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Tuesday, February 15, 2011

President Obama Announces Plan To Shut Down Fannie Mae And Freddie Mac

This story was interesting. President Obama announced a plan to shut down Fannie Mae (FNM) and Freddie Mac (FRE). Here is the proposal on the Treasury website.

Some people have speculated "Does President Obama or one of his advisors read my blog?" I've repeatedly wrote that FNM and FRE are evil. Did someone get the "shut down FNM/FRE proposal" from my blog?

FNM/FRE only exist due to State subsidies. They're an excellent example of corruption capitalism. They're an excellent example of "Privatized profits and socialized losses." During the boom, FNM/FRE executives paid themselves huge bonuses. During the bust, they got a bailout. FNM/FRE executives don't have to pay back the huge bonuses they earned during the boom.

I'll review the State subsidy that FNM/FRE get. No other bank gets this perk. When speculating on mortgage bonds, FNM/FRE's debt is backed by the Federal government. When other banks speculate on mortgages, they may borrow at the Fed Funds Rate (currently 0%-0.25%). FNM/FRE get to borrow at the Treasury term rate. This allows them to balance the cashflow of their debt with the cashflow of the mortgages.

If a bank borrows at the Fed Funds Rate to buy mortgages, they are taking a risk that the Fed Funds Rate will rise more than expected. FNM/FRE is not taking this risk, because they're borrowing at the term rate and not the overnight rate. This gives FNM/FRE an advantage when financing mortgages. They can always bid more than any other bank, when bidding on the same mortgage. This is due to cheaper financing costs.

FNM and FRE have their debt backed by the Federal government. This enables them to borrow at the Treasury term rate. This debt guarantee was always implicit. During the recent housing crash, this implicit guarantee was made explicit. The Federal government spent a *LOT* of money bailing out FNM/FRE.

When other banks issue term bonds, they have to pay the Treasury rate plus a default risk premium. That gives FNM/FRE an unfair advantage. Other banks may borrow at the overnight Fed Funds Rate, but not the Treasury term rate.

Executives at FNM/FRE spend money lobbying. This is pure corruption capitalism. They receive a massive State subsidy. They spend part of this money lobbying. By spending State subsidies lobbying, I thought they would always successfully block reform.

I thought that FNM/FRE were politically untouchable. I am shocked that President Obama proposed eliminating them.

It is very easy to shut down FNM/FRE. The Federal government pays off the bondholders, honoring the guarantee. The mortgage bond portfolio of FNM/FRE is held to maturity or sold off. If there's any money leftover, FNM/FRE preferred stockholders and common stockholders get paid. I doubt that the common stock would be worth anything.

There is only one downside to eliminating FNM/FRE. Housing prices would drop further. Due to cheap credit, FNM/FRE push up housing prices. However, the Federal Reserve is currently massively inflating. That should push up housing prices. The effect of inflation should be greater than any housing price decrease caused by eliminating FNM/FRE.

A pro-State troll says "FNM and FRE are beneficial. People get to buy a house more cheaply." You pay a lower interest rate, but the price of a home is greater. It's a net loss.

The profits of FNM/FRE aren't free. These profits are paid as inflation by everyone else.

Obama's "eliminate FNM/FRE" proposal involves shutting them down like I described. The Federal government would also provide "super-cat" mortgage reinsurance. If the housing market sharply dropped again, the Federal government would start buying mortgage bonds.

Unfortunately, that reemphasizes "too big to fail". If you know that the Federal government will intervene during a severe recession/depression, then the incentive is to take big risks during the boom. You know you'll get bailed out during the bust, so why not profit as much as possible during the boom?

There's another "benefit" to eliminating FNM/FRE. With FNM/FRE out of the picture, other big banks like Goldman Sachs, BAC, etc. can make bigger profits. With no State-subsidized competition via FNM/FRE, big banks can make more money speculating on mortgages.

However, this is progress! I thought that FNM/FRE were politically untouchable. Now, President Obama is proposing eliminating them.

The Federal Reserve is currently politically untouchable. Will that change? I thought that FNM/FRE were politically untouchable. I'm noticing much more anti-Federal Reserve comments in the mainstream media.

I'm surprised that President Obama proposed eliminating FNM/FRE. It is a good idea. I thought that FNM/FRE executives would always be able to block reform.

Eliminating FNM/FRE is a step in the right direction. It's still short of the correct answer, which is "The Federal Reserve is immoral! The Federal Reserve is a price-fixing cartel! Inflation is theft! The financial industry is one big money laundering conspiracy!"

Are some government insiders reading my blog? I'm shocked that President Obama is proposing to eliminate Fannie Mae and Freddie Mac.


ArrowThief said...

FSK please. Fannie & Freddie will be shut down with the TOXIC/BAD mortgage debt burden being shouldered by taxpayers. The PRIME/GOOD loans will be sold to the Banksters who will make the profit of Fractional Perverse Banking. Sorry to copy your Slash/Backspace technique, but imitation is flattery!

FSK said...

Actually, FNM/FRE have already bought toxic debt from the banks. The taxpayers already are stuck with the loss.

If they're shut down, that will limit their stealing in the future.

ArrowThief said...

If they're shut down then someboby else will do the stealing. Private or Public- whatever. I have to admit that Obama is more in favor of private stealing than I thought he would be. He's a company man!
FYI-I don't really agree with your TOTAL anarchy thinking, but many of your posts are very true.
Gold Bless You.

Anonymous said...

Obama is only playing in his favor.

Now that Fannie and Freddie are loaded with junk, he wants us to pay promptly, so, - he closes them.

This way he achieves both, - he looks like a dragon-slayer, and he gets to abuse the people.

Freddie and Fannie should be banned from issuing any new mortgage or purchasing any, but allowed to stay open to deal with their problems.

Close them, and everyone will forget what mess Obama created, while promising to turnaround the economy.

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