Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac
âIn this present crisis, government is not the solution to our problem, government is the problemâŚ It is no coincidence that our present troubles parallel and are proportionate to the intervention and intrusion in our lives that result from unnecessary and excessive growth of government.â â Ronald Reagan, Inaugural Address, January 20, 1981
The moves by the government to calm the waters over the perilous health of Fannie Mae (FNM: 13.78, -1.22, -8.13%) and Freddie Mac (FRE: 10.12, -0.68, -6.29%), the mortgage finance giants, have had a temporary Xanax effect on the markets, similar to the Federal Reserveâs shotgun marriage between JPMorgan Chase and Bear Stearns. This, despite the fact that the moves have kicked into high gear the haymaker of inflation now coming a cropper through family budgets.
What puts me near to having a stroke is when Congress thinks it can whip a fast ball by Americans by saying the moves to bolster Fannie and Freddie will cost $25 bn, in order to sell the $300 bn housing bailout bill.
The $25 bn number is a fake number, the cost will be dramatically higher. Read to the bottom to find out why.
The Congressional Budget Office spitballed this one and came up with a best guesstimate based on its averaging out of what it thought the losses might be. The $25 bn tossup represents an average of the odds of no government money spent whatsoever (weighted at better than 50-50 odds, who is the fantabulist who cooked those odds up?), what the CBO believes is the smaller odds of spending in excess of $25 bn and then in excess of $100 bn (pegged at a rosy 5% probability).
Donât believe for a second that you can make money following these pie-eyed Grandma bureaucrats at the slot machines in Las Vegas. More importantly, the $25 bn arises despite the fact that the Congress just this week sent in the Eliot Nesses from the Federal Reserve and the Office of the Comptroller of the Currency to go find out what the heck is really sitting on Fannie and Freddieâs books, as it clearly doesnât believe the management at these two levered up examples of crony capitalism.
And donât forget the history here, CBOâs estimates on the annual cost of tax code legislative changes (federal tax revenues gained or lost) are often way off by $150 bn or more.
But hereâs what should concern you.
The legislation would increase the statutory limit on the national debt by $800 bn, to $10.6 tn, as the two would now get to buy and back jumbo loans worth $625,000 each.
However, the House bill doesnât force Fannie and Freddie to wipe out, or even cut, their dividends to investors in the event they draw down on the governmentâs line of credit, a pipeline into the Treasury worth $2.25 bn each, now expanded and open for the next year and a half. Treasury gets to make that call.
I donât know where to begin with the stink bombs, potholes and steam pipes bursting in these two reckless publicly traded companies, which have a total $5.3 tn book of business and another $3.3 tn off balance sheet. Why taxpayers now must now be forced to own a piece of these publicly traded disasters, who exhibit zero fiduciary responsibility, is beyond me.
The two have much higher leverage ratios than banks or hedge funds, but lower borrowing costs due to their implicit government backing, capital cushions they whittled down after they gunned their lobbying engines on Capitol Hill, showering elected officials with money.
Hereâs a listânotice none of these issues are addressed in the housing bailout bill:
*Both have a total of a microscopicâdid you see it, did you catch it?â$54bn in net worth, generally assets minus liabilities (donât listen to the $81 bn figure tossed around for their total capital, thatâs a pro forma fake number that doesnât include certain losses).
*Teetering atop that razor thin wedge is a pyramid of debt.
*One stink bomb is the total of $260 bn in securitized assets backed by subprime and Alt-A loans, loans which sit in between subprime and prime. Those sums dwarf their capital positions.
*Freddie has $156.8 bn in level three assets, those illiquid securities it canât get a pricetag on because no one wants them now.
*Fannie has $56.1 bn in level three assets, or about a seventh of its fair valued assets.
*Fannie and Freddie have combined debts of $1.59 tn, borrowings they made merely to operate their businesses. Again, thatâs against just $54 bn in total net worth. Their guaranteed liabilities were 29 times their net worth at the end of the first quarter.
*They each have $2.25 bn pipelines into the Treasury, which the government now wants to expand. Forty years ago, when they went public, Fannie had debt of about $15 bn. Do the math against Fannieâs $804 bn in liabilities today, and the pipelines should be about $120 bn each.
Still believe that $25 bn figure Congress is selling you?
So essentially expect the Congress to give Fannie and Freddie a Ninja (no income, no equity) home equity style line of credit, which should make taxpayers realize that Congress itself is now a predatory lender, backed by the ATM machine known as the US taxpayer.
The right thing and pull the sheet over the two, put them in receivership and restructure their businesses. Restrain their portfolios, the two need statutory limits on their portfolios, put the guardrails up and do it now.
Weâre not talking bankruptcy here, calm down banks and central bankers who hold Fannie and Freddie debt overseas, weâre talking about a restructuring that protects everyone, let the portfolios run off, or else you, foreigners, will be importing our inflation.
Congress must insist on showing a âprofitâ from this misadventure, beyond the equity you and I will now hold in these two via the governmentâs moves (taxpayer-owned stakes which are subordinated to other investors, but thatâs for another day).
End note: Isnât it interesting that Fannie and Freddie went public after former US president Lyndon Johnson, worried about the effect of the Vietnam War on the federal budget, moved both off of the governmentâs books, in an off-balance sheet, adumbrated move presaging Enron?
Remember for the first time in the late â60s, Congress changed the rules to let it get its mitts on taxpayerâs our Social Security funds, which it since spent on pork to buy votes.
The â60s were when all fiscal and monetary responsibility started to fly into a ditch, and when taxpayers were loaded into the backseat of Congressâs spaceship pointed directly at the center of the sun.
Read Reaganâs quote again at the beginning of this blogâitâs back to the future time.
Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac at Emac’s Stock Watch | Fox Business