Volatility

May 12, 2010

The Ongoing Follies of Fannie and Freddie

 

One of the most active fronts of the Bailout continues to be the looting of taxpayer money through the government-supported entities (GSEs), Fannie Mae and Freddie Mac and a few others. Since August 2008 alone the government has thrown nearly $140 billion down the GSE rathole, and the hemorrhaging continues. Fannie and Freddie both recently announced further losses and made new requests for government handouts.
 
Fannie just declared a first quarter loss of $11.5 billion and asked for another $8.4 billion. This followed on Freddie’s begging for $10.6 billion after reporting an $8 billion loss. These “losses” are nothing but money laundering to banks who refuse to hold loans or take risks themselves but will “lend” when the GSEs promise to guarantee the risks or just directly buy up the mortgages.
 
The Republicans are trying to seize upon the requests to force the GSEs onto the finance reform agenda. John McCain proposed a joke amendment to force the government to cut all ties to the companies within five years. The Democrats meanwhile are scared of the whole issue and want to pretend it doesn’t exist. They claim to want to put off clarification of the GSEs’ role until after the election (I suppose their rationale is the same old delaying tactic of falsely claiming the thing needs more deliberation or whatever), but they really don’t want to do it at all. We can bet if the Dems can get a sham finance reform bill this year and can still control the agenda post-November, they’ll never take up Fannie and Freddie at all.
 
The fact that the Dems refuse to engage GSE reform now proves their bad faith and bad conscience. Of course the Reps don’t really care either. They’re the ones who nationalized Fannie and Freddie in the first place. They started laundering the Bailout through the GSEs in the first place. Bush was especially ardent to use Fannie and Freddie to keep the subprime bubble inflating once it looked to be stalling. But as usual the Democrats have turned a big political advantage into a disadvantage. (As always, all the Dems had to do to guarantee themselves a permanent majority was to do the right thing. Smash Wall Street. But as always they remain stupid, cowardly, and wicked.)
 
As usual, the sticking point is the fundamental corruption and unsustainability of the system itself.
 

Fannie Mae and Freddie Mac were created by Congress to reduce the cost of home ownership. The companies buy mortgage loans from banks and other lenders, freeing up money for another round of loans. By providing a guaranteed return, the companies also allow lenders to charge lower interest rates.

 
If home ownership is so important, and if it would be impossible to accomplish through a free market, then why have the private middleman at all? Why doesn’t the government just directly lend? Even if it were true that as a result of the existence of the GSEs the banks did charge lower rates than what a true free market would charge, they still extract a rent and therefore cost more than what it would cost if the government directly lent. So it’s the worst of both worlds, an assault on the free market from both ends, government social engineering and private gangsterism.
 
(The standard retort that government is too “inefficient” to do it on its own has long since been proven to be a lie. No level of government waste and corruption ever equals the level of inefficiency, waste, and corruption of corporatism, where we combine all the worst aspects of government with private rent extraction. We’re seeing a spectacular example of that in the Gulf of Mexico today. No sane country places its energy production in the hands of private corporations. The oil belongs to the people, so if it’s worth developing at all it’s worth developing only on that basis.
 
And the reply is supposed to be that government would be too “wasteful” to drill on its own, maybe just hiring contractors? That handing the works to BP was going to be more “efficient”? Heckuva job.)
 
Fundamentally, turning the suburban model of “home ownership” into a fetish was always a bad policy goal. This campaign in social engineering was primarily undertaken for the sake of propping up the corporate economy (which must always rely on “engineering” new markets since the natural bounds of its growth didn’t allow for the infinite extraction of monopoly rents; that’s the point of enforced consumerism as a top-down economic policy) and for social control (keeping people socially embarrassed not to be rat racers, and deeply in debt once they do comply; that’s the top-down socio-political goal).
 
To this day “home ownership” is still an essential part of the “American Dream” propaganda, to keep the zombie ex-middle class lurching along, still politically astroturfed, like a dying workhorse still being lured by the mirage of a carrot dangling before it. So the loans have to still be made available, at something remotely like an affordable level. But the banks would never lend a cent on their own, since they know the market isn’t sustainable. Housing prices are still inflated way beyond reality.
 
At the same time, the loans must continue at the right level to continue to prop up all the worthless paper on the banks’ balance sheets, and to enable the banks to continue looting and extracting bonuses. The system is in an increasing state of difficulty trying to square this circle of keeping the Bailout going while keeping the American Dream ideology viable. The mission is hopeless in the long run, and probably the longer short run as well. Fannie and Freddie are the only game in town to even try to accomplish it for the shorter short run.
 
So when the Republicans claim to want to get rid of these things it’s the same scam as when they say “We don’t need to break up the banks, let’s just promise not to bail them out in the future.” In both cases they know damn well the big banks will always be bailed out for as long as they exist at all. But for as long as the Dems play the Rep game, for the Reps talk is cheap.
 

At the same time, the companies have become more important to the health of the housing market as private sources of mortgage funding evaporated almost completely during the financial crisis. Those sources have yet to make a significant comeback.

 
“Health” – sic. That’s like saying if you’re exhausted and need sleep, the way to restore health isn’t to, um, get some sleep, but to shoot up crystal meth.
 
The only patient here whose health is a glimmer in the government’s eye is the toxic paper held by the bank rackets. The Bailout’s goals are to prop up the balance sheets while the looting continues as fast and furiously as possible. Time is short.
 
1. The banks make bad loans to prop up the zombie housing prices.
 
2. Fannie and Freddie buy the bad loans at even more inflated prices.
 
3. The government keeps handing F and F taxpayer money to cover the losses from the bad loans.
 
4. F and F use the money to keep buying from the banks at the banks’ inflated prices.
 
5. The balance sheets and the “market” are thus propped up as zombies.
 
6. The taxpayer is the sucker being fleeced.
 
(The government, specifically Barney Frank, claims the ongoing F and F losses are from pre-8/08 loans, not from loans bought since then. Dean Baker keeps questioning whether this is really true, and clearly believes it isn’t. Common sense tells us we have to assume it’s a lie, since the government refuses to hand over the evidence.) 
 
Since something like the TARP seems to be not politically replicable (Congress won’t vote for it again directly, and has so far resisted Geithner’s attempt to get TARP-like disbursement authority, as a blank check, written into the “reform” bill), the Bailout now has to be laundered in various ways. The GSEs are a favorite loot conveyor.
 
So far $140 billion has been conveyed since 8/08. But a good indication of Obama’s expectation for how big a role the GSEs may play in the future is how at the end of 2009 the administration lifted the existing $400 billion cap on GSE laundering to infinity (at least through 2012). Doing this as quietly as possible over the holidays at the end of the year was a recursively vaster example of putting out bad news on a Friday. The furtiveness of such a blockbuster move is a testament to its unaccountability and flouting of democracy itself.
 
Meanwhile the losses flow freely like oil erupting from an unsealable blowout. As the NYT piece says, “the quarterly requests [for the continued loot conveyance] are a formality.”
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4 Comments

  1. Today, I watched Robert D Steele’s video:

    New World Order in disorder
    http://www.brasschecktv.com/page/843.html

    It sounds as if he is saying that the American people who are not complete idiots will awaken and realize the system is not only broken, but unfix-able. The government needs to be replaced; the questions which remain appear to be related to who and when. Mr Steele’s proposals are interesting if only because it appears that America seems to be rapidly becoming the next failed super-power.

    Comment by William Wilson — May 12, 2010 @ 6:32 am

    • Thanks, I’ll check it out.

      The government (the whole system, not just existing politicians) sure does need to be replaced.

      We can only start again where we actually left off, at the soil, with the original covenants, the original constitution.

      Comment by Russ — May 12, 2010 @ 9:40 am

  2. (The government, specifically Barney Frank, claims the ongoing F and F losses are from pre-8/08 loans, not from loans bought since then. Dean Baker keeps questioning whether this is really true, and clearly believes it isn’t. Common sense tells us we have to assume it’s a lie, since the government refuses to hand over the evidence.)

    Yup. You’re up to date regarding Sanders bill, right? The GAO will be doing an audit. Unfortunately, the amendment which strengthened this bill was voted down.

    I’m really wondering what it is the Treasury/Fed is hiding. I think when they finally released the Maiden Lane series, it was an attempt to foil the calls for an official audit. What was on the books there was bad enough so I am duly frightened about what an audit might reveal.

    I’m also cynical. Perhaps this audit will be limited and focused only to securities and who took advantage of the fed lending window and under what terms. We know this already, really. The results are right in front of our faces. So what are they hiding keeps popping into my head.

    What is enraging are the 4 big broker/bankers reporting a ‘perfect quarter’. What is enraging is record profits and bonuses last year.

    New term facilities just opened again in support of the EU for currency swaps. ugh.

    As the Fed exist purchasing of RMBS, I wonder if that 2 Trillion can be sold at any price. I wonder if the coming wave of CMBS default will expand that balance sheet even more at the expense of us all.

    Clearly the government is willing to sell out every single man, woman and child to support businesses and in particular Wall Street. I’m growing very, very weary of eating the DOO that trickles down from Lord Blankfiend and his competitors.

    I’m turning in my pitchfork for tar, feathers, wood and a stake.

    Comment by NS — May 12, 2010 @ 8:31 am

    • Yeah, the anodyne audit is in itself just rehashing ancient history, but useless for imposing democratic accountability on the Fed going forward.

      I suppose since they would’ve preferred not doing even that, it’s a step in the right direction, and maybe the optimists are right that the history it will uncover will be outrageous enough to become a political catalyst in the here and now. I sure hope so.

      Meanwhile it’s anemic compared to the Paul-Grayson amendment in the House bill (and Grayson’s been critical of the Senate cave-in.) Now we’ll see what happens in conference…

      And then there’s the other things you mentioned. It’s all atrocious.

      Comment by Russ — May 12, 2010 @ 9:37 am


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