So. Let us summarize:
We do not expect the GSEs to grow their portfolios at all, so we are
fixing the bloated portfolio problem by easing the portfolio caps to
permit a quarter trillion dollar expansion thereof.
We do not expect either of the GSEs to need more help from the
Treasury, so we are responding to the underutilized $400 billion
“lifeline” the GSEs have with the Treasury ($111 of which is currently
used) by expanding it to… infinity.
Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.
Great work team! It’s already almost 11:00. Let’s go to lunch.
The other shoe having now dropped, Bloomberg has joined in our skepticism:
Taxpayer losses from supporting Fannie Mae and Freddie
Mac will top $400 billion, according to Peter Wallison, a former
general counsel at the Treasury who is now a fellow at the American
Enterprise Institute.
“The situation is they are losing gobs of money, up to $400 billion
in mortgages,” Wallison said in a Bloomberg Television interview. The
Treasury Department recognized last week that losses will be more than
$400 billion when it raised its limit on federal support for the two
government-sponsored enterprises, he said.
Wallison continues:
“It was always safe to buy these notes,” he said. The
U.S. government was always going to stand behind them. They’re as good
as Treasury notes.”
We are no longer sure this is the most inspiring comparison. Wallison also chimes in via the Wall Street Journal and points to a darker vein shot through the GSE story:
New research by Edward Pinto, a former chief credit
officer for Fannie Mae and a housing expert, has found that from the
time Fannie and Freddie began buying risky loans as early as 1993, they
routinely misrepresented the mortgages they were acquiring, reporting
them as prime when they had characteristics that made them clearly
subprime or Alt-A.
In general, a subprime mortgage refers to the credit of the
borrower. A FICO score of less than 660 is the dividing line between
prime and subprime, but Fannie and Freddie were reporting these
mortgages as prime, according to Mr. Pinto. Fannie has admitted this in
a third-quarter 10-Q report in 2008.
But because of Fannie and Freddie’s mislabeling, there were millions
more high-risk loans outstanding. That meant default rates as well as
the actual losses after foreclosure were going to be outside all prior
experience. When these rates began to show up early in 2007, it was
apparent something was seriously wrong with assumptions on which AAA
ratings had been based.
Losses, it was now certain, would invade the AAA tranches of the
mortgage-backed securities outstanding. Investors, having lost
confidence in the ratings, fled the MBS market and ultimately the
market for all asset-backed securities. They have not yet returned.
It has become conventional wisdom, perhaps even cliche, to pin the
origins of the credit crisis on the big banks or, AIG or even the
practice of financial modeling. Certainly, these actors have received
the most play in the media, and have now endured the focus of populist
ire for more than a year. We now think that the analysis leading commentators to focus blame on these entities is fatally flawed.
We have seen no credible data that any of the large banks or other
underwriters of mortgage backed securities (“MBSs”) or collaterized
debt obligations (“CDOs”) or firms like AIG selling protection on same
actually misrepresented the character of underlying collateral. This
is in direct contrast to the allegations of Edward Pinto as printed by
the Wall Street Journal. If Pinto is correct such that the
mis-marking of mortgages by the GSEs and the discovery thereof
destroyed confidence in the accuracy of ratings in mortgage backed
securities and their derivatives (and it seems probable to suspect that
he is) then it seems almost beyond question that the policies (or
policy malfeasance) of Fannie and Freddie, and not the actions of large
banks or firms like AIG are the proximate cause of not just the credit
crisis, but also the continuing multi-act, multi-bailout farce that
continues to be passed off to the public as necessary “stimulus.”
It takes only a cursory examination to suspect that misdirection plays a key part in the latest act of the ongoing crisis theater of the absurd.
Misdirection to distract attention from the key complicity of GSEs in
the crisis. Misdirection to deflect scrutiny away from the political
personalities from both sides of the aisle responsible. Misdirection
to conceal what could only be described as the most damaging acts of accounting and securities fraud in the history of accounting, securities or fraud.
Precious few assumptions are required to come to conclusions laying
responsibility for the largest economic disaster in recent memory at
the feet of the GSEs.
First, that the GSEs had substantial influence over the mortgage market.
This is a no-brainer with the GSEs either holding or guaranteeing
51% of outstanding home mortgage debt in 2003. To put this in
perspective, that figure was around 33% of the GDP of the entire United
States in 2003. Read that last line again. Anyone wishing to play in
the market had to compete with the rates set by Fannie and Freddie.
Second, that the GSEs artificially depressed rates (read: underpriced risk).
This is equally trivial to find given that this precise mandate has
been the express purpose of the GSEs since at least 1993. The GSEs
were not tasked with increasing the capacity for mortgage lending.
They were tasked with making loans “affordable.” They used a number of
tools to do so, but the key elements were acting as a proxy for
quasi-government guarantees and bundling mortgages into risk tiers to
act as a sort of clearing house for securitization pools. It is often
said that providing a guarantee (particularly governmental) reduces
risk. This is, of course, a fantasy. All that explicitly or
implicitly tax dollar backed guarantees do is socialize risk. However,
they manage to do so without requiring consolidation of the resulting
liabilities on the government’s balance sheet. Convenient that, yes?
A guarantee is a subsidy. Period. Failing to understand this is what
permitted the political class to mislead the American public into
thinking that cheap loans for everything from housing to small
businesses to education (the next fiscal disaster on the horizon) come
with no cost. (Or that cheap debt wouldn’t pump up the price of
everything from education to housing). Today’s pundits seem to enjoy
blaming “moral hazard” (by which they mean “corporate moral hazard”)
for the crisis. Oddly, government guarantees, particularly those that
everyone assumes will be costless, are not typically part of this
definition.
These assumptions, on their own should be sufficient to indict the
GSEs, the totally unqualified and unaccountable recipients of political
payoffs who occupied the executive offices of these fiscal singularities
and their other supporters (including the voters who continued year
after year to return these jokers to public office) on charges of gross
negligence.
If, as Pinto suggests, we add purposeful misrepresentation of underlying collateral to the mix three things become apparent:
First, absent some intervening criminal act by actors
farther downstream (and we may yet find some), we have isolated
absolutely the cause of all that followed.
Second, it becomes quite easy to construct a criminal case
for literally millions of counts of accounting, securities, wire and
mail fraud against the GSEs. To the extent executives at Fannie and
Freddie signed off on financial statements disclosing the portion of
their balance sheets that held “AAA” securities and these had been
purposefully misidentified we should be exploring prosecution for
violations under e.g., Sarbanes-Oxley. (Given, however, Rham Emanuel’s
involvement in Freddie and Fannie, we aren’t holding our breath).
Third, given the presence of blatant government price fixing
in more than a third of the entire economy, the United States hasn’t
been anything like a “free market” since before 2003.
It should shock you that literally a third of the U.S. economy
should become a playground for the social experiments of any political
group of any party affiliation.
It probably will not shock you (since you are reading Zero Hedge) to find what may be the largest example of securities fraud ever directly connected to elected officials of the United States and their cronies.
Taking a step back, it should shock you that power over literally
a third of the U.S. economy should ever have been allowed to become
concentrated in two entities with blatantly socialist aims and under
the control of executives with no relevant qualifications of any note
other than loose purse strings on their political contribution satchels.
What should grip readers with even more substantial alarm is the combination
of blank checking for Fannie and Freddie backstops, and the shifty
manner in which these disclosures were made. Is it possible anymore to
doubt that the administration simply lied through its teeth while
promising us it expects no need of increased credit lines for the GSEs
while simultaneously expanding same literally to infinity?
Given that Fannie, Freddie and the FHA have now taken up the mandate of
supporting housing prices at any cost (to the taxpayer via endless
bailouts and unlimited credit) is it possible in any way to credit the
current “upturn” to fundamentals? When we factor in similar capture of
the FDIC and the like, where does this leave us, exactly?
Permit us to ask a few questions:
1. Why are Fannie and Freddie still operating in any way whatsoever?
2. Given that their credibility for reliable (or even
remotely non-fiction) financial disclosure nears complete obliteration,
who is likely to buy anything from these entities in the future? (If
you said “The Fed” you may advance to the bonus round). Surely the
conflict of interest implicit in government ownership does nothing to
improve the situation. Perhaps the news that the Fed plans to issue securities to shrink its balance sheet
and reverse “quantitative easing” describes an attempt to securitize
the tattered reputation of the GSEs? Will the Fed simply aggregate its
balance sheet and issue tranches? Does that make the Fed simple the
collateralized debt obligation (“CDO”) of last resort? Who will do the
rating? Who will be writing protection on CDO Fed Tranch A-1 (AAA)?
3. Given that neither entity is currently monitored by an
Inspector General (despite what used to be statutory language so
mandating) and both entities are completely captured by the current
administration, how can it be anything other than insanity to expect
any result from these entities other than the formation (or expansion)
of a ravenous fiscal black hole?
4. Given increasing government control beyond Fannie and
Freddie that now extends far beyond 33% of GDP, what can we expect if
we continue to permit political parties of any stripe to exercise
command and control influence over what is now probably a simple
majority of our economy?
There was a time when we hoped that the United States would learn
its lesson with respect to permitting political control over large
swaths of private markets. Today that time seems very long ago, and
somewhat naive.
Perhaps we are being too harsh on the likes of Barney Frank and
other GSE proponents. Adopting a slighty more relativistic economic
morality, we might count Frank as one of the greatest legislators of
all time. Consider:
To the extent Mr. Frank and his ilk self-identify as advocates for
low-cost housing for those ill-able to afford it, or beset by poor
credit, the last 20 years have represented the largest single wealth
transfer (composed primarily of real estate and flat screen TVs) to
that sector known to us. Not only that, but given the de facto
nationalization of MBS portfolios (we’ll give you three guesses who
have been the largest MBS buyers over the last several quarters) the
GSEs and their supporters have managed to get taxpayers to pay for it
all. Of course, had they simply proposed such a measure in Congress it
would have been laughed from the chamber. And yet, it almost seems as
if these individuals simply wrote a multi-trillion dollar check to
their constituents that happened to be drawn on the United States
Treasury.
It almost seems this way because it was this way.