls and mortgage brokers, whose ranks are filled with fraudsters and crooks.

Whatever we may call it, their dream is to bring back the seeming golden age sponsored by Alan Greenspan at the Federal Reserve. It was a decade of quick mortgage billionaires writing fictitiously high mortgages and selling them off to pension funds and to German and English bankers eager to seek a few extra fractions of a percentage point in current income so as to justify a big bonus by claiming to outperform more reality-based money managers.

All this is as American as apple pie. Altruistic political talk aside, the reason why the finance, insurance and real estate (FIRE) sectors have lobbied so hard for Fannie and Freddie is that their financial function has been to make housing increasingly unaffordable. They have inflated asset prices with credit that has indebted homeowners to a degree unprecedented in history. This is why the real estate bubble has burst, after all. Yet Congress now acts as if the only way to resolve the debt problem is to create yet more debt, to inflate real estate prices all the more by arranging yet more credit to bid up the prices that homebuyers must pay. The plan is thus to pretend that the Bubble Economy’s financial unreality may be made real by Finance Socialism.

Can the plan work? The reason why Fannie and Freddie have been able to borrow at lower rates than their rivals is because their public sponsorship led investors to believe that there was an implicit public guarantee not to let them fail. And in view of the fact that these two agencies account for some $5 trillion in mortgages – nearly half the nearly $12 trillion U.S. home mortgage market – they do indeed seem to be “too big to fail.” The face value of mortgages they have guaranteed is nearly as large as the entire U.S. federal debt held by the public. This means that the nominal federal debt would double if they went under. But at least the government can always print money, while the real estate backing the mortgages guaranteed by Fannie and Freddie (or held in their own accounts) is plunging in price into the dreaded Negative Equity territory.

But on their shoulders ride the hope of re-inflating housing prices to bail out the financial managers who sought to make money by debt creation rather than tangible capital formation. So the question is whether housing prices can be raised to a level that oblige families to run into even more debt than they now are carrying – with even lower down payments, subsidized at public expense.

In this case the subsidy would not really be for homeowners at all, but for the financial system’s mortgage holders. The aim would not be to make housing more affordable, but less so, because the debts would be larger!

A replay of the federal S&L insurance crisis: Bailing out the risk-takers, not their victims

Junk bonds issued by corporate raiders were the highest-yielding bonds in the 1980s – before they brought down the S&Ls. Since the Federal Reserve flooded the economy with credit after the dot.com bubble burst in 2000, junk mortgages have been the highest-yielding securities. Meanwhile at the Federal Reserve, Chairman Alan Greenspan deregulated the banking system to let the usual array of financial crooks express the “animal spirits” that he believed were the driving force in his Ayn Rand fantasy world.

The result is a replay of the S&L collapse two decades ago – a financial “golden oldie,” so to speak. The S&L bailout is relevant today because proposals to bail out FNMA and Freddie Mac bondholders are distressingly like the bailout of S&L depositors in crooked S&Ls back in the 1980s. Only a handful of S&Ls went under – and they were the notorious risk-takers. Their depositors were not neighborhood moms and pops. They were large institutional savers, who didn’t care about risk or crooked behavior, because there was a government guarantee by FSLIC: the Federal Savings and Loan Insurance Corporation. And that bailed out the large depositors.

Fast forward to today. FNMA was shown many months ago to have been cooking the books. But large speculators didn’t care. Although there was no official government guarantee, there was an “implicit” protection for risk-takers. Financial insurance firms sharply raised the default-insurance premiums for these two government-sponsored mortgage agencies. But investors still were able to make a few basis points more than normal by buying their bonds.

Should they be bailed out? And if the government does not do so, would this mean that FNMA goes under and the US mortgage market plunges?

What Fannie and Freddie did was to provide a vast new source of demand for mortgages. Their role has been to extend the market for mortgage debt, creating opportunities to make money financially in an environment of asset-price inflation – the Bubble Economy. The effect was to push up housing prices. This has been the great American game for a century. And it has turned increasingly to outside investors (including gullible German banks which were the first to go bust by trusting the U.S. junk mortgage market), swelling the supply of loanable funds that bid up property prices.

Prior to FNMA and Freddie Mac, banks that issued mortgages held onto them, because there were no outside blind buyers. This was the pre-fraud era. It is now looking like a Golden Age. Housing prices were lower, and buyers did not have to go so deeply into debt to purchase homes. But the Senate and Congress – at least the Democrats – are urging the FHA and other government agencies to prop up the mortgage market by issuing zero-down-payment loans and other subsidies. The immediate aim is not to help homeowners – who indeed will have to pay more if the housing market re-inflates. Each new economic crisis adds a few new words to the English language. This time we get “reflate.” Others include NYU Prof. Roubini’s “stagdeflation” for a combination of debt deflation of incomes and price inflation for commodities as the dollar sinks in response to the balance-of-payments deficit resulting largely from the war in Iraq. But that is another story. Today’s story is about how Congress is aiming to bail out the banks that have bought or packaged these junk mortgages, about how needless this bailout is, and about how much simpler and more fair to just write off the bad debts.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, [email protected]


CounterPunch: Tells the Facts, Names the Names

 

[Toro]

BVB

re: S&L crisis - The US government made hundreds of millions of dollars buying up the assets of the bankrupt S&Ls and selling or retiring it when markets calmed down.


Brian

China holds roughly $600 billion in agency debt, Russia $400 billion. It is likely that diplomacy played a pretty big part in the decision to backstop the debt. Also, there is a worry about a dollar crisis if there is significant losses in the agency market, as even the perception of selling could tank the greenback.

But of course if they were going to bail out Bear Stearns, they'd bail out the GSEs, no matter what they said. I guess all that jawboning over the past several years about the government not backstopping the debt was all just hogwash. No surprise.

Gold is trading at $975.

 

[sealybobo]

How much oil it'd take to buy the US
At the recent price of $140 a barrel, it turns out to be a mere 400 billion barrels, or just about the combined reserves of Iran and Saudi Arabia.

Most of us view the world through dollar glasses. It's perfectly reasonable. Dollars, after all, are the currency we use in daily life. And those lenses, until recently, were distinctly rosy.

When we asked, "How much is that in dollars?," we usually liked the answer.

But it may be time to ask another question: "How much is that in barrels of oil?"

Trust me, others are doing exactly that.

That's when the world starts to look very different. It also looks more than a little scary to the U.S. Today, the net worth of the entire country is equivalent to a mere 400 billion barrels of oil. That's a smidgeon less than the proven reserves of two Middle Eastern countries: Saudi Arabia (264 billion barrels) and Iran (139 billion barrels).

At more than 40 times its 1970 price, oil has outstripped the value created by a full working generation of Americans in a period of dramatic technological change and innovation. During the same time, the value of American business shares, as measured by the S&P 500 Index ($INX), has risen only about 15 times above its 1970 level.

I learned this by measuring the net worth of all U.S. households and nonprofit organizations in barrels of oil. Every three months the Federal Reserve estimates the value of our collective tangible assets, financial assets and liabilities to arrive at our net worth. It's the whole enchilada -- all our cars, our houses, our durable "stuff," bank deposits, stocks, bonds and mutual funds. Everything. Then it subtracts all our mortgages, consumer credit and other debt to arrive at our net worth.

At the end of March, for instance, our collective net worth as a nation was $56 trillion, the second straight quarter it had dropped. Divide $56 trillion by the recent $140-a-barrel price of oil and you get 400 billion barrels of oil as the value of America, a fraction of our national value in 1998, 1995 or even 1990.

Either oil is too expensive or America is too cheap.


The value of the U.S., in barrels:

Year Household net worth* Price of oil Barrels to buy America
1970
$3.4 trillion
$3.18
1.1 trillion

1975
$5.1 trillion
$7.67
670.3 billion

1980
$9.5 trillion
$21.59
438.6 billion

1985
$14.2 trillion
$24.09
589.7 billion

1990
$20.3 trillion
$20.03
1.1 trillion

1995
$27.7 trillion
$14.62
1.9 trillion

1998
$37.4 trillion
$11.18
3.3 trillion

2004
$48.1 trillion
$42.00
1.1 trillion

2007
$57.7 trillion
$120.00
481 billion

2008
$56 trillion**
$140.00
400 billion



*Includes nonprofits. **Through March. Sources: Federal Reserve, Bloomberg.

How much oil it'd take to buy the US - MSN Money

 

[Wow]

BVB

re: S&L crisis - The US government made hundreds of millions of dollars buying up the assets of the bankrupt S&Ls and selling or retiring it when markets calmed down.


Brian

China holds roughly $600 billion in agency debt, Russia $400 billion. It is likely that diplomacy played a pretty big part in the decision to backstop the debt. Also, there is a worry about a dollar crisis if there is significant losses in the agency market, as even the perception of selling could tank the greenback.

But of course if they were going to bail out Bear Stearns, they'd bail out the GSEs, no matter what they said. I guess all that jawboning over the past several years about the government not backstopping the debt was all just hogwash. No surprise.

Gold is trading at $975.

China holds roughly $600 billion in agency debt, Russia $400 billion.
When Clinton was in office, this was called investment of confidence in the US economy. It's funny how these things change.

 

[jillian]

China holds roughly $600 billion in agency debt, Russia $400 billion.
When Clinton was in office, this was called investment of confidence in the US economy. It's funny how these things change.

How much was the debt when Clinton took over? How much when he left?

You made the statement, back it up with credible sources, because I believe that's another misrepresentation.

 

[Charles_Main]

How much was the debt when Clinton took over? How much when he left?

You made the statement, back it up with credible sources, because I believe that's another misrepresentation.

Please don't say you give Clinton the credit for the short lived Budget surpluses in the 90's, or worse yet that you actually think we used one penny of the surpluses to pay of any of the debt.

 

[Chris]

Please don't say you give Clinton the credit for the short lived Budget surpluses in the 90's, or worse yet that you actually think we used one penny of the surpluses to pay of any of the debt.

Bush and Reagan's tax cut and spend is responsible for 90% of the National Debt.....

ReaganBushDebt.org

 

[Charles_Main]

Yes yes what an unbiased reliable source you have there.

Your partisan posts are hardly even worth reading anymore.

 

[JimH52]

But its true. They were in charge of the biggest deficits in US History. Conservatives in name only...

 

[gonegolfin]

BVB
Brian

China holds roughly $600 billion in agency debt, Russia $400 billion. It is likely that diplomacy played a pretty big part in the decision to backstop the debt. Also, there is a worry about a dollar crisis if there is significant losses in the agency market, as even the perception of selling could tank the greenback.

Was this just an estimate for China's agency debt? Or was this agency debt plus MBSs issued and guaranteed by Fannie/Freddie? Setser has China's agency debt at $436 billion as of last quarter (I believe). But he also thinks that more agency debt was sold to the UK and then resold to China, bringing the total to about $500 billion. He has Russia at around $150 billion. But again, this is just the agency debt.

Brad Setser: Follow the Money Blog Archive The May TIC data (with special attention to Agencies and London)

Brian

 

[gonegolfin]

.
.
.

American mortgage holders have been paying a risk premium to investors of agency obligations (currently about 100 basis points above long term treasuries). But a risk premium for what (assuming a bailout is in the cards)? Conducting a bailout of the creditors will result in not only mortgage holders paying more than they should have, but it will milk the US taxpayer as well. That is, the US taxpayer would be subsidizing the risk taken by these investors (many of them foreign). At the very least, this subsidy should be removed from the amount of the bailout (foreign investors should not receive more than the long term treasury rate if they are in fact being backstopped by the US government). If the creditors of Fannie Mae and Freddie Mac do reap the benefits of a bailout, it will be interesting to see the public reaction to the foreign investors being rescued at the expense of the public.

Brian

I am surprised nobody commented on this. Maybe I did not explain it well.

Brian