Long-time readers know I have often referred to the “off-balance sheet” nature of Fannie Mae and Freddie Mac – the so-called “Government-Sponsored Enterprises” that are not considered “government-owned” due to accounting chicanery that allows such ownership to be held in the form of 20-year warrants instead of actual common stock. Make no mistake, said “sponsorship” was the single most damaging aspect of the mid-2000s housing bubble – enabling mortgage companies to sell subprime mortgages to people that couldn’t afford them, knowing Fannie and Freddie would buy them with no questions asked; in the name of laws like Bush’s “American Dream Down Payment Assistance Act.”
Signed in December 2003 – and funded by essentially unfettered, un-scrutinized mortgage purchases by Fannie and Freddie – this ill-conceived legislation, conveniently signed just before Bush’s 2004 re-election campaign, fostered a 50% U.S. real estate surge in just two years; ultimately, catalyzing the 2008 Global Meltdown that essentially BROKE the financial system FOREVER.
Of course, when an historic real estate bubble collapses, the entities most exposed to it collapse as well. And thus, on September 7th, 2008 – just a week before Lehman Brothers filed for bankruptcy – the government took over Fannie and Freddie – in a convoluted “conservatorship” that, per above, allowed them to be considered “off-balance sheet” entities. At the time, the U.S. national debt was “just” $9.5 trillion – compared to $5.0 trillion for the two GSEs. And thus, any and all accounting shenanigans were invented to pretend taxpayers’ cumulative debt liability hadn’t just increased by 53% overnight.
By the way, the $5.0 trillion includes $1.6 trillion of straight debt and $3.4 trillion of toxic mortgage-backed securities; many of which, I’m sure, are arbitrarily marked far above their true values. After all, if the April 2009 FASB accounting changes allowed private financial institutions to lie about their mortgage portfolios, how could such thievery not apply to the government as well?
For the record, at the time Fannie and Freddie were subsumed by the government, the Fed owned just $479 billion of Treasury bonds – compared to $2,100 billion today – and ZERO mortgage-backed securities. Worse yet, Fannie, Freddie, and fellow GSE “Ginnie Mae” originated or purchased an incredible 99.3% of ALL mortgages in 2012, compared to just 45% at the time of the government takeover. Hence, the title of today’s piece.
You see, when a single entity not only makes a market, but controls it, even the slightest contraction in its size can be devastating – particularly when it’s very existence fosters a greater degree of moral hazard with each passing day. The 2008 Global Meltdown all but DESTROYED the entire mortgage industry; and thus, while few realize what these behemoths are doing behind privatized walls, they are essentially running the whole U.S. housing market like a malignant mafia don – replete with the same kickbacks, side deals, and other hallmarks of a government bureaucracy.
Worse yet, the government can now completely control GSE accounting – and thus, has deemed them “profitable” despite the fact housing prices are lower today than at the time of the September 2008 nationalization. In fact, a report released last month by the Federal Housing Finance Agency’s Inspector General believes Fannie and Freddie are NOT profitable at all; asking why they – and ALL Federal Home Loan Banks – have been dragging their feet implementing 2012 accounting changes that would accelerate the timing of tens of billions of unrealized losses on bad loans from the uber-toxic 2004-2008 period. Next, recall what I wrote last week about the “extraordinary measures” the government has taken to delay the inevitable debt ceiling breach; and realize that the so-called dividends are but a figment of the government’s accounting imagination…
This year’s reported decline in the budget deficit is due principally to accounting shenanigans utilized to delay the debt ceiling breach into mid-October; which, when it finally occurs, should yield an instantaneous debt surge of perhaps $300 billion. And don’t forget the outrageous payment of ‘dividends’ from Fannie and Freddie to the Federal government – which simply make these government-owned entities even more insolvent. In other words, “robbing Peter to pay Paul.” Moreover, now that the housing market has shifted into reverse, Fannie and Freddie’s supposed ‘profits’ will rapidly turn to losses.
–Miles Franklin, September 18, 2013
By definition, an albatross is a “continuing problem that makes it difficult or impossible to do or achieve something.” And in the case of Fannie Mae and Freddie Mac, the Ponzi scheme nature of their existence is only making said problem larger and more irreversible. In a morbid economy being kept alive solely by the QE “respirator”– per today’s comments by Fed governors Dudley and Lockhardt – “tapering” is no longer an option; and likely, NEVER will be.
Each day, the Fed owns a larger piece of the mortgage industry; in essence, transferring ownership from the government to the “TBTF” banks. As of today, the Fed now owns 32% of ALL Treasury bonds – speaking of Ponzi Schemes! – but even more ominously, 42% of mortgage-backed securities, while originating or purchasing more than 99% of ALL new issuance. ALL of this has occurred since September 2008; and thus, I think you’re starting to realize why the financial system is irreparably broken. Throw in the “under the radar” issue of the dearth of “tier one” collateral being absorbed by this one entity – which can NEVER sell, lest interest rates will surge; and you can see why the banking system MUST be eternally propped up with ever-increasing levels of QE. That is, until confidence is lost – and the system implodes of its own weight.
And thus, the next time you hear PROPAGANDA of how the economy is “recovering” – particularly when the “rising stock market” is qualified as an indicator; think long and hard of what’s REALLY going on behind the scenes – and the credibility of those speaking. The aforementioned trillions of Treasury bonds and mortgage-backed securities are the “twin albatrosses” that will NEVER enable recovery; and any attempt to shrink them will result in devastating, immediate economic ramifications. Worse yet, any Fed attempt to sell them will DESTROY these markets instantaneously.
ONLY gold and silver are non-debt based monetary instruments that CANNOT be defaulted on. Everything else in the supposed “tier one” category – like “cash,” Treasuries, and Mortgage-Backed Securities (MBS) will in fact default; and would have already if not for fraudulent accounting. Considering all I have just written, where do you think the safest place to store capital is?