Public Risk and Private Profits

By: Guest Authors

With the economy in a shambles, the government rescuing banks from liquidation and the housing market all but collapsed, it might be a good thing that Pelosi and the rest of her minions are on vacation. Seriously. They are the ones responsible for getting us into this mortgage mess in the first place – can you imagine how completely screwed up it will be when they go back to “work” and try to “solve” the problem? I mean, we all know how great the Federal Government is at fixing things and getting stuff done in a timely manner and on-budget. Yeah, right. Budget –a word that nowadays seems even more elusive to our increasingly incompetent representatives in Washington. The scary thing is that when they come back from vacation they will actually try to fix the mortgage problem. Guess how? Yup! You guessed right! – They’ll just do what they always do and what never works: they’ll throw more money that the Treasury doesn’t have at a couple of the primary culprits, Freddie Mac and Fannie Mae.

The more I learn about these two institutions, the more upset I become, and mostly because not enough Americans out there seem to be getting upset enough about this. This is the type of stuff that will shape the financial future of this nation – as in whether we’ll have one or not. For our purposes here, I will only be referring to Freddie Mac, because the two are, for all intents and purposes, identical.

The following comes from the Freddie Mac website:

Freddie Mac “is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.” [Emphasis mine]

“As a government-sponsored enterprise with an important public mission to make housing finance more accessible and affordable, Freddie Mac is unique. We have special responsibilities to the American people. It’s incumbent upon us to carry out these responsibilities to the best of our abilities.” [Emphasis mine]

This part of a letter from Richard F. Syron, Freddie Mac’s Chairman and CEO is almost comical, in a very dark way, in light of what is going on in the housing market:

“Freddie Mac plays a critical role in financing homes for America’s families and providing strength and resiliency to America’s economy. I aspire to no greater legacy than to build public trust in an institution chartered by Congress to ensure the stability, liquidity and accessibility of the nation’s mortgage markets.” [Emphasis mine]

All of this leads to several concerns. First and foremost, since when does the Congress actually have the Constitutional authority to charter an institution to ensure the stability, liquidity and accessibility of anything? This is not the function of Congress, it is the function of the market – you remember, the FREE market, where people set prices they think people will pay for stuff they think people will want to buy, all without government rushing in to “fix” things that would balance themselves anyway? As a student of government I was blissfully unaware that the government had any obligation or authority to “raise capital on Wall Street and throughout the world’s capital markets to finance mortgages for families across America.” Aha! So, this is how Freddie Mac is simultaneously a stockholder-owned corporation established by Congress as well as a government-sponsored enterprise. Wait a minute – I think I get it!

Correct me if I am wrong, but my understanding of this example of a “public/private partnership” goes something like this: A bunch of Congressmen and Senators get together with some representatives of banking and mortgage lending special interests [yes, really] and figure out that they can: 1. violate the limitations on governmental authority and scope set forth in the Constitution; 2. Set up a “corporation” with private money and private investors to engage in high risk loans and activities that could potentially turn a tremendous profit, but that no one would be foolish enough to undertake unless, of course, the investment was guaranteed by the Federal Government; 3. Use this new “corporation” as a place to reward their political hack buddies with nice, high paying jobs. Wow! That really takes the risk out of “high-risk” now, doesn’t it?

Of major concern ought to be this: Freddie and Fannie are both a stockholder-owned corporations established by Congress as well as a government-sponsored enterprise. That means they are “run” essentially by the government – worse, the Congress, – and are accountable to no one – just like the Congress. It also means that those investors have no risk, for given the fact that these “corporations” were created by Congress, it stands to reason that they would be the largest monstrosity in the mortgage industry. Fedzilla at its best! So given that fact, if either one of them collapsed, then the entire housing market would be in jeopardy, and then other segments of the economy would likely be dragged to the bottom. Get the picture? If you have the capital to invest, theoretically you can’t lose – the Government will not let Freddie or Fannie collapse because they can’t.

Now, given the fact that the housing market has been in an abysmal state for months, if not years, and seems only to be getting worse, there has been speculation over the last several months about what is to be done to correct the situation. Oh, the Fed, you know – our Soviet-style central bank that all the Founding Fathers except Hamilton warned against – tweaked the interest rates again and then didn’t tweak them again, and we all got some of our own money back from our dear friends who serve us at the IRS, and guess what? It didn’t work!

Worse yet, there has been much speculation about the possibility of a Government bailout for these two pillars of socialism. Now it is a certainty. Here are some noteworthy points from an article in the International Herald Tribune on 20 August 2008:

“The markets are acting like a bailout is inevitable,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm.”

“Egan said he believed the federal government would need to help pump about $20 billion into each company, possibly through a government guarantee rather than through a direct injection of capital.”

“We believe Treasury is going to be forced to act within the next couple of weeks,” he added. “Probably some time after Labor Day, when investors (and Congress) are back from vacations so that the bailout has the biggest possible positive impact.””

Calls for a bailout by Uncle Sam! Imagine that! For those of you who are not yet sufficiently cynical about this kind of stuff, let me expedite your way to my happy place: This is a classic example of cronyism. It is special interests making deals with our elected officials who, incidentally know they don’t have to be accountable for their actions, for even if voted out by an angry electorate, there’s always work at Freddie and Fannie. These two bastions of Government waste and excess cannot be allowed to collapse because there are too many politicians and party hacks from both sides of the aisle dependent upon them for their living. Now, here’s the best part – at least if you’re a politician who may be in need of a job come November: “With an implicit promise of federal backing, Fannie and Freddie have borrowed money at low rates and used these funds to purchase and hold large portfolios of mortgages and mortgage-backed securities, now totaling $1.4 trillion.” Did you get that number? In case you didn’t, that was $1.4 trillion, as in $1.4 trillion in addition to the massive deficit we are already carrying that is going to bring about the economic collapse of an economy that was once the most vibrant in the world.

Just to make sure you get the idea, here are some excerpts from a National Review piece called Crony Capitalism Meltdown published 18 July 2008:

“Fannie Mae and Freddie Mac are called government-sponsored enterprises. At times, Congress has seemed a Fannie Mae- and Freddie Mac-sponsored enterprise. The companies spent $200 million on lobbying and campaign contributions during the past decade. They lavished dollars on members of Congress, hired key Washington players for lucrative executive positions and extended the largesse to nonprofits through a charitable foundation and to congressional districts around the country through so-called partnership offices.”

“For a senator or congressman to get on the Senate Banking or House Financial Services committees was a guaranteed ride on the Fannie and Freddie gravy train. With their sharp lobbying elbows, sometimes it was unclear who was doing oversight on whom.”

“After Fannie was caught cooking its books to the tune of $6.3 billion a few years ago, the institutions still escaped reform. With the subprime mortgage market in meltdown lately, Congress has wanted Fannie and Freddie to assume even more risk.”

“Fannie and Freddie exist to bolster mortgage lenders — and therefore homeownership — by buying mortgages, guaranteeing them and selling them on the secondary market. With an implicit promise of federal backing, Fannie and Freddie have borrowed money at low rates and used these funds to purchase and hold large portfolios of mortgages and mortgage-backed securities, now totaling $1.4 trillion. In short, the government gets the risk, the executives and shareholders get the profits.”

“Unlike many well-capitalized savings and loans and commercial banks,” Alan Greenspan warned in 2004, “Fannie and Freddie have chosen not to manage that risk by holding greater capital.” Why would they, if Uncle Sam is underwriting them? Fannie and Freddie kept Congress from limiting their expansion and from tightening their capital requirements. Instead, Fannie and Freddie have been recklessly undercapitalized at debt-to-equity ratios of 20-1 or more, when Bank of America and J. P. Morgan are at roughly 4-1.”

As this is being written, the Bush Administration has just seized the assets of the two hemorrhaging behemoths. Administration officials stated that Freddie and Fanny were being placed in a government conservatorship. Treasury Secretary Henry Paulson announced earlier that the Treasury will do “whatever it takes” to keep the two mortgage giants from failing. Do you know what that means? For starters, it means that the Treasury will execute an infusion of about $100 billion dollars. Where will it end? Remember that $1.4 trillion figure I was telling you about? Just wait and see how long it takes for our Treasury that has no money to come up with $1.4 trillion. How, you ask? According to the AP, “after the Treasury Department’s announcement, credit rating agency Standard & Poor’s downgraded Fannie and Freddie’s preferred stock to junk-bond status, but reaffirmed the U.S. government’s triple-A rating.” That is to tell foreign interests that are already holding a substantial amount of U.S. debt that a whole lot more is about to come on the market and it will be safe to buy up. It says foreign governments need not fear losing on assuming Fannie and Freddie’s debt, because it is now guaranteed by the U.S. Treasury – that has no money.

Good stuff, eh? Are you mad yet? You should be, because when Congress comes back into session after their break you can bet that Pelosi will rally her minions – with little opposition from Republicans, I should think – and have the whole issue of authorizing a massive trillion-dollar bailout concluded in record time. Then you and I will be charged with yet another couple of trillion dollars we’ll have to pay off – that is, unless the Chi-Coms lend it to us, which is highly probable. Either way, we lose. We either incur more debt to pass on to our posterity or allow even more foreign lordship over not only our domestic economy, but also our Treasury. You know, this could easily surpass even the most monumental achievements of the 110th Congress in their previous session – like the whole thing about apologizing for slavery. Big stuff. I’m glad they were able to vote themselves a raise recently – they deserve it, don’t you think? At least it shows they can get something done, doesn’t it?

And so it is. They will authorize it and sell us out one way or the other. That’s what happens when Congress is allowed to charter an institution to ensure the stability, liquidity and accessibility of the nations mortgage markets. Empty promises, flowery rhetoric, ripped-off and screwed. And left holding the bag to pass it on to the next generation, that is if the government makes it that long.


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