Fannie Mae and Freddie Mac, a $5.2 Trillion Bankruptcy

Posted 5 months ago (Sunday, August 3rd, 2008 at 4:32 pm) by jwsmith

By J.W. Smith

When established in the 1930s, Fannie Mae was a government sponsored, non-profit financial institution, designed to provide low-cost home loans to a nation traumatized by the Great Depression.

In 1970, FMae was privatized so as to remove it from the federal budget and Freddie Mac was established the same year. As government sponsored organizations (GSEs), neither paid local or state taxes, they were exempt from Securities and Exchange registration and fees, they were permitted to operate with lower reserves than banks, and they could each borrow up to $2.5 billion directly from the U.S. Treasury at low interest. The faith that they were backed by the government and operated so cheaply gave them access to massive sums of low-interest money looking for both profits and security.

With those advantages mortgages bought directly from lenders provided a large and steady profit stream which was reflected in high and secure stock prices. Even larger immediate profits were made when those loans were packaged into bonds (Mortgage Backed Securities) and sold to investors at a high capitalized value justified by the expected profits on these packaged mortgages and the normal low interest on bonds.

This proved so profitable that banks and other lenders packaged their loans into bonds, sold them on the market for that quick profit (especially the agent rake offs), loaned out those replenished funds, and did this over and over again with riskier and riskier loans as housing prices climbed higher and higher and security requirements were lowered to essentially nonexistence.

When bankruptcies jumped above normal, the value of those Collateralized Debt Obligations (CDOs) collapsed. The market now knew home prices were going to drop, the losses were going to be very large, and those CDOs, SIVs, (Structured Investment Vehicle) or any other name they went by were unsaleable.

Starting with the Bear Stearns collapse in March 2008, The Federal Reserve has pledged to pour several trillion dollars into banks and other financial institutions (including other central banks) to stem their collapse and the financial markets have still not liquified.

Each knows the various ways of being leveraged beyond the rules of prudent banking, know both they and all others were way over leveraged, so they must keep the money handed to them by the government to bring their debt ratios down from 30:1 to 70:1 (Citibank was 280:1 when bailed out) and do not loan to each other. Realizing the new rules will force them to reduce their leverage (meaning reduce those debt to equity ratiios), those trillions are being kept in reserve to pay down their debts and keep them within the parameters of prudent banking as demanded by those new rules. Both accounting rules and the law says a maximum of 12:1.

As homes and other equities continue to lose value (11 million homeowners with negative equity and prices expected to fall at least another 30%), the financial institution’s debt to equity ratios  look worse faster than money can be poured at them. Bankruptcies and walk-aways are rapidly increasing and prime loan walkaways and Alt A bankruptcies, expected to start in 2009, are anticipated to create greater losses than subprime loans.

The soothing words of $25 billion being available to shore up the two FMs and even that may not be needed fooled few people. Two hundred billion has been spent and another $800 billion is budgeted to buy up their toxic debt. And it is still far from sure the two FMs can survive.

Lets do the math. The housing rescue bill just passed, December, 2008, is intended to protect the $5.2 trillion in mortgages of the two FMs which are now guaranteed by the government. The value collapse of the remaining $7 trillion in mortgages is supposedly protected by the trillions poured at the rest of the financial structure, including the shadow banking industry. Thus GMAC and may other shadow banking corporations have officially became banks and eligible for bailout money.

Since most those trillions authorized by Congress is to replenish the coffers of financial institutions and only possibly $800 billion will go to homeowners to stave off their bankruptcies, it would appear two or three million will still lose their homes. And this is before the much larger 2nd wave of foreclosures and bank crises–the keep up with the Jone’s Alt A loans, prime mortgage holders whose income has collapsed, home mortgages up to 50% under water walk-a-ways, and credit card defaults–hits.

This financial crisis was never necessary. On GRIT TV, 7/18/08, Headrick Hertzberg pointed out that Fannie Mae did not have that high overhead when originally established. He said, “What is the purpose of all that overhead, those high profits, the huge salaries, and the annual payoffs to presidents and others?” It is obvious that providing low cost home loans was the proper function of the two FMs and neither should have ever been privatized.

One of the key aspects of our research is that so much unearned wealth is appropriated through Plunder by Raids and property rights law as applied to nature’s resources and technologies that denies others their fair share. Those huge blocs of unearned finance capital within the ethereal world of high finance get larger and larger, they cannot find enough places to safely invest it, and this is why they insist on privatizing, privatizing, privatizing.

Not even massive conspicuous consumption and investment in new privatizations can consume all the massive funds being appropriated from its proper owners. So investors turn to hedge funds and derivatives which produce absolutely nothing. They are only bets which decide who will end up with most of the stolen wealth.

They reach down into the real economy to appropriate more wealth and they grind up (waste) ever more wealth as they gamble between themselves (hedge funds and derivatives, $526 trillion worth, are only bets between each other).

Instead of pouring money at the ethereal world of high finance, it should have been pointed towards those millions threatened with loss of their homes, in short, towards the real economy.

In The simplicity of eliminating poverty and war will stun you we demonstrate a society can stop a financial collapse in its tracks if they point newly created support money at the real economy (those troubled home owners, the unemployed, and the underemployed). In the process it is possible to restructure the economy to double its current efficiency, the ethereal world of high finance disappears, a quality life for each citizen of this world is provided at less than half the current resource consumption, and future financial collapses are eliminated.

Instead of running such a society with full and equal rights for all, the corrupt financiers now controlling the money creation process are pointing most this money at themselves, the ethereal world of high finance which we prove are negative producers reducing economic efficiency by fully 50%.. Thank you

J.W. Smith

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