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Monday, January 31, 2011

Are FRE/FNM Being Used For A Stealth Bank Bailout?

Freddie Mac (FRE) and Fannie Mae (FNM) get special perks that no other business has. When FRE/FNM borrow to buy mortgage bonds or mortgages, their debt is backed by the Federal government.

This is a huge State subsidy. FRE/FNM can borrow at the Treasury term rate. Other big banks can borrow at the overnight Fed Funds Rate, but not the Treasury term rate. This gives FRE/FNM an advantage over every other bank, when speculating on mortgages.

Even if I could organize an efficient mortgage financing business, I could not compete with FRE/FNM. They get to borrow more cheaply than I would. They have an unfair competitive advantage.

Due to the housing market crash, FRE/FNM were insolvent. They receive huge State subsidies. However, due to the crash, they didn't have the cashflow to pay off bondholders.

The Federal government had implicitly guaranteed the debt of FRE/FNM. That implicit guarantee became explicit. The Federal government gave FRE/FNM bailout money.

Now, FRE/FNM can be used as a backdoor bailout of other banks. Allegedly, this backdoor bailout was used by BAC and others. Suppose BAC has mortgage bonds with a "book value" of $1B but a fair market value of $100M. Those bonds are sold to FRE/FNM for $1B. BAC received a stealth bailout of $900M.

FRE/FNM are already insolvent. The loss of $900M is buried on their books. FRE/FNM get $900M more bailout money from the Federal government.

FRE/FNM are already insolvent. A bigger loss makes no difference. FRE/FNM can do stealth bank bailouts. They buy mortgage bonds for more than they're worth. The Federal government is stuck with the loss.

To be accurate, *ALL* of the debt of FRE/FNM should be counted as part of the "national debt". The Federal government is guaranteeing it. Unfortunately, that isn't the way State accounting works.

A pro-State troll says "FRE/FNM are beneficial. People get mortgages more cheaply." The fallacy is that you get a lower interest rate, but the price of a house is higher. Plus, the FRE/FNM middlement get a cut, paying themselves salaries and bonuses. Overall, it's a net loss.

The profits of FRE and FNM aren't free. Everyone else pays the cost via inflation.

If FRE/FNM were cut with no replacement, housing prices would drop further. However, that isn't a reason to let FRE/FNM executives keep stealing.

Can you imagine the argument "Robert Kahre and Sholom Rubashkin should not have been imprisoned because their wife and children were stuck." However, State thugs say "We have to keep the FRE/FNM scam going. Otherwise, the housing market would collapse." There are two moralities, one for State insiders and one for everyone else.

If they wanted to, State thugs could shut down FRE/FNM. They could pay off all the bondholders, honoring their guarantee. They could then keep the mortgage bonds to maturity, or sell them. State thugs won't shut down FRE/FNM, because it's a huge pork opportunity. State insiders pick their friends to get high-paying executive jobs at FRE/FNM. It's pure corruption capitalism when FRE/FNM spend money lobbying.

FRE/FNM are being used as a stealth bank bailout. They are buying mortgage bonds for more than the fair market value. Then, the Federal government is stuck with the loss, because the Federal government guarantees the bonds of FRE and FNM.

FRE and FNM are abominations. They only exist due to State subsidies.


Anonymous said...

In London, UK property prices are eye watering high.

You can only buy property if you get a large amount of money from your parents or you have a high paying banking or legal job. Or you are a politician that gets a "loan" from a wealthy businessman.

As discussed elsewhere in this blog, lawyers are primarily highly paid due to the threat of government violence (all laws are enforced ultimately by violence or the threat of it), rather than for being hard working or smart. Banksters just create money out of thin air, not backed by surplus production or real savings, and make the process so complex most people can't understand it, nor can it easily be prosecuted for fraud.

If you do actual, real work for a living, you won't be able to afford a house or flat in London, unless you inherit a large amount of money or you are family buy it for you or you get a high-paying job due to connections.

It is in the interest of banks and estate agents to push the price of property higher.

Scott said...

Excellent points.

You're one of the few people that would deserve a Nobel Prize in economics. Of course that will never happen, but assuming the Nobels weren't a scam.

Anonymous said...

Exchange all paper money and digits in your bank account for food, guns and a good property. + ammo
The slightest interruption in the flow of oil will send people screaming into the streets. Be prepared. Get out of the cities while you can. Nice article by the way.

Anonymous said...

As always it is difficult to disagree with you, FSK. You and anonymous are absolutely right that mortgage availability does not make property more affordable. Mortgages make property more expensive as they create additional demand for houses.

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