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  • July 24, 2008 10:24 AM EDT by Elizabeth MacDonald

    Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac

    "In this present crisis, government is not the solution to our problem, government is the problem... 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." -- Ronald Reagan, Inaugural Address, January 20, 1981

    The moves by the government to calm the waters over the perilous health of Fannie Mae (FNM) and Freddie Mac (FRE), the mortgage finance giants, have had a temporary Xanax effect on the markets, similar to the Federal Reserve's 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. And it's not just because the government's estimate of the cost to taxpayers for the S&L crisis rose from an initial $50 bn to more than $124.6 bn (not inflation adjusted). 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).

    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 Freddie's books, as it clearly doesn't believe the management at these two levered up examples of crony capitalism.

    And don't forget the history here, CBO's 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 here's what should concern you.

    Instead of reining in their colossal, outsized portfolios which has caused such danger to taxpayers, the legislation went in the opposite direction. It 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.

    However, the House bill doesn't force Fannie and Freddie to wipe out, or even cut, their dividends to investors in the event they draw down on the government's 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. Also, the two can use the securities they mint on their own to use as collateral when borrowing at a cheap $2.5% at the Federal Reserve discount window.

    And nowhere to be found is any talk of capping the top execs' pay at Fannie and Freddie. Last year, Freddie's chief exec Richard Syron got paid about $19.8 mn even though shares in his company lost half their value. Fannie's top gun Daniel Mudd got paid $12.2 mn in compensation, (with a $2.2 mn bonus).

    I don't 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.

    Here's a list--notice none of these issues are addressed in the housing bailout bill:

    *Both have a total of a microscopic--did you see it, did you catch it?--$54bn in net worth, generally assets minus liabilities (don't listen to the $81 bn figure tossed around for their total capital, that's a pro forma fake number that doesn't 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 can't get a pricetag on because no one wants them now. Remember, under US accounting rules, it gets to assign its own values to these assets, they could be worth more, they could be worth less.

    *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, that's 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 Fannie's $804 bn in liabilities today, and the pipelines should be about $120 bn each.

    Still believe that $25 bn figure Congress is selling you?

    The right thing to do would be to 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.

    We're not talking bankruptcy here, calm down banks and central bankers who hold Fannie and Freddie debt overseas, we're 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 "profit" from this misadventure, beyond the equity you and I will now hold in these two via the government's moves (taxpayer-owned stakes which are subordinated to other investors, but that's for another day).

    End note: Isn't 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 government's books, in an off-balance sheet, adumbrated move presaging Enron? 

    Remember for the first time in the late ‘60s, Congress changed the rules to let it get its mitts on taxpayer's our Social Security funds, which it since spent on pork to buy votes.

    The ‘60s were when all fiscal and monetary responsibility started to fly into a ditch, and when taxpayers were loaded into the backseat of Congress's spaceship pointed directly at the center of the sun.

    Read Reagan's quote again at the beginning of this blog--it's back to the future time.  

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Greedom

Not sure if prior submit made it or not - reposting. Please ignore this is the first one made it, I am thinking maybe if it's too long, the server cuts it off ? You know ? When I say 25 Billion listed for buyout costs - I too thought - gee, that seems awfully low. Heck, it seems awful PERIOD, but low too ! While I agree with the article, it didn't present issue of federalization of a US corporation as key issue why to question whether this is a responsible move for a troubled nation state. Call me crazy, and some have ! I have always been a fan of germany styled federalization of the energy resources. I suppose there was that one town that had heating to all the homes, and that was that. Anyway - somewhere in there is a good move for humanity. but federalizingh the mortgage brokers - what's next ? federalization the banks ? I mean, what would follow that ? my god - Some Federal Reserve Bank would show up amidst record train robberies of record cash printing in the early 1900's ! oh no ! By the way - I did observe the US started to print massive cash in the early 1900's - ALSO the same time as - go figure- these massive train robberies - Only recently did it occurr to me that - yikes, these robberies ? were pulling down 10's of millions - at that's at 1900 USD ! Ask yourself - that REAL money, where'd it all go ? Who's family inheritances have been poisoned by stolen cash ! Uh oh, in that case, if the US took the land from the Native Americans - who'd THEY Steal it from ? Looks like humanity is one pathological line of theivery after another - and we just don't get it - we just keep taking. How is it we can rob ourselves - How can fail to discern when we are on a dangerous tangent usurping our energies that otherwise could be used to better the life of child. Yes, the stink bomb is humanity ! Oh uh, maybe not. Arthur Koestley says humanity is pathological, that religious wars, civil wars, you name it, that with nuclear weapons, we're all wearing a time bomb around out neck. And here births the internet out of Arpanet out of planning for a nuclear attack. And here births Larry Craig's big interest - nuclear energy out of technologies developed to blow ourselves to kingdom come. Hard to fit the right words in that prior statement. 25 Billion is low balling it. Oh no, I can't seem to use any words regarding Craig that can't be turned into a euphamism. The big problem with Fannie Mae or Freddie Mac buyout is - even IF you can accept Pualson getting the green light to allow the US Fed gov. just start buying stock in a company, and offering unlimited loans ? (Sounds like Paulson wants a countrywide mortgage here to take the money and fix Fannie and Freddie - IQ above 150 only on that one) is whether the US gov. can even AFFORD it. At the end of the day, the forest comprises of trees. While the 'taxpayers' term is thrown around as if it's more than an abstract noun collectively, what ? the US citizens have to pay off their mortgage and THEN pay off the debt of the mortgage company ? Wow - when one goes to sign a mortgage - does the fine print now say "And - you are responsible to pay off the mortgage provider's debt if it makes some mistakes". There are SO many reasons even considering bailing out Fannie and Freddie are dangerous. For one ? IF nation states that have put their money into the SAFE HAVEN of FM & FM (FM^2 hereafter) ? get word that the US is considering bailing OUT FM^2 ? ALl the while the USD is at it's WORST positioning ? My god - and Treasury continues to state 'confidence is most important feature' Hey - if the US Federal Government is there to bail out corporations when they fail ? Gee ? Maybe they can bail out the citizens too ? Ah, I see, the corporation is more important than the citizen in a corpocracy. That is the real problem here, we live in a corpocracy all the while the Treasury and Federal Reserve pretend it's something else, and when we have blips showing up on the radar that reveal the tight fit between Congress and Corporations - there really isn't much to do but get a bag of popcorn and watch political/economic theory/ideologies unravel. Odd, while China keeps oppression and attempts to move from communism/socialism towards capitalism, the US moves towards oh - nm. One planet as seen from space, no one has dibbs on anything beyond that- hope you people have some seriously real dreams, in come cultures, the dream is considered the beginning of the day.

July 24, 2008 at 11:41 am

Greedom

You know ? When I say 25 Billion listed for buyout costs - I too thought - gee, that seems awfully low. Heck, it seems awful PERIOD, but low too ! While I agree with the article, it didn't present issue of federalization of a US corporation as key issue why to question whether this is a responsible move for a troubled nation state. Call me crazy, and some have ! I have always been a fan of germany styled federalization of the energy resources. I suppose there was that one town that had heating to all the homes, and that was that. Anyway - somewhere in there is a good move for humanity. but federalizingh the mortgage brokers - what's next ? federalization the banks ? I mean, what would follow that ? my god - Some Federal Reserve Bank would show up amidst record train robberies of record cash printing in the early 1900's ! oh no ! By the way - I did observe the US started to print massive cash in the early 1900's - ALSO the same time as - go figure- these massive train robberies - Only recently did it occurr to me that - yikes, these robberies ? were pulling down 10's of millions - at that's at 1900 USD ! Ask yourself - that REAL money, where'd it all go ? Who's family inheritances have been poisoned by stolen cash ! Uh oh, in that case, if the US took the land from the Native Americans - who'd THEY Steal it from ? Looks like humanity is one pathological line of theivery after another - and we just don't get it - we just keep taking. How is it we can rob ourselves - How can fail to discern when we are on a dangerous tangent usurping our energies that otherwise could be used to better the life of child. Yes, the stink bomb is humanity ! Oh uh, maybe not. Arthur Koestley says humanity is pathological, that religious wars, civil wars, you name it, that with nuclear weapons, we're all wearing a time bomb around out neck. And here births the internet out of Arpanet out of planning for a nuclear attack. And here births Larry Craig's big interest - nuclear energy out of technologies developed to blow ourselves to kingdom come. Hard to fit the right words in that prior statement. 25 Billion is low balling it. Oh no, I can't seem to use any words regarding Craig that can't be turned into a euphamism. The big problem with Fannie Mae or Freddie Mac buyout is - even IF you can accept Pualson getting the green light to allow the US Fed gov. just start buying stock in a company, and offering unlimited loans ? (Sounds like Paulson wants a countrywide mortgage here to take the money and fix Fannie and Freddie - IQ above 150 only on that one) is whether the US gov. can even AFFORD it. At the end of the day, the forest comprises of trees. While the 'taxpayers' term is thrown around as if it's more than an abstract noun collectively, what ? the US citizens have to pay off their mortgage and THEN pay off the debt of the mortgage company ? Wow - when one goes to sign a mortgage - does the fine print now say "And - you are responsible to pay off the mortgage provider's debt if it makes some mistakes". There are SO many reasons even considering bailing out Fannie and Freddie are dangerous. For one ? IF nation states that have put their money into the SAFE HAVEN of FM & FM (FM^2 hereafter) ? get word that the US is considering bailing OUT FM^2 ? ALl the while the USD is at it's WORST positioning ? My god - and Treasury continues to state 'confidence is most important feature' Hey - if the US Federal Government is there to bail out corporations when they fail ? Gee ? Maybe they can bail out the citizens too ? Ah, I see, the corporation is more important than the citizen in a corpocracy. That is the real problem here, we live in a corpocracy all the while the Treasury and Federal Reserve pretend it's something else, and when we have blips showing up on the radar that reveal the tight fit between Congress and Corporations - there really isn't much to do but get a bag of popcorn and watch political/economic theory/ideologies unravel. Odd, while China keeps oppression and attempts to move from communism/socialism towards capitalism, the US moves towards oh - nm. One planet as seen from space, no one has dibbs on anything beyond that- hope you people have some seriously real dreams, in come cultures, the dream is considered the beginning of the day.

July 24, 2008 at 11:39 am

david a belanger

the real reason ( potatohead sect.paulson is doing this is that china and other country have a total of 1 trillion of the securitys fannie and freddie have. this is the only reason they have done what they have done.. still from americans to make their freind in china happy.. what a mess the congress has led us into. they need to let the cards fall. just as the same banks are doing to millions of americans. i just let my so call 400,000 dollar home i baught for 300,000 4 years ago go back to the bank, now that it is only worth 140,000 as todays best offer, what a joke. paulson should be hung high and dry.

July 24, 2008 at 11:39 am

Tony Touch

The best article on this debacule ever. Keep up the good work. BTW other countries are already importing our inflation.

July 24, 2008 at 11:38 am

Tom

Finally someone in the press gets it.... and from Fox no less.

July 24, 2008 at 11:37 am

Tom

If these institutions, who actually required down payments or PMI, were the reckless lenders, please give me a list of the responsible ones.

July 24, 2008 at 11:37 am

David Row

Same old story. Bailouts for the private companies are okay, but the semi-government agencies discussed here should be axed. Whats needed is more government intervention, not less. Maybe if the FOX (Bush or the Network) had been watching the henhouse before we got to this point, the chickens wouldn't be running wild all over the barnyard.

July 24, 2008 at 11:37 am

Daniel Oakes

Amen, if you ever decide to run for the Senate, please let me know. I would like to help in your campaign. Let the government stop devising various abstract means of 'printing money' in order to push the economic pain further into the future while generating inflation. That future pain becomes increasingly more intense under the wound salt of inflation than the pain to be realized now in dealing with the ever pervasive mal management of trusted assets. Let's get back to a free market economy in which the gain and/or the loss is realized by the risk taker not the American tax payer.

July 24, 2008 at 11:37 am

Westcoaster

This decision is avoiding the tough medicine that is needed to get the US back on track. Is the government going to bail out the individual consumers who spent too much at Old Navy or Home Depot? I totally agree with your position. Foreign debt holders must be reconsidering their positions.

July 24, 2008 at 11:35 am

gary brunk

GREAT ARTICLE!!! Too bad our local Tulsa FOX "talking heads" won't air this.

July 24, 2008 at 11:33 am

Steven

I totally agree. They're a solution to a problem that hasn't existed for decades, making huge profits out of big too big to be allowed to fail. Either they should be nationalized and wound down, of left to fail on their own. Shareholders shouldn't be given a huge hand out from taxes. Just look at other Western countries, none have Fannie or Freddie equivalents, and the Northern Rock shambles in the UK, demonstrates what happens when government sticks their oar in. Sometimes short term pain, a big failure, is the best in the long term.

July 24, 2008 at 11:29 am

Deano

I don't think that I am the only one who believes this country is on a major, downhill slide. It seems there is nothing sacred when it comes to congressional members doing anything they can to save big money investors in this country in an attempt to garner the post-politics position they seek. Anytime they start messing with the natural ebb and flow of the economic system, it starts to go awry.

July 24, 2008 at 11:29 am

theantibush

So we’ve privatized gains and socialized risk. What a knot! As for bail outs with tax payer money, why isn’t bushie screaming ‘we dont need socialized trading!’? Ok, we let incompetent borrowers into the financial markets, manipulated by sleazy loan people. Ok, we let incompetent people’s votes, manipulated by sleazy political advisors and ‘think tanks’, count the same as the competent. Thus by normal distribution, the tail wags the dog. Is it any wonder democracy in America is one of sub-prime leadership? Until votes are weighed according to citizenship, time in country, community service, criminal record, education, and age, our sub-prime leadership crisis will continue unabated.

July 24, 2008 at 11:28 am

John Nakao

Strongly worded but probably the most honest, direct editorial a major news publication will put out? The numbers are staggering, and I agree with the "shut them down" and structuring approach. If we are to call them GSE's it is a half-way house that has confused the market from Day One. This piece is owned lock, stock and barrel by the U.S.A. (read: taxpayer). Anything going forward should be called U.S.A. (government guaranteed, and greatly resisted) or privately-owned and managed, with no bailouts for the owners.

July 24, 2008 at 11:27 am

Tracy Horn

Good article, Liz! I'll bet you won't see anything like this on any of the (other) major networks! Why can't we get more people interested in taking an active part in our government's actions, and get them back to their proper role of being "the people's servants"? I guess we all want "ice-cream and circus's" too badly.

July 24, 2008 at 11:27 am

David

No responses? The public doesn't understand where congress is taking them and that is to the poor house. We have no stewardship in DC, no backbone and obviously no intelligence. Woe the the people who's leaders have no character and do not represent the wishes of the people and only the wishes of the party. I am afraid this is on both sides of the isle. If you pray, now would be a good time!

July 24, 2008 at 11:24 am

Ty

"This, despite the fact that the moves have kicked into high gear the haymaker of inflation now coming a cropper through family budgets." What does that mean?

July 24, 2008 at 11:21 am

DL

Good thoughtful analysis scoping out the "rest of the iceberg" under that $25B tip we are being shown.

July 24, 2008 at 11:21 am

Bill Hunt

Phil Graham was right, we've become a nation of whiners. God bless Rupert Murdoch and Fox News. The end is near.

July 24, 2008 at 11:20 am

Terryeo

Personal independence, personal freedom, we all want these things. Government's duty should aid us and not hinder us. Fanny and Freddie are selected businesses, whether they hurt us and fail or help us and prosper. Don't let private enterprise be "bailed out" by big government because that is the first step on the road to government tyranny.

July 24, 2008 at 11:16 am

Tommy Wagner

You have the exact point. I never get responses to my explaination of a new species in congress- moronzos- a cross between bozos and morons! Will your article make the news?

July 24, 2008 at 11:15 am

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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