Fannie/Freddie Fallout: The US' Financing Bill is Coming Due
Foreign central banks had been among those voicing concerns in the weeks ahead of the government's seizure of Freddie and Fannie. The banks had steadily reduced their holdings of debt in the two firms in recent weeks as the turmoil around the firms worsened.China's four biggest commercial banks, too, pared back their holdings in agency debt, with Bank of China Ltd., the largest holder of Fannie and Freddie securities among these banks, saying it sold or allowed to mature $4.6 billion of the $17.3 billion it held as of June 30, down from more than $20 billion at the end of last year.
Treasury tried to head off such concerns by having David McCormick, an assistant secretary for international affairs, call foreign central banks and other overseas buyers of the companies' securities or debt to reassure them of the instruments' creditworthiness. Over the weekend, Treasury officials called sovereign-wealth funds in Abu Dhabi and elsewhere in the Middle East, assuring them that they were working on financial issues involving Fannie and Freddie, says an individual apprised of the conversations.
Like many investors, foreign governments, particularly central banks and sovereign-wealth funds, believed the U.S. government implicitly stood behind Fannie and Freddie and would prop them up to prevent a failure.
But when the Treasury won approval from Congress in July to backstop the pair through an equity investment or a loan, it sparked questions among some investors about the relationship between the government and the mortgage giants.
Amid worries about the debts' backing by the U.S. government, some central banks decided to buy Treasury securities instead. That increased the spread between the rates for Treasuries and mortgages, exacerbating the crisis that officials had been trying to resolve.
In his public comments Sunday, Mr. Paulson said the "ambiguities" in the firms' congressional charters led foreign central banks and investors in the U.S. and around the world to believe the firms' debt was "virtually risk-free."
"Because the U.S. government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings," Mr. Paulson said.
On Monday, Mr. Paulson sought to assuage the concerns of foreign officials, explaining the government's takeover in a brief call with his financial counterparts in the Group of Seven.
A few points here:
1.) Paulson -- for all that I have criticized and even lampooned him -- is the right man for this job. He has extensive experience in dealing with big deals and big name players. He probably knows most of these people in a more than passing way in one capacity or another.
2.) The next Congress has to put aside partisan differences and hold extensive hearings on the entire financial system. We need to look at all the pieces, big and small, and figure out what needs to be done to provide competitive financing and prevent the last 7 years from happening again. The chance of that happening is, well, 0%.
3.) Perhaps the biggest crime with this situation is the reason for it -- the fact the US's trade deficit and lack of domestic savings leads to the need for foreign financing -- is so incredibly ephemeral that explaining it to most people is at best incredibly difficult. If there was a straight-forward reason for this happening it would be so much easier to deal with and solve. But trade deficits and foreign financing just seem so beyond the experience or exotic to most people that solving the underlying problem is next to impossible.
4.) Yesterday I wrote the following:
The point is all of the press indicates it's these conversations with foreign bankers that got Paulson's attention. That means there are some nervous people all over the globe. And that's what is driving this -- at least partially. And that should scare everyone to death. We are no longer in complete control of our sovereignty.
Think about this for a minute. One of the largest financial decisions of the last 100 years -- the decision to essentially nationalize elements of the mortgage market -- was driven by outside (non-US) investors. That does not mean we should stop selling our assets to non-US investors -- they are, after all, a vital source of funding for a variety of projects etc.... However, it is important to note that things are not going well in the US. That means that foreign investors who want to protect their investments will speak up and talk too the appropriate people in the US.
Throughout my writing career I have written extensively about debt. Right now the US is in debt up to its eyeballs. The federal government has issued over $500 billion dollars of net new debt per year since 2003. That means there is a fundamental problem in the US budgeting process that no one is addressing. The US consumer is just as bad. According to the federal reserve's flow of funds report, there is almost as much household debt as there is US GDP.
All of this debt has to go somewhere. That means that when we borrow money someone inherently has to lend it. And a fundamental rule of lenders is this: they want to be repaid. We've now seen the first round of lenders saying, "we want too make sure we will get repaid." Right now we have no idea how much this is going to cost, although I have a terrible feeling it's going to be far more than anyone is estimating.
But the real issue is our method of doing business as a country has finally gotten us in trouble. That means all of the people we have borrowed money from got nervous for the first time and said, "you better do something or we won't lend you money any more." And to keep the spigots pouring, we nationalized Freddie and Fannie.
Think about this basic fact: we -- the US as expressed through the Congress -- were not the people who decided what to do. Foreign investors forced out hand and made us allocate up to $200 billion to this endeavor.
Out way of doing business is broken.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
" 'Accountants and lawyers' are two people that you do NOT want to have running your business, or your country."
... hmmm ...
"Houston, I think I see the problem here." :-D
"3.) Perhaps the biggest crime with this situation is the reason for it -- the fact the US's trade deficit and lack of domestic savings leads to the need for foreign financing -- is so incredibly ephemeral that explaining it to most people is at best incredibly difficult. If there was a straight-forward reason for this happening it would be so much easier to deal with and solve."
You want a straight-forward reason? I'll give you one.
Go into ANY store and try to find something MADE IN THE USA. You can't, because there isn't any.
Nothing made here in the USA means NO JOBS here in the USA means NO MONEY TO SAVE.
No jobs in the USA? The unemployment rate has been between 4 and 5% for much of the Bush Presidency. ..that's full employment.
the service industry (especially financial) provides the jobs, not manufacturing. We produce very little of what we buy.
This is one subject that won’t be debated, won’t be discussed and won’t be brought up by the corporate media. Neither of the Presidential candidates and neither of the Parties have an economic game plan to solve our most pressing economic problem, The Big Owe. We owe everybody. Everyone knows about China, Japan and Saudi Arabia but we even owe Mexico money. When you have to go to Mexico for a loan you’re in bad shape. We owe 89 billion to Luxembourg!
For right now the prospect of getting Government paper to replace shoddy, fraudulently rated private paper will calm our creditors. The amount of Government debt created by the Bush Administration will wind up being about 5.5 to 6 trillion with this bailout and the upcoming bailouts. The recently announced 407 billion dollar deficit is about half the true total. The Wars and bailouts are off budget and the Social Security surplus is borrowed.
The World is awash in American debt. Much of the mortgage debt has yet to be discounted (recognized as wallpaper). The Fed has already taken 400 billion in Wall Street paper onto its books (bailout). Many banks have much more suspect paper. The FDIC has asked Congress for additional financing to bailout banks.
The prospect is for more and more debt piling up yet the only talk you hear is about tax cuts, spending plans and cuts of 3 dollars in earmarks.
At what point will the lenders drop our rating to Junk?
Oversimplified lay person analysis: The taxpayer is screwed, but perhaps not as screwed as we would be if Fannie and Freddie were left on their own to drive the boat a little further into the rocks. Home debtors: still screwed. The dollar: still screwed, but better off than would be the case if Fannie and Freddie were left to tank, with no bailout. It matters; as wages are stagnant.
On this count, I have little faith in either party. I was not surprised, but still disgusted, to see Biden talking to Brokaw the other night, and trying to explain away his family connections to MNBA, his support of harsher bankruptcy laws, with no provisions for those affected by catastrophic medical expenses, etc....And he was asking The People to trust that Bernanke and Co. know what they are doing with the Fannie/Freddie takeover.
What Biden should have been doing is screaming bloody murder over the taxpayer being forced to pick up the bill for corporate excesses and an institutionalized Ponzi scheme in the lending market with realtors and builders complicit as they skimmed their own cut. But no one in Washington has clean hands, and this isn't the year to decline a "lesser evil" in favor of a protest vote -- not when you imagine what the neocons could do with another 8 years.
Pity that "A curse on both your houses, but I'll go with Obama" doesn't make much of a bumper sticker.
http://www
I give you the Freddie results page for 6/30/08. Brief reading shows they have "excess" capital by their requirements! Their losses are a result of expense provisions for reserves. Point for you is this.... they are expensing for reserves largely as a result of the effect from the external subprime mortgage loan securitization that they were not a direct part of. Think about this for a second. Fannie and Freddie are comfortable "volkswagons" of credit doing what their original intent was. However, the investment banks, brokers, appraisers, addicts of greed bloated a market value of easy money and the bloodshed affects Fannie and Freddie. I am telling you if Fannie and Freddie stick to conforming loans making a reasonable margin between their cost of funds and what they "bid" for conforming widget product... it is no problem. The problem really is the floated paper purchased by foreigners.
The problem is FS was being run by dishonest people and the government knew it and now taxpayers have to pay billions for the mistakes of a private company. People like you try to make it seem less simple than it actually is - the Conman running FS made millions while the government allowed it to happen which isn't surprised considering everyone who runs the Fed is from Conman Sachs as if they're qualified. Yeah right - let's hire some pimps to tell us how to reform prostitution. That REALLY makes sense!
Obviously the government had to get involved but don't make us pay for it.
I can't believe they didn't censure that. Of course when I said pimps and prostitutes I meant that in a very...sym
WEALTH CONSOLIDAT
Fanny and freddie did fine while they were a government institution. Then the republicans privatized and deregulated them, and all hell broke loose.
Not enough Regulation
is the problem.
Deregulation began seriously during the clinton administration with repeal of the Glass-Steagall Act. But the dems certainly don't want to cop to that. I am with a poster above. Both parties are to blame for this fiasco only the repubs more so.
Banking deregulation of the 1980s under Reagan and the Saving & Loan debacle slip your mind?
Clinton signed it, but the major force behind it was McCain's top economic adviser, Phil Gramm. There's plenty of blame to go around.
There seems to be multiple reasons for the buying of Fannie and Freddie. To read about more reasons check out the "Eco-Compass" Blog.
Here is a link to the blog...
http://blo
Nationalization how un American can this Republican administration get? How about nationalizing the oil and gas corps? Tell me fellow Americans do you recognise that that there is an upper and lower class in the US? I hear plenty about the middle class but nothing about the lower class. Which group in your opinion would be called lower class? Would these poor people fall into the group that are below the poverty line? Has this group of citizens been increasing under this Republican administration? Will their circumstances improve under John and Sarah? Has it ever improved under Republicans or their friends? Does this sound like the middle ages in Europe? My friends, what say you?
The nationalization of oil and gas companies in other countries has resulted massive decreases in production and lower investment. Do you really want government employees managing oil and gas companies? The government is taking control of Fannie and Freddie because economy and financial system will continue imploding if they do not -- and that will not be good for the lower class, or the middle class, or the upper class or anyone.
What you had to say about Fannie and Freddie is true. Something had to be done. Of course, looking at the mortgage crisis independent of the overall state of the economy (wages, jobs, healthcare, education, etc.) is a useless endeavor. The fact that most conservatives cannot link all of the above is unfortunate. Of course, I don't see the Democrats offering us something all that different.
And the fact that you conservativeshave such a kneejerk hatred of government is astounding. Have the private contractors in Iraq done any better than the military could have done in areas of security and rebuilding? Is government involvement always bad for you people? Consider the Second World War: if we had fought that war under the same ideological paradigm that the Bush administration has used in Iraq, I am unnerved to think what the result on world history would have been.
I think everyone must understand these basic facts first and foremost. Unfortunately, conservatives play upon peoples' ignorance in painting government as some kind of evil in the world. I don't mean to be simplistic here, but I believe that this core belief in free markets has done more damage to this country than a thousand Osama Bin Ladens could have possibly achieved.
I am not sure where you are getting your data on nationalized oil production, but regardless you make two apparently contradictory points: The first part of your post says that government operation is inefficient and inferior to private management, then follow that up with pointing out that the government has to take over Fannie Mae and Freddie Mac because the private sector f***ed it up beyond all recognition.
By the premise of your first statement, shouldn't this government takeover make things worse? Which is it? Nationalized industry is inefficient and inferior, or private industry is too greedy to be practically functional? Because I have yet to see anyone brazen enough to declare that the woes of the financial sector were caused by too much government regulation and interference.
It's not fair to blame repubs entirely for the fact that the rich have gotten richer while everyone else has gotten worse. Of course their tax policies help the rich but the problem began before they were even in office.
I actually think dem policies are worse for the country - I live in the most liberal city in the country and it's an example of what happens when dems are in charge. We banned all cigarette sales in drug stores because dems, who of course want to be responsible for our lives because they're smarter than us, decided it's bad to sell cigarettes in stores with pharmacies. Of course our state doesn't have a budget and we actually need taxes from cigarette sales and the drug stores won't hire as many people because they can't afford it after losing all the business and it's a horrible decision but it doesn't matter because dems need to feel superior to everyone else even if their policies don't make sense.
My point is just that I'm not sure dem policies are really good for the economy.
It does appear that dems are smarter than you!
re: "...I'm not sure dem policies are really good for the economy."
then perhaps you will explain this:
"Remember the last time the number of jobs grew more rapidly under an Republican president? John McCain can't. Because he wasn't born yet. Over the past 75 years, one trend has held constant. Rapid job growth only occurs when there's a Democrat in The White House."
Millions of Jobs Added
Truman 1949 -1952 5.2
Eisenhower 1953 - 1956 2.7
Eisenhower 1957 - 1960 0.8
Kennedy/Johnson 1961 - 1964 5.7
Johnson 1965 - 1968 9.8
Nixon 1969 - 1972 6.1
Nixon/Ford 1972 - 1976 5.2
Carter 1977 - 1980 10.4
Reagan 1981 - 1984 5.2
Reagan 1985 - 1988 10.8
Bush 1989 - 1992 2.5
Clinton 1993 - 1996 11.6
Clinton 1997 - 2000 11.5
Bush 2001 - 2004 (0.1)
Bush 2005 - 2008 5.1* [Job increases here are through August 2008. Most economists expect more job losses before the end of this year.]
http://www
There isn't ANY possible way that Paulson could just sit back and allow these companies to go under - this isn't the same as BS failing. He HAD to do something - I don't know if there was pressure or not from Asia but he obviously had to do something.
Can anyone really say anyone else could have handled this better than Paulson has? And I don't usually support bankers or anyone who worked at Conman Sachs but at least he is TRYING to fix this problem. The problem is the fault of dems or repubs - it's about how a private company like FM could have been allowed to do this with government guaranteed loans and that has been going on for years.
Why aren't Mudd and Syron in jail? -- If I did this in my personal business I would be prosecuted for fraud..
Hell, If I write a bad check I can go to jail>.... I;m sick of this... i want a hangin
Steal a hundred bucks, go to jail. Steal millions . . . maybe not so much so. Steal or mismanage billions? Immune and primed for the golden parachute.
Kill one person, go to jail. Kill a hundred thousand, retire on a government pension and become a millionaire lobbyist/speaker. Always think big.
I like how Bondad doesn't ever mention that the national debt to gdp ration is the same as it was in 1998 and that interest payments on the national debt are the smallest part of the national budget since 1980 because of low interest rates -- that's 28 years.
Big deal. Big debt is big debt. Should I go out and take on a bunch of debt just because I can get a low interest rate on it? Should I go out and run up a bunch of debt if I get a raise? All your comment tells us is that the US is squandering a chance to get into a strong financial position by taking on ever more debt.
"Net interest costs have been falling. The portion of the federal budget consumed by net interest costs has dropped from 10 to 15 percent of annual federal spending during the 1980s and 1990s, to 8 percent today. Low interest rates have more than compensated for rising debt levels since 2001. If interest rates begin rising, however, net interest costs will follow."
I like how you state random facts and think they have any bearing on the situation at hand. Anybody else wanna state some random facts?
http://zfa
"The United States’ current level of national debt is both affordable and consistent with most all other nations. National accounting statistics show clearly that the U.S.’s 67% national debt/GDP percentage is roughly average compared with other modern economies, about right smack in the middle. Moreover, the level of U.S. national debt as a percentage of GDP (67%) is at the same ratio as it was back in 1997 and 1992. The ‘”trick” is that debt must be benchmarked to the size of a nation’s economy or income. I find it interesting that if I tell someone that Bill Gates owes someone $10M they quickly deduce that he’s probably fine, but if I tell the guy at Starbucks that the U.S. owes $9.4T they think the country is screwed up!"
However, Mr. DuganS1, don't we have a slight problem with "interest payments" on entitlement trust funds? These payments are actually accounting entries on nonexistent trust funds for Social Security and Medicare. Take SS as the usual example. If the economy stays solid (it won't), then the turnaround date is about 2017. If things keep going downhill, it will be sooner than that. At that point, SS inflows will be insufficient to cover outgoes. Since all the "debt service" to Social Security was actually a phantom acctg. entry, we'll actually have to come up with the money, or cut benefits or raise taxes or do something. It's not quite as rosy as you depict. We've kept debt service low by not actually paying a significant chunk of it.
Sir,
Re: Point 3, I don't think it is that hard...
Americans spend more than we make.
To do that, someone has to lend us money.
If it isn't Americans, it must be foreigners.
They now own us.
lehman getting crushed...
Yes, the bill is definitely coming due. Read Kevin Phillips book "Bad Money." That is his thesis exactly.
Here's a link to a review from the LA Times: http://www
Excellent book. Terrifying and enraging at once.
You must be logged in to comment. Log in or connect with
