Posts Tagged ‘Fannie Mae’

How to destroy capitalism in one easy lesson

February 5, 2013

Today, February 5, 2013, U.S. Attorney General, Eric Holder – the socialist Obama-appointee who currently heads up the Justice Department – is expected to bring a civil law suit against Standard & Poor’s Rating Services, one of New York’s three giant bond-rating agencies. Several state attorneys general are expected to join this rent-seeking lawsuit.

This suit is designed to bankrupt the company and send out a warning signal to the remaining two giants not to mess with the Obama administration. Incidentally, the law suit will strike yet another Obama blow against the rule of law and anything remotely resembling laissez-faire capitalism in the United States.

Officially, the law suit is targeted at S & P for its failure to predict the housing meltdown that led to the financial crisis in fall 2008. In truth, it is a revenge action because S & P downgraded the U.S. credit rating following the failure of the Obama administration to address the debt crisis in fall 2011. If the federal courts buckle under such administration pressure, the Madisonian experiment is over and yet another Republic will be well on its way to internal dissolution.

The financial crisis was generated not by any rating agency, but by a cross-party political conspiracy to bludgeon mortgage companies to extend mortgages to minority households that had no resources to enter into home ownership. A crude vote-seeking frenzy ensued, fed by Fannie Mae and Freddie Mac, two government-enterprises that were shell agencies for a Ponzi scheme in the housing market. S & P’s error was ever to take credit guarantees emanating from the government with anything except supreme contempt.

Let us hope that the courts toss out this evil lawsuit and award damages for reckless litigation against the Juatice Department and its co-conspirators.

When crooks fall out honest men come into their own

October 10, 2012

Over a period of some 40 years, following pressure initially  exerted by the Carter administration, United States financial institutions were egged on into making mortgage loans to high-risk households. The outcome in 2007-2008 was all but inevitable, when the housing market collapsed and a huge raft of worthless mortgage securities brought the global economy to its knees.

Central to the entire corrupt enterprise were the government agencies that forced uneconomic mortgage lending down the throat of reluctant financial institutions. Fannie Mae and Freddie Mac, of course, were the Fagin fences that established markets for junk securities under the stamp of their approval.  Operating behind the scenes as the evil and menacing Bill Sikes of the underworld, however, was the Federal Housing Association (FHA), a government agency that does not make loans, but that insures the loans made by others that satisfy its standards.

Throughout the years building up to the crisis, it turns out that the FHA had no standards whatsoever concerning loans made to the poor and the unemployed, the profligate and the irresolute,who flooded into the housing market in search of easy gains from a rising market. As the chickens come home to roost, and as the FHA exhausts its reserves in covering defaults by high-risk borrowers, the Obama administration is now soaking the very financial institutions pressured by the FHA  to make such loans.

In February 2012, Bank of America agreed to a $1 billion settlement of False Claims Act fraud allegations involving FHA-backed loans without admitting any wrong-doing.  Three other large banks since then have agreed to pay more than $490 million in similar cases.  Last week, New York’s top prosecutor filed a civl lawsuit against J.P. Morgan Chase
alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgage-backed securities.

Yesterday, the U.S. government sued Wells Fargo &  Co., accusing the nation’s biggest mortgage lender of reckless lending and of leaving a federal insurance program to pick up the tab. Wells Fargo denies the allegations, but, like its illustrious predecessors, it most likely will settle out of court.

The FHA is desperate to extract such protection money because its reserves are seriously under threat. Because of its own ideological preference for expanding home ownership into high-risk markets, the FHA’s reserves, standing at $4.7 billion one year ago, would have been wiped out in 2012, forcing the agency to seek $700 million from the U.S. Treasury. Instead, it has soaked the financial institutions to cover the cost of  its own malfeasance.

The good news should be that financial institutions will never make mortgage loans into high-risk territory in the future. As a consequence, the housing market should prove less vulnerable to price bubbles and to bubble bursts.  At best, the market for mortgage loans will tighten significantly as borrowers’ credit ratings are properly evaluated and suitably  high down-payments are required.

The bad news is that such is the grip of the federal government over liquid and insolvent financial institutions that the FHA will continue to press for bad loans on the one hand while recouping the default losses from those loans from those self-same banks.  The Fagins and the Sikes of this U.S.  mortgage- securities underworld will continue their nefarious activities unless they face the dreaded drop or a Bow Street runner’s bullet, as the case may be.

That is life under crony capitalism.

Hat Tip: Shane Raice and Nick Timaraos, ‘U.S. Sues Wells Fargo For Faulty Mortgages’, The Wall Street Journal, October 10, 2012

Barney Frank: goodbye and good riddance (2)

November 30, 2011

The Herb Moses episode

 Shortly after coming out from the closet as homosexual,  in 1987, Barney Frank met and began to date Herb Moses, an economist and an activist in the LGBT (lesbian, gay, bisexual and transgender) movement. They would set up home together in Washington, DC and the relationship would last for eleven years, until they parted ways amicably in July 1998. 

Barney Frank always referred to Herb Moses as ‘his husband’.  Herb Moses was the first partner of an openly gay member of Congress to receive full spousal benefits.  The two were considered to be Washington’s most powerful and influential gay couple. As a powerful Washington politician, Barney Frank was well-placed to move his husband into lucrative employment.

From his position on the House of Representatives Financial Services Committee, Frank successfully lobbied executives at Fannie Mae to give Herb Moses a job.  Thereafter, Barney Frank was a pivotal member of a menage a trois,  comprising Barney Frank,  Herb Moses and Fannie Mae.  Interestingly, the year that Barney Frank and Herb Moses  separated, Herb Moses  and Fannie Mae also experienced a parting of the ways. By then, of course, Barney Frank and Fannie Mae were locked into their own torrid romance.

Barney Frank helped to write legislation deregulating Fannie Mae during his lengthy liaison with Herb Moses. In 1991, the year that Moses was hired by Fannie Mae, Barney Frank pushed the agency to loosen regulations on mortgages for two- and for three-family homes, even though such householders were defaulting at twice and five times the rate of single homes respectively.

 Moses was assistant director for product initiatives at Fannie Mae and was in the forefront of relaxing lending restrictions at the company for impoverished rural customers. He helped to develop many of Fannie Mae’s  affordable housing and home improvement programs, writing out lucrative sub-prime mortgage contracts, thus bringing home large bonuses to share with his ‘wife’. 

Challenged by the Boston Herald as to the ethics of such an arrangement, Frank replied: “If it is a conflict of interest then much of Washington is involved in similar conflicts.  It is a common thing in Washington for members of Congress to have spouses work for the federal government.  There is no rule against it at all.”

In Washington, DC, it would seem that there are no rules against anything for members of the federal government. Herb Moses not only brought home his own bacon for Momma, but he made sure that Momma’s re-election coffers were well-filled by Fannie Mae campaign contributions throughout the period of their love-in. 

The rest, as they say, is history. At long last, Fat Momma is removing her pantry from the nation’s capital. Surely that pantry will not be bare. Momma’s waistline will be well-taken care of  throughout her hard-earned retirement.

 

 

 

Larry Summers panders snake oil solutions to US housing market dis-equilibrium

October 24, 2011

“The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending and spending, it can be resolved only with more confidence, borrowing, and lending and spending.  This is true, above all, of housing policies.  Fannie Mae and Freddie Mac , government-sponsored enterprises (GSEs) whose purpose is to mitigate cyclicality in housing and that today dominate the mortgage market, have become a textbook case of disastrous and pro-cyclical policy.” Lawrence Summers,  ‘How to save the housing market’, The Washington Post, October 24, 2011 and The Financial Times, October 24, 2011

So how does the former Chief Economic Adviser to President Obama define the so-called housing market problem?  As one would expect from a hydraulic Keynesian retread, he defines it in terms of the inevitable market consequences of a government-fueled house price and construction  bubble, that eventually burst, as do all such bubbles. 

Nominal losses on owner-occupied housings amount to $7 trillion since 2007.  Construction of new single-family homes has plummeted from 1.7 million per annum in the mid-2000s to 450,000 per annum since the burst bubble.

Why this should surprise or concern a professional economist is puzzling indeed.  Home-owners’ nominal wealth increases unrealistically during a bubble and falls back to where it should be during the collapse. The construction industry wastes resources in the bubble and the market corrects during the collapse. With a little over-shooting on the downside – which will correct itself in the absence of intervention – unfettered market forces will locate a new equilibrium, with the home-ownership- home-rental ratio restored to a sustainable balance, and with the construction industry appropriately down-sized.

Surely what is not required following a burst bubble – except for an economist obsessed with increasing the size of an already-bloated state – is to reintroduce the very mechanisms that drove the original bubble. One definition of insanity, after all, is to engage repeatedly in self-destructive activities.  Yet such is exactly what snake-oil salesman, Larry Summers, actively promotes:

“First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous. Second, as President Obama stressed in rolling out his jobs plan, there is no reason that those who are current on their GSE-guaranteed mortgages should not be able to take advantage of lower rates.  From the perspective of the guarantor, as distinct from the mortgage holder, lower rates are all to the good since they reduce the risk of default.” Lawrence Summers, ibid.

So what is Professor Summers peddling to his Harvard University students and to readers of The Washington Post and The Financial Times?  Well, it surely does not come out of the pages of Adam Smith’s Wealth of Nations

No Income!  Bad Credit! Liar’s Contracts!  Come back, all is forgiven!  Private market in mortgages! Be Gone!  Fannie Mae and Freddie Mac!  Go for it, as you did in throughout the noughties!  Taxpayers? Open up those fat wallets!  Fill up those Fannie and Freddie begging bowls all over again!

John Maynard Keynes left behind some very sorry disciples, of which Larry Summers is one of the sorriest.  As Milton Friedman once said, talking about the  Cambridge England economics faculty during the 1950s, following the death of Keynes:

 ‘One should never judge a Master by the words of his disciples’ 

The same message should be sent out around the corridors of Harvard Square!  Beware ambitious snake oil salesmen, especially in troubled times!

Government crooks and incompetents cover each others’ backsides

September 6, 2011

The financial crisis of 2008 started in the U.S. housing market in October 1977 when President Carter signed into law the Community Reinvestment Act.  This Act promoted home ownership for minorities by prohibiting the practice of redlining whereby banks refused mortgages in poor areas on grounds of excessively high risk. The Carter administration funded ACORN to monitor bank performance under this Act.  In 1991, rules were tightened to include a specific demand for racial equality in bank lending.  In 1992, the Federal Reserve Bank of Boston published a manual advising that a mortgage applicant’s lack of credit history should not be viewed negatively in any loan assessment.

And so the great housing bubble-party began, fueled during the early years of the twenty-first century by loose consciences,  loose money, and loose accounting on the part not only of banks but of all relevant government agencies from Fannie Mae and Freddie Mac to the Federal Housing Agency and the SEC. The outcome was entirely predictable -the bubble burst and many dirty government fingers found themselves locked into the trap sprung by a free downfall in the value of the assets that they had so corruptly procured. 

All parties to the fraud –  underwater borrowers with liars’ contracts, the financial institutions, the GSEs, the FHA, Congress and the White House, were fully aware that the racket eventually would end in disaster. Greed, incompetence and fear drove the frenzy that ended in September 2008 with trillions of dollars of wealth evaporating in a Wall Street debacle.

So now, the corrupt agencies that created the problem are seeking wealth from the private sector to cover their own losses and to hide their own shame.  On Friday September 2, 2011, federal regulators filed 17 lawsuits against some of the world’s biggest financial institutions alleging that such institutions made untrue statements and omitted key facts when when they sold mortgage investments to loan giants, Fannie Mae and Freddie Mac

 Of course, they did so. That was the name of the federal game. Lie, lie, and lie again, but never, never, never decline a loan application from  a racial minority or an indigent household!  That was Moses and all the prophets!

The suits involve $196 billion in mortgage bonds. The suits will turn on whether the federal courts are or are not honest when dealing with corrupt government agencies. They will turn on whether the courts believe that agencies of the size and experience of Fannie Mae and Freddie Mac are or are not capable of assessing mortgage risk, and whether they should remain in business if they are not.

These suits are well worth following closely. For they will provide us with an immediate understanding of just how far and just how irreversibly the United States has abandoned the rule of law for rule by men during the incumbency of President Barack Obama.

Scandal on Pennysylvania Avenue: The Return of Sherlock Holmes

January 7, 2010

“Holmes”, complains  Watson, “I am worried about your condition.  You appear to me, old chap, to be increasingly dependent upon your daily injections of cocaine, and to be slipping away from your customary acuity of thought.”  “Nonsense, my dear Watson”, is Sherlock Holmes’ laconic reply.  “I am simply  thinking more deeply about the Scandal on Pennsylvania Avenue.  It contains a much deeper significance than either  you or I,  until this very moment, have identified.  Let me explain, my dear fellow, the direction of my thoughts.  Write up my insights  for yet another of those delectable accounts for which you are so well known.”

Holmes puffs on his long-stemmed pipe, and shares with Dr. Watson the wisdom of his further thoughts:

In September 2008,  when the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship,  the United States Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each of the two firms would maintain a positive net worth.  In the darkness of the Eve of Christmas, 2009, the Treasury amended the PSPAs to allow the cap on this funding commitment to increase as necessary to accommodate any cumulative reduction in net worth right up to the presidential election in November 2012. This much we already know.

Think now about the implications of this clandestine move for the United States housing market.  The Treasury essentially is placing the full guarantee of the United States Government behind  all additional interventions in the mortgage market by Fannie Mae and Freddie Mac.  Now we already know that these two corrupt agencies  purchased toxic mortgage securities on a massive scale and invested them with their seals of high quality. The Treasury has now provided the same agencies with an all-but-limitless underwriting not only for their existing assets, but for their additional mortgage acquisitions.

“Leopards, my dear Watson, do not change their spots.  The expectation must be that Fannie Mae and Freddie Mac will now engage in ever more reckless sub-prime mortgage acquisition policies, even as the housing market continues to suffer from declining prices and rising foreclosures”:

“Or worse, perhaps homeowners who have been diligently making their payments will keep their homes, and homeowners who took out mortgages they couldn’t afford will keep their homes as well with no adverse consequences for the lenders – since the underlying loans are now owned by the Fed. and the Treasury has pledged its unlimited support.  Why pay one’s debts if it becomes optional, and the Treasury stands to absorb unlimited losses at public expense?” (www.hussman.com ).

“Of course, Watson,  even a rationally  ignorant  electorate will not indefinitely comply with such theft of their private wealth  by an undeserving  minority of  profligate households.  The gamble along the length of Pennsylvania Avenue must be that the gullibility of the thrifty will dissipate only in mid-November 2012, when President Obama is safely back in the White House for his second term, and when Fannie Mae and Freddie Mac belatedly discover that the unlimited  Treasury guarantee has been surreptitiously withdrawn.”

The Scandal Widens to Both Ends of Pennsylvania Avenue

December 30, 2009

‘Sherlock Holmes puffs on his long-stemmed pipe and quietly plays a haunting melody on his violin, thinking deeply about the Scandal at Pennyslvania Avenue.  ‘I am now quite sure, my dear Watson, that the scandal does not rest at Number 1500′, he murmurs. ‘A small-time operator like Secretary Geithner would not act alone on such an extensive adventure. Surely, he is controlled by more powerful actors.  In politics, money is the Book of All Power. Let us follow the money and see where it leads.  Watson, kindly review for me the movement of political campaign contributions from Fannie Mae and Freddie Mac. In the meantime, I shall explore the network of  relationships between US politicians and the GSEs that they oversee.’

As always, Dr. Watson pursued his task with meticulous professionalism while Holmes used his intuition to identify the key political players in the Scandal.  The facts entirely supported Holmes’ theory:

Over the period 1989 to 2008, political action committees financed by Fannie Mae and Freddie Mac contributed $3,017,797 to liberal  members of both Houses of Congress.  Barney Frank (Democrat: Massachusetts), since 2007, Chairman of the House Financial Services Committee (and a member of that Committee since 1981) is ranked 16th on a list that includes both Houses and 5th among his colleagues in the House as a recipient of this funding.  Other prominent Democrats in receipt of such funding include former Congressman Joe Kennedy (Democrat:Massachusetts),  Senator Chuck Schumer (Democrat: New York)  and Senator Christopher  Dodd (Democrat: Connecticut).  In addition, Fannie Mae and Freddie Mac funded the presidential campaign of Barack Obama, as well as such media lobbyists as Paul Krugman and Steven Pearlstein.  All of these political operators, and many more,  have provided continuous support for Fannie Mae and Freddie Mac throughout the mortgage market debacle.

Sherlock Holmes identified an important personal link between Barney Frank and Fannie Mae in the form of  a long-time homosexual relationship between Frank and Herb Moses (then a senior executive with Fannie Mae and personally responsible for developing high-risk mortgage relationships between the Corporation and poor rural farmers).  The personal relationship ended in 1998, when Herb Moses left Fannie Mae.  Frank served on the House Banking Committee throughout the ten years that they were together. That Committee has jurisdiction over government-sponsored enterprises.

The consequences are entirely predictable.  Here are a few examples.  In 1991, Barney Frank and Joe Kennedy lobbied for Fannie Mae to soften rules on multi-family home mortgages, despite the fact that such dwellings showed a default rate twice that of single-family homes.  In September, 2003, Frank aggressively thwarted reform efforts by the Bush administration, stating that the problems of Fannie Mae and Freddie Mac were ‘exaggerated’.   On October 8, 2003, Frank opposed giving the Bush administration the right to disapprove business activities that could pose risk to the taxpayers. In April 2008, Frank blamed short-sellers for Fannie and Freddie’s problems, stating that the two corporations ‘are better off than the market thinks’.  In June 2008, Frank stated that ‘Fannie and Freddie are fundamentally sound.’   In July 2008, Dodd strongly defended Fannie and Freddie stating that ‘these are viable strong institutions’.  Not once on the campaign trail was Barack Obama motivated to say anything controversial on the GSE issue. And he had plenty to say about almost everything else.

The political consequences of this scandal are serious indeed.  Since September 2008, Fannie Mae and Freddie Mac have been bailed out with $1.5 trillion in direct and indirect government aid.  The Obama administration is banking on them to end a three-year housing market slump and is delaying plans to lay out a new framework for them. Congress has not scheduled any meetings on their future.  On Christmas Eve, 2009, the Treasury Department removed a $200 billion limit on aid to each of the two companies, and promised to cover their losses through 2012 (note the year). Earlier, the Federal Reserve extended a mortgage-bond purchase program by three months, through March 2010.  The Federal Reserve has purchased $1.1 trillion of the two corporations’  home-loan funds and $124.1 billion of their corporate debt in 2009,  pushing mortgage rates to record lows.  The Treasury has also purchased $191 billion of their mortgage bonds and made $112 billion of preferred stock purchases. In the meantime, the two corporations have lost $188.4 billion over the past nine quarters and are set to lose a great deal more as the housing market continues to struggle.

‘What did the President know, and when did he know it?’  muses the great detective, still puffing on his pipe.  Ultimately that is a question that even a biased media will have no option but  to confront.

A Scandal at 1500 Pennsylvania Avenue, NW

December 27, 2009

In the gathering dusk of Christmas Eve 2009, long after the closure of the healthcare debate, long after the US  Senate has closed its doors, long after the US President has departed for his vacation in Hawaii, long after the US Press has shut down its political surveillance for the upcoming festivities, a misleadingly innocent-looking figure flits  furtively through the darkened rooms of 1500 Pennsylvania Avenue, NW.  A computer whirrs  into action as Treasury Secretary Timothy Geithner, fortified by the knowledge that he is entirely alone in the building,  presses the Send button of his computer  to despatch a carefully-timed  Press Release to a hopefully  slumbering media.  His task well-executed, Secretary Geithner shuts down his office, turns out the lights,  and slips quietly into the enveloping  darkness of a largely diverted metropolis…

Stirred into action by the curiousness of this event, Sherlock Holmes and Dr. Watson decide to investigate the strange case of A Scandal at 1500 Pennsylvania Avenue, NW.  “Let us start with deductions, my dear Watson”,  murmers Holmes, as he quickly inserts and withdraws the needle of his syringe into one of his veins.  “From these deductions, we can locate the relevant facts and solve this mystery.”

“Now why would the Secretary of the Treasury, a man appointed into office with a mandate  from his President to bring a new transparency to the US  government, engage in such behavior in the darkness of a festive night?”  Holmes inquires of his loyal associate.  “Well Holmes, perhaps Secretary Geithner was so obsessed with the important events of the day that he had simply  overlooked this message” responds the cognitively more-limited, but well-meaning doctor.  “Not so, Watson”,   Holmes laconically responds.  “Secretary Geithner does not appear to me to be a man who would ever forget his mission to indulge in the unbearably boring  trivia of a Senate session.  Watson, mischief is afoot in the District of Columbia!   Let me advance the hypothesis that a message sent out under such circumstances is designed to be unseen, while yet satisfying a facade of transparency. “

On the basis of this supposition, Holmes quickly assembles the facts relevant to his case.  The facts lead Holmes inexorably to a determination that this indeed is a case of government by stealth, a determined attempt by a desperate public servant to outwit  a public rendered largely witless by seasonal exuberances.  On a dark and stormy night,  this is how the story ran…

Government-sponsored enterprises (GSEs as they are called in the Washington dialect) are a group of financial services corporations created by the United States Congress.  Their function, in principle,  is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.   Of course, as with almost everything involving government, the reality is almost exactly the opposite.  GSEs are designed to divert funding opaquely and inefficiently to constituents courted politically  by members of the Congress and/or by the President.  Nowhere is this divergence between principle and reality more marked than with regard to the behavior of the Federal National  Mortgage Corporation (FNMA or Fannie Mae) and of the Federal Home Loan Mortgage Corporation (FMLMC or Freddie Mac) in expanding the secondary market in mortgages throughout the United States.

The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate.  Currently GSEs hold or pool approximately $5 trillion of mortgages.  Of course, if marked to market, this official book value would shrivel to a tiny fraction of that estimate, because much of the portfolio is composed of highly toxic assets.  Because the US mortgage market had slowly unravelled over the prior two years, on September 8, 2008, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac under its conservancy.  The enterprises were insolvent and would be propped up by Henry Paulson’s Treasury Department which acquired billions of dollars of their preferred stock, paying at a rate of 10 per cent per annum. The total ‘investment’ was expected to rise to some $100 billion.

The facts unravelled by Sherlock Holmes are as follows:  The insolvency of Fannie Mae and Freddy Mac has worsened sharply through the fall of 2009 and will worsen still further once the current program of Federal sub-prime mortgage provisions expires early in 2010.  At that time, the market will openly recognize losses of hundreds of billions of dollars in the GSE mortgage pools, where the face values of the mortgages hugely exceed property market values or foreclosure amounts.  Secretary Geithner clandestinely is trying to set the scene for full nationalization of the GSEs and for a full specific guarantee of the GSE debt by the US Treasury.

Geithner’s nocturnal machinations set the scene for placing official GSE debt on the US government’s sovereign debt balance sheet.  Actually, that is exactly where it belongs, since this has been a game of deception over an implied guarantee and it is more than time for that to stop.  Foreign sources and domestic US institutions see through the deception and are loathe to buy GSE debt. In consequence, the Fed has had to step in with over $1 trillion to bolster the US housing market. In so doing, it has downgraded its own balance sheet no doubt to a Baaa3 rating  if any of  the rating agencies had the nerve to call the Fed’s bluff.

Secretary Geithner is a truly desperate man.  Had he not acted in the dead of night, and had the markets responded by pricing GSE debt at wide spreads to Treasury debt, the home mortgage interest rate in the United States would  have increased significantly, the nascent housing recovery would have been choked off, and the House of Representatives assuredly would have fallen into Republican hands in  2010.  Undoubtedly, Secretary Geithner was acting upon the highest authority to preserve and protect, not his country, but the administration that he currently serves.

Mystery solved.  “Elementary, my dear Watson!”


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