Treasury Secretary Tim Geithner is now leading committees upon symposiums upon commissions to concoct some kind of reform by January 2011 of the Thelma and Louise of housing, Fannie Maeand Freddie Mac, who are already driving the US taxpayer off the cliff, to paraphrase conservative pundit Pat Buchanan.
But as government committees are, in reality, animals with four hind legs that only move in reverse, and given the legislative history on reform here, there’s a good chance 'Frannie' reform will remain entombed in Congress along with Social Security, Medicare and tax reform for years to come, leaving taxpayers stuck with dead money in these two politically captive hedge funds. Freddie Mac has already drawn down $64 billion from its unlimited pipeline into the Treasury, meaning taxpayers’ pockets; Fannie has taken $86.1 billion.
Fannie and Freddie will likely get more direct cash injections than what was spent on the TARP bailouts of US banks and the automakers combined, analysts’ estimates show. Frannie’s recklessness also will likely cost taxpayers more than the collapse of the savings and loans in the 1980s.
If Geithner Were Serious, He’d Stress Test Frannie
If Treasury Secretary Geithner and the government were truly serious about reforming Frannie, they would have stress tested both before giving each of them an unlimited pipeline into the Treasury’s vaults in the dead of night last Christmas eve.
But taxpayers did not get any pay restrictions or a stress test of Frannie, and instead Frannie got an unlimited pipeline to stimulate an over-stimulated housing market even more.
Because as the housing kitchen got white hot, Frannie’s books boiled faster, and lots of dough went politicians’ way. That’s why the US taxpayer is now confronted with a Frannie that owns $5.4 trillion out of the $11.9 trillion in outstanding mortgage debt, as both were taken into US conservatorship in September 2008. More than nine in every ten new mortgages written during the first quarter of 2010 were government-backed.
Both grossly misrepresented their financial health for years, and both have a negative net worth. Both exploited their implicit government guarantees to blow out their leverage ratios to extremes only Bear Stearns’ Jimmy Cayne could appreciate. Both have been posting tens of billions of dollars in losses, and combined both have $335 billion in nonperforming loans.
The galling irony here is these two massively distorted and overstimulated the housing and credit markets for decades, an overstimulation that has come home to roost on the Federal Reserve’s balance sheet and in the form of a sucking straw in the Treasury’s U.S. mint division. The Fed is now staring morosely at a mountain of a trillion and a half of rotting paper in the form of mortgage-related debt securities. Purchases of bonds issued by Frannie plus Treasuries have swelled the Fed’s balance sheet from $900 billion two years ago to $2.35 trillion today.
“An In-House Appropriations Committee”
And though Congress took the time to enact 13 new government agencies to oversee the markets in financial reform, it somehow couldn’t find the time to stiffen the macaroni noodle spines of the supposed overseers of these two politically captive hedge funds. There is no mention of Frannie in financial reform at all, leading the Wall StreetJournalto quip “they were kept outside the financial reform bill...so they could be used as an in-house Appropriations Committee.”
Other Countries Have No Frannie
We know that Australia, Britain, Canada, Denmark, Germany, Ireland, and Spain do not have the same level of government housing support as the U.S. does, but all have the same levels of housing ownership and less debt when summed up in total, even though all royally messed up their economies with their own home-grown market distortions.
And as we continue to fall through the looking glass, now Frannie’s bailout has weirdly created an ethics charge due to a bailout of OneUnited Bank, another reckless Internet bank that Rep. Barney Franksaid deserved $12.1 million in taxpayer TARP money because, ipso facto, OneUnited had been hit with steep losses after its preferred securities in Fannie Maeand Freddie Macplunged due to the government bailout of Frannie. That pushed OneUnited capital reserves below regulatory limits, so it came hollering.
The House Ethics Committee is also investigating charges leveled against a second member of Congress, Representative Maxine Waters, (D-Calif.), who allegedly improperly intervened on OneUnited’s behalf. Waters’ husband is a former OneUnited director and owned stock in the bank.
Back to the Future
The Bush administration tried to reform Frannie in 2003, but failed at replacing their overseers, the Office of Federal Housing Enterprise Oversight. That came 11 years after the S&L crisis saw the creation of the Office of Federal Housing Enterprise Oversight in 1992. Former senator John Corzinetried his hand at a Frannie reform bill, but it got choked off in the Senate Banking, Housing, and Urban Affairs Committee, as did another Frannie reform bill a few years later by Senators Elizabeth Dole, Chuck Hagel, John McCainand John Sununu. All the while Representatives Frank and Waters, and Senators Chuck Schumerand Chris Doddessentially were saying in Congress that Frannie didn’t face any imminent crisis.