I have no additional insight, but I thought Fannie Mae and Freddie Mac were originally and always public?
They were semi public. They were like the post office supposed to be self sufficient. They were essentially a loan guarantee depository. A small fee and they would guarantee the low income loans. Since few loans defaulted, Freddie Mac and Fannie May, depending on what program you were using, rarely had to pay out. Like the VA loans for Veterans.
What made them semi public, was that their CEO’s and senior managers were all political appointees. Appointed by whomever was in charge when the previous term ran out. Like the Chairman of the Federal Reserve, appointed for a term.
Now as long as most loans did not default, things were fine. But when a lot of loans defaulted, they had to make good. And they didn’t have anywhere near the money they needed.
The Treasury bailed them out, and made them completely public. They were to use the vernacular of the technique, Nationalized.
Now in the interest of honesty, Bush (43) did warn that there were a lot of bad loans being written, and guaranteed by Fannie Mae and Freddie Mac. But Congress refused to act. Truthfully, by the time the warning was out, it was far too late anyway.
Let me give you an idea of how bad it was already. CDO’s were the Mortgage Bonds being bought and sold. Ok, no problem. But there were a finite number of Mortgages for the Collatoralized Debt Objects. So the banks like Morgan and Lehman came up with Synthetic CDO’s. These were CDO’s that were made up essentially as bets on the other CDO’s. Let me link to a bit of the movie The Big Short.
It is a nightmare, and that explanation is as good as any. But the important thing to understand for the moment is every dollar of actual mortgage bond, had twenty dollars riding on it. Twenty bucks bet on that one dollar. And if the Mortgage Bond failed, too many of the mortgages went bust, then those bets had to be paid.
When those insurance policies and bets were called, companies faced ruin. They had loved the things when all was going well. But when things went bust, companies lost more money than they had in every single holding.
It is fascinating to see what happened, and as I said I’ve read books and watched documentaries trying to understand. What amazes me is that the banks are doing it again. Today. Oh they’re using different terms. But it is the same thing, profit today and ignore the dangers tomorrow. Because all we did was TARP and then hold our breath and cross our fingers. We didn’t create new regulations to make sure it didn’t happen again. We didn’t create new oversight to stop banks from doing it, we just stood back and prayed that we made it through the recession. When we made it through nobody wanted to take the time to actually explain to the public what had happened. It sounded too much like fraud. It might have not been legally fraud, but morally, it certainly was.
Paulson panicked after Lehman failed. He had not realized how interconnected the banks were. Lehman bought insurance from AIG to cover the chance that they might lose. AIG bought similar policies from Bear, Morgan, and the rest. All of these policies were rated as AAA secure. It could never happen, the guys in charge were way too smart to let something like Lehman fail. Impossible.
When it happened, the stock holdings of Lehman were now worthless. And the stocks others had in Lehman were worthless. So Meryl had to admit they had lost billions in one night as Lehman went belly up. That loss made them look weak, and now they’re in trouble. All the bank stocks went south, and the companies holding those stocks went down too. It was a series of dominos. One led to the next, and you couldn’t stop it.
Pumping money was the only thing Paulson could think of, and he pumped. He pumped like there was no tomorrow. Creating money out of thin air. He pumped and pumped and pumped. Congress needs more money? No problem. Snap the fingers and tap on a keyboard, and another half a trillion is in the internet waiting to be sent out.
I honestly was worried when he started doing that. Because in history nobody had ever pulled off the hardest part of printing money. The reduction of supply to stop the inevitable inflation. That’s what hit Germany in the 1930’s depression. They printed so much money that reporters took notes on hundred mark bills because it was cheaper than buying paper.
But the way Paulson did it, well that was different. The money was just ones and zeroes in the internet. He could add or subtract money with the tap of a few keys on a keyboard. Want to get some out, have the Fed sell back some of the bonds. The money is then removed from the internet supply and bam, the economy keeps going. I didn’t think he could do it. I’m still not sure how the hell they managed it. But they did, I’ll admit that.
The next one is going to be worse, because this time people will revolt and drag the fat cats out of their beds and hang them on their manicured front lawns.
