September 7, 2008
Elaine Meinel Supkis
Now that details are finally coming in, we can see the outlines of the 'Fannie Mae/Freddie Mac' rescue more clearly: the über hell hound, Carlyle, is taking over these organizations? Oh my. I remember 9/11: the bin Laden clan leaders were meeting in Washington, DC at the annual Carlyle meeting. Talking about how to make money, fast. Handing over the tattered remains of our banking system to privateers is pure insanity. But then, no one at the top wants to take responsibility for running the US deeper and deeper in the red in trade, government spending or future obligations. This is one rescue that is doomed to failure.
Paulson Statement on U.S. Action on Fannie, Freddie:
Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs - including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers - both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.
Based on what we have learned about these institutions over the last four weeks - including what we learned about their capital requirements - and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.
The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.
We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.
Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.
Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.
It this a sudden crisis? Or is this a classic case of a problem building and building, obvious to any outside observers?
When we discuss US financial problems, we have to step back and look at the entire US economic system. Looking moronically at only one tiny aspect or another deludes people into thinking, it isn't so bad, is it? This desire to not examine all aspects of a deteriorating system is understandable. Humans tend to overlook things going wrong. This means we can continue to do wrong things so long as we pretend we cannot see obvious problems.
The people at the top of the US political system all think they are very smart. They imagine, they can see much further forwards in time than ordinary Americans who can barely see past the next paycheck. Of course, we all know that most of US industry is run on a quarterly basis. Most successful managers focus only on the next four months. Long range plans are shoved aside as everyone focuses on the near-time frame returns.
In our government, few look beyond the next elections. Delivering promises is more important than preparing for the future. This short-sighted way of doing business means that when bad thing happen due to stupid promises given in elections have to be shoved onto someone else while the same parties who destroyed things now must claim, they are here to fix the messes they created with foolish promises.
The US has been living as if Santa Claus, not Bush, were President. I have detailed in the past how Xmas spending has worked like a manic tick-tock clock to jerk upwards, US revolving credit spending. Each year, more is spent and less is paid off. This has caused revolving credit to soar.
Just as we have over-consumed imported goods, we are overspending on Xmas. And the biggest Xmas of them all come every 4 years: Presidential elections. Everyone has their hands out and all the guys bribing politicos are out in force. This warps our political and economic systems.
This election, after some of the most reckless tax cutting on earth, Americans are still holding their hands out for more tax cuts. We are witnessing the utter and total collapse of our entire banking system. Yet we want more tax cuts. Our leaders are fixing 70% of our housing market's debt holding systems by 'injecting' money we don't have. This, in turn, is supposed to enable more loan-creation by our bankrupt banking system. But there is no money in Washington, DC to lend to Fannie Mae.
Just this week, the US gave a gift of a billion dollars to Georgia so Georgia can massacre more Russian peacekeepers? Or the $21 billion gift given to Israel? And then Egypt: there are riots because of a mountainside fell on shabby slums built by anxious Egyptians and unlike China, no help came in to save anyone. Egypt gets billions from the US, too. The US hands out many billions of dollars to foreign places. Especially Iraq. There, we hand out over a billion a week. Ditto, Afghanistan. This bleeding of US finances is on top of our entire system going into the red.
Back to today's news conference:
I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.
I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.
What is America's problem today? Too little housing? Or is it a huge, exploding trade deficit? The US can't export housing. It can export commodities and manufactured goods! Our economy isn't in trouble because we aren't building tract housing like crazy. It is floundering because our imports far exceed our exports. There is no cause to restart our housing industry. We must restart our manufacturing industry.
Americans don't want more houses. They want their present houses to rise in value no matter what. They want that good old Home ATM machine spitting out $20 bills! They want a basis for wild overspending. The US government worked hand in glove with Greenspan when he dropped interest rates to 1%. Both wanted the housing market to take off and feed consumer frenzies. This happened, just as they wished.
Now, the markets are saturated with excess housing. Is this time to encourage more housing? Or to encourage more savings? Savings is dead. Housing sales are dying. But one feeds the future and the other cannibalizes the past. Just as the world was awash in record red ink last year, it is also awash in excess housing in the wrong places, this year. When credit dried up, instead of accepting this as a sign that we need to move towards saving money instead of lending, the central bankers of the G7 nations went into hysteria, screaming that we were having a credit shortage.
This was a lie. We were drowning in credit until last summer. Suddenly, the ability to hand out even more credit on top of the tons of previous lending, this failed. Totally. Instead of facing reality, we still see everyone trying to push wild lending. We see a frantic effort to restart the Japan carry trade, for example.
Paulson explains the New World Order:
To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
HAHAHA. Why wasn't this fool laughed out of the room? So, we will have the now-bankrupt Fannie Mae organization INCREASE the holdings they have been accepting from Countrywide and other criminal Ponzi organizations until 2010? Then, they will refuse to engorge themselves with tatty, ratty mortgage portfolios and grow smaller by 10% every year? HAHAHA. And this will be a 'NATURAL RUN OFF'? HAHAHAHA. Then, when Fannie Mae, grown to huge girth in the last 4 years of the housing boom, will grow even more and then go on a diet?
Join 'Weight Watchers'? HAHAHA. Impossible. The bankers and brokers all demanded Fannie Mae eat all their lousy SIVs and CDOs last year. They need to unload even more offal this year, thus the deadline being moved to next year. Then, when everyone is done, Fannie Mae can 'naturally' shrink to nothingness?
HAHAHA. Like Lehman Brother's saying, they want to move all their bad business onto a new bank that will be then destroyed? Hey, what novel ideas they all have! Instead of honest bankruptcy, they can all shove all failures to one side and go on and on, forever?
Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders - senior and subordinated - and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
Since when has it been the job of the US government to ENSURE that companies that are stupid, keep their net worth POSITIVE? What company deserves this boon? Which banks? If no banks or companies are ever punished for doing really stupid things, what future stupid things will they all do? We know the answer: there is no limit. The fear of failure should trouble the sleep of the rich gnomes as they lay with their hairy or bald heads on billowing, soft breasts of goddesses. They should be frightened of the consequences of their schemes. They should expect jail, not rescue, if they fail to balance their spread sheets. Or tend to the goddesses as they spread their legs on the sheets.
The consequences of failure should be most severe since the rewards are so tremendous! We don't reward these clowns for goofing off or making one mistake after another. Note also the talk about NOT triggering receivership? This is fancy talk for, 'We won't let anyone go bankrupt. We will pretend everyone is solvent even if they can't even pay interest, much less, principal, on any and all loans.' This is INSANITY. This is the 'absolute zero' form of lending I warn about all the time. No one has to pay back a PENNY because NO ONE WILL BE PUSHED INTO BANKRUPTCY. Instead, everyone will continue to lend and do other things even though these things are bankrupt.
What a notion! Why did Congress listen to the bankers for several years? The bankers spent a fortune on campaign donations in order to drag Congress into amending the bankruptcy laws so they would be harsher! Now, we have the same banking clowns running about, frantic to stop the enforcement of bankruptcy laws? HAHAHA. Indeed, this is truly an irony.
Why should anyone pay a penny for mortgages if they can live in a nice McMansion for free? Obviously, many will opt for the 'I don't pay' rather than the honest, 'I'll pay anyway' option.
These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.
Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.
The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.
Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today's action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.
The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.
Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009.
Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs' business outlook.
Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.
The promises of future prosperity from this hackneyed system of deep-in-debt government agencies lending to deep-in-debt bankers is pure fantasy. My deceased father-in-law worked for Roosevelt during the Great Depression. 'Temporary fixes are always permanent', he told me years ago. Indeed, Fannie Mae was a temporary lending agency that was supposed to be ending once the Depression was done. Instead, as per usual, it grew to gargantuan size until it was a major hunk of the entire US lending system! This led to it going bankrupt because our entire system is bankrupt.
And let me make clear what today's actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today. While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs.
In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.
Hints about how the taxpayers will be whacked? How about this: what taxpayers? I look around and I see an entire nation dead set against paying taxes. And are not paying taxes. Carlyle and other hell hounds famously avoid paying taxes! This is why they all have kennels in various island tax havens swearing fealty to Queen Elizabeth! If all the corporations and hedge funds that are destroying our economy were to pay taxes, we would have money to save our economic system, right?
Well, Paulson and his ilk won't talk about this. They pretend they are protecting taxpayers by running their rescues on CREDIT from China! Not one taxpayer will pay tomorrow for any of this. We pay in the future when China rubs its hands and demands we do their bidding or else. Indeed, much of this rescue operation is really to rescue our corrupt, bankrupt system from Asian anger. All of Asia will hammer us mercilessly if we stiff them. So all this talk about saving US taxpayers is pure hogwash. Just like the talk about saving US homeowners. I own my home. And this rescue does absolutely nothing for me.
Treasury Extends Secured Credit Line to Federal Home Loan Banks
The Federal Home Loan Bank system is the largest U.S. borrower after the federal government. The FHLBs, lend money to more than 8,000 thrifts, credit unions, insurers and commercial banks at below-market rates, mainly to finance their mortgage holdings. The banks also buy and hold mortgage-related assets.Any loans to Fannie, Freddie or the FHLBS are likely to be for less than one month but no shorter than one week, the Treasury said. Loan amounts will be based on available collateral. The target interest rate for the loans is the equivalent of the London interbank offered rate of the same term, plus 0.50 percentage point, the statement said.
The FHLBs had about $1.34 trillion of assets on June 30, mostly eligible collateral for the lending program, and $1.25 trillion of debt, according to the finance office, which manages their collective debt sales.
Before this year, we had fake interest rate lending thanks to the Bank of Japan and Greenspan. Now, it continues directly from the government. The central bankers in the US cannot sustain this system anymore. But the government can do this via fiat. This fiat currency business is very inflationary. And of course, the point is to avoid a depression by artificially lending at fake, low rates. This releases Inflation who will blast everything with her hot breath. We think, just because oil is dropping, all will be well.
Oil drops periodically. But it will climb again if the US floods the earth with more easy lending.
Treasury officials had little choice. With the credit markets still in a tailspin and investors deeply reluctant to buy up mortgages with even a hint of risk, Fannie Mae and Freddie Mac currently guarantee about 70 percent of all new home loans, the director of the Federal Housing Finance Agency, James B. Lockhart, said.
The process whereby former communist nations like China and Russia go capitalist and the capitalist nations in the West go totally communist is nearly done. The irony of a quasi-governmental agency set up in the Great Depression and which is now overwhelmingly the only dealer in markets today, is now in receivership and the government will now run it outright....we don't have the communists taking over steel works, etc. We have our own communists taking over private ownership of homes in the US? This is what happens after half a century of suburban domination in US politics!
Auto industry to press Congress for $50B in loans
Auto industry allies hope to secure up to $50 billion in government loans this month that would pay to modernize plants and help struggling car makers build more fuel-efficient vehicles.With Congress returning this coming week from its summer break, the industry plans an aggressive lobbying campaign for the low-interest loans. The situation is growing dire after months of tumbling sales, high gasoline prices and consumers' abandoning profitable trucks and sport utility vehicles.
Lawmakers authorized $25 billion in loans in last year's energy bill to help the companies build fuel-efficient vehicles such as hybrids and electric vehicles. With credit tight, automakers and suppliers now want lawmakers to come up with the money for the program - and expand the pool of money available to $50 billion over three years.
If private home ownership is being bailed out, why not industry? If the US auto industry were focused, like Japan's Toyota, on exports, I would say, yes, save them. But they were busy selling gas guzzlers to US drivers. They made big, big mistakes the size of a Tundra SUV. Now, they pay the piper. Only they want us to pay the piper. But we can't because of the last half-century tax revolt. Which is why we have to go to China, hat in hand, begging for credit.
We are the mortgaged nation that will be the bankrupt nation.
Savvy commentary and exposure of the fraud that is consuming our standard of living. Though that there xmas appears. What's with that.
Posted by: Indiana John | September 08, 2008 at 06:33 AM
"What is America's problem today? Too little housing? Or is it a huge, exploding trade deficit? The US can't export housing. It can export commodities and manufactured goods! Our economy isn't in trouble because we aren't building tract housing like crazy. It is floundering because our imports far exceed our exports. There is no cause to restart our housing industry. We must restart our manufacturing industry."
Amen, Elaine! America has been funding a Global Trade Welfare State, allowing parasitic, overpopulated economies to sustain their bloated labor forces by preying on the U.S. market. All we get in return is access to markets that are stunted by overcrowding and low per capita consumption (if we get access to them at all). It's time for a return to the sensible tariff policies that, prior to our signing the Global Agreement on Tariffs and Trade in 1947, built the U.S. into the wealthiest nation on earth and its preeminent industrial power.
Pete Murphy
Author, "Five Short Blasts"
Posted by: Pete Murphy | September 08, 2008 at 08:33 AM