Tuesday, January 5, 2010

WSJ: The Treasury Department's Christmas Eve Massacre of the US Taxpayer

Long time readers of FMMF know of our calling out warnings of the disaster that was to become of Fannie Mae and Freddie Mac, or what we call FanFredron (i.e. Enron).  I'll outline some of the history below - but the steps taken on Christmas Eve to open the US taxpayer to unlimited losses for the next 3 years borders on unconstitutional.  Frankly I have no idea how the Treasury Department got away with being able to transfer monies in unlimited amounts without Congressional approval (checks and balances anyone?) but it must of been part of the original bailout originated in 2008.  If your neighbors of friends don't follow this sort of thing, it is very important they understand what they now are being exposed to - because without an engaged populace, this sort of abuse can continue and expand.  It's already been taken to levels not imaginable just a few years ago.

I was detached from the news for a few days during the holidays but I knew there was a Dec 31st, 2009 deadline for FanFredron - after which point Treasury would need to go to Congress to extend/expand the bailout.  I thought they'd increase the liabilities from $400B to something larger, but in no way, shape or form did I expect "infinity" to be the answer.  I attempted to write a post about this subject last week, but was filled with such disgust after doing further reading I could not even finish writing it, so it was discarded - and I tried to attach myself back to the Matrix where there are no worries, and only pleasures.  At least for the holidays.

There is a very nice WSJ opinion piece, which aside from 1 throwaway paragraph attacking Democrats, does a great job of describing the issue in a way even your financially "not interested in economics" acquiantences can understand.  It really peeves me when this is made up to be a "Democratic" situation - when both parties are part and parcel to this crime against the taxpayer.  FranFredron was the LARGEST lobbyist (by dollar amount) for decades - their handouts went to both parties, and looking the other way was done by both parties.  While the Wall Street Journal is a conservative paper, I think it's ridiculous to make this out to simply be a Democratic issue - the bloody glove fits both parties perfectly well.

In short - how did we get here?  I summarized it when the bailout happened September 2008 here [Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]  Ironically as the housing market began to degrade in winter 2007-2008/spring 2008 the politicos ... rather than reducing risk, actually took steps to increase risks on these entities, [Feb 27, 2008: OFHEO Increases Allowance for Fannie Mae] [Mar 19: Fannie, Freddie Layered with MORE Risk]  in their traditional kick the can down the road strategy.  Unfortunately, unlike most other problems in the US where kicking the can works for years or perhaps decades - the wall was only 6-8 months away.  The can stopped there.

Our warnings about the stupidity of INCREASING risk of these entities went unheeded, and Hank Paulson showed up in the summer claiming he had a bazooka and that FanFredron would not need a bailout.  Then a funny thing happened... the Chinese got nervous about their holdings and in a very public way wanted "guarantees" on their FanFredron holdings.  You see, FanFredron were quasi public institutions at the time - they were able to be run as private corporations - able to lobby Congress, able to pay exorbitant salaries - but with a "wink wink" backstop that was always implicit.  Well as you recall the world was a crazy place at the time, this was post Bear Stearns but pre AIG, Lehman, Citi, Bank of America bailouts or bankruptcies.  You can only imagine what the Chinese said to Hank Paulson, because within days of their public insistance that their investments be protected, FanFredron were effectively nationalized.  So the (wink wink) implicit backstop became an explicit backstop and Hank Paulson's bazooka looked the fool. 

Hank promised us it would only cost "up to $200B, i.e. $100B each" to bailout FanFredron.  As with almost every bailout, handout, government program it was classic bait and switch.  It didn't take long for "up to $200B" to turn to "up to $400B".  And yet we didn't do a full nationalization - because that's socialist and we don't do socialism in America... that's "European".  So we're still paying these CEOs top dollar and pretending these companies are actual public entities... they have stocks that trade, even as we funnel tens of millions almost every quarter into their carcasses.  I stopped keeping track by mid 2009, since it's just non stop and never ending and the actions of late are meant to increase future losses, not stop them.  [Nov 14, 2008: Freddie Mac First to the Trough] [Jan 25, 2009: Freddie Mac Saddles Up for Another $35B] [Mar 12, 2009: Fredie Mac is Back for More of Your Grandkids Money - $30.8B] [May 8, 2009: Fannie Mae with Next $19 Billion Bailout]

As part of this "conservatorship" (don't call it nationalization! you don't want to be deemed a European!!!) FanFredron were supposed to be shrunk over each ensuing year.  But as you well know Fannie, Freddie, and FHA are now almost the entire US housing market - the fully subsidized US housing economy.  (the irony should not be lost on people who want to avoid calling the US socialist in any manner)  As noted above, somewhere in the agreement must have been a footnote that said up to Dec 31st, 2009 the Treasury could do whatever they wanted with the taxpayer's money without Congressional approval.  And that leads us to the Christmas Eve massacare of the US taxpayer - where for the next 3 years, unlimited losses are allowable (throw out that $400B figure!) and the companies no longer need to shrink, but can instead grow.

p.s. if you are wondering what is happening at the FHA..... we are following the exact same path that took us down the FanFredron disaster. [Nov 18, 2009: Toll Brothers CEO - "Yesterday's Subprime is Today's FHA"]  We are documenting this disaster as it unfolds just as we did FranFredron.

And that essentially leads us where we are today... a trail of bad decisions, followed by a more recent trail of broken promises (cost, duration of the bailout, size of the entities, any hope of winding down these carcasses, etc).  And this is one, of many reasons, I constantly refer to what we now have as a fully subsidized US economy - entire portions are fully backstopped and being run by the government.  Fannie and Freddie are now run purposefully as money losing operations with constant taxpayer handouts - so that we can reinflate the housing market with easy money [Nov 20, 2009: NYT - With FHA Help, Easy Loans in Expensive Areas]  All it costs is a few trillion dollars of debt for future generations to deal with.  Or maybe more depending on the Administration's plans... there must be a larger master plan to pull this stunt on Christmas Eve.  One might surmise something along the lines of massive principal forgiveness for underwater Americans but who knows.  We've already seen the plan for FanFredron to allow people to rent their own homes back from the agency, and I suppose having the taxpayer pay for fellow citizens' mortgage payments would be the next "logical" step - it has already been floated  [Jul 15, 2009: Reuters - Obama Mulls Rental Option for Homeowners, along with Paying Mortgages for Unemployed]  The possibilities are endless when you give a blank check to yourself in the cover of the night... Christmas Eve style.


Here is the full WSJ opinion piece - outside of the political dogma paragraph it's something everyone in America should read and understand.  A few snippets:
  • The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
  • The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers.  (this is where you laugh - do you notice a continuing themes in all our solutions?  Borrow from 1 credit card to pay off the other?)
  • The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.  The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Now one part that never struck me is how these entities can be used to hide US financial obligations.  By not fully nationalizing them and instead putting them in a cubby hole out in space, the US government is pursuing the same tactics Enron did.  Having "off balance sheet" entities, so that when someone looks at the books they don't get the full picture.  Did we learn any lessons from Enron?  No - instead, most of our major financial oligarchs saw the brilliance of Enron and devised similar schemes through the 2000s; they too were able to make their balance sheets look spiffy by hiding things in off balance sheet world.  How did that work out?  Pretty much the same as Enron.  So what does the US government do?  Follows the exact same game plan - FanFredron is the off balance sheet entity - only they have an unlimited printing press to "fix" any problems that might arise. So as losses continue to pile up and these carcasses are used to subsidize the entire US housing market - the government doesn't have to "officially" take the hit... it's Fannie and Freddie - the "independent" entities that take the hit - and we'll just shovel taxpayer money into them while wagging our finger at those 2 smoking hulks while saying "tsk, tsk".:
  • Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies.
  • Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.

  • This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.  Unlimited bailouts will now allow the Treasury to keep them in conservatorship.
  • With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
  • That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase.
  • All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
  • Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks.
So as you see housing data improve in the future (or as you marveled at least year's improvement) please understand there should always be cost-benefit analysis.  We celebrate the "good" without looking at the enormous costs born to countless generations after us.  Remember this as Wall Street exhalts in joy at the housing "recovery" to come - bought and paid for by these schemes that have no hope of ever being paid back unless we go to a national 60% tax rate.
  • In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.

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