How Can You Tell That Fannie and Freddie Are Government Owned? They Keep Asking For More

Fannie says they would be close to profitable if they didn’t have to pay interest on the money they received in the bailout. Isn’t that like a home owner not going into foreclosure if they didn’t have to repay their loan.

I started a thread about Fannie Mae nearly three years ago but stopped because the story was always the same. There was a single line is this AP article that inspired me. The article: Fannie Mae asks for $2.5 billion in new US aid. And the line from that article: “Fannie and Freddie together have repaid $16.7 billion as dividends to the Treasury Department.”

The reason I found that line so interesting was that the AP writer, Marcy Gordon, said that they have “repaid…as dividends” quite a bit of money. Dividends are like interest, it is earned off of the principle. They have yet to repay any of the principle. Fannie issued a statement last week saying that they would have been profitable if they didn’t have to pay back the government.

From Fannie Mae’s November 5, 2010 Press Release:

“WASHINGTON DC – Fannie Mae (FNMA/OTC) today reported a net loss of $1.3 billion in the third quarter of 2010, compared to a net loss of $1.2 billion in the second quarter of the year. The company continues to focus on building a strong new book of business and returning to profitability (excluding Treasury dividend payments)”

In fact they haven’t “repaid” the government anything, all they have done is to pay the dividends on the money they needed to keep them from going under. Since the government takeover and they received their bailout money, Fannie and Freddie have been asking for billions every quarter. Yet they have the nerve to suggest that it’s the governments fault their not making money.

In order not to mislead, Fannie has announced the repurchase of $1.3 billion of notes on the 15th. So they need $2.5 billion more so they can repay $1.5 billion.  Now that is how you get ahead.

Fannie Mae and Freddie Mac hold 70% of all mortgages in the U.S. and FHA hold another 20%. In the last two years they have lost $249 billion. or $1768 for every taxpayer. Notice I said taxpayer because if you don’t pay taxes they haven’t cost you anything.

Over that same period the Treasury has purchased $1.25 trillion in MBO’s (Mortgage Backed Obligations) leaving almost no private mortgage market. It is all government owned or backed.

Both the Federal Reserve and the Treasury have well over a trillion dollars each to use to ease the credit markets. So why are they printing another $600 billion?

The media is saying that it is to stimulate the economy by spreading some money around and to create jobs by making our exports more attractive. The money spreading helps the financial markets and the cheaper dollar only helps the multi-nationals. Aren’t those the same ones they have been blaming for our situation.

The Fed is putting the money into the economy by buying (with newly printed money)$75 billion in Treasury Notes each month for eight months. The question is why are they doing it this way. Why is the government borrowing money from the government and not in a way that that gets the money into the pockets of consumers. You and I, the consumers, represent 70% of the economy. Or into an investment tax credit that motivates business to upgrade and hire.

The answer is in the housing market. There has never been a recovery that didn’t include housing and the abnormally low rates we have had has not been enough to overcome the unemployment rate and the depressed wages it has caused. By purchasing $90 billion a month they will keep the price of Treasuries artificially low as to not effect mortgage rates.

That brings up the point that at these rates private enterprise would never be interested in funding home mortgages. So without Fannie, Freddie and FHA there would be no housing market.

If the recovery doesn’t kick-in in the next eight months, will they have to print more? As the dollar weakens because of this financial engineering will they have to raise rates to slow the economy to keep inflation from getting totally out of hand.

Again the winners are the major corporations that are flooding the debt markets with cheap paper. IBM just raised $1.6 billion at ¾ of one percent. Unbelievable. Did you ever think that companies could borrow money at less than 1%.

The government, in their politically expedient effort to make home ownership available to everyone, caused this recession. They loosened the rules and demanded that the banks make loans that they would of never done in the past. The banks stood to lose little with Fannie and Freddie either buying or securing them.

If the government would of let the chips fall, the housing crisis would have been washed out by now. Because of government intervention there is still 3 million homes that still need to go through foreclosure. That is as many as been foreclosed on in the last two years.

The result of this financial engineering could be worse. Bye replacing the mortgage bubble with a Treasury or liquidity bubble we could end up with a devalued dollar, devastating debt payments, crippling inflation and soaring interest rates. The Federal Reserve seems to be making all of their long term assumptions that foreign entities will continue to want Treasuries. If the dollar falls any more they will accelerate the rate at which they have been pulling their money out of the U.S..

It’s not too late for Washington to change direction and make some sound decisions instead of taking the path that produces the best sound bite. The media needs to stop reporting political sound bites as fact. The President needs to stop social engineering.

It's Not Inflation That is the Danger - It is Interest Rates

As reported on Bloomberg.com by Daniel Kruger and Bryan Keogh the government now has to pay a higher interest rate than the top U.S. companies. Obama Pays More Than Buffett as U.S. Risks AAA Rating.

Last year the money center banks could borrow from the Fed at rates below ½% and use that money to buy Treasuries and keep the 1% for nothing. Since the Fed has raised their discount window rate to 1 % some of the fun is out of the game but what-the-hell, where else can you get paid to take money. That’s why the money center banks have been cleaning up in a bad economy.
From the article:

“The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.”

 “Last year’s $2.1 trillion in borrowing by the government exceeded the $1.08 trillion issued by investment-grade companies, the biggest gap ever, Bloomberg data show.

Moody's states that interest payments this year will be 7% of the governments revenues and will increase to 11% in three years.  That is a 63% increase in three years.  And that's assuming interest rates don't go crazy.

Social Security Goes The Way of China and Japan

At present the Social Security Administration holds 20% or $2.4 trillion of the $12 trillion that the U.S. now owes. That means that the government will soon lose its single biggest customer of U.S. debt. No one is saying exactly when this will occur but I’ll guess that the party is winding down and will end in the next two years. At the same time the next two largest purchasers of U.S. debt, China and Japan, are trimming their purchases of U.S. debt by 15% a year.


As I wrote last May in, The Honeymoon Is Over And I Want A Divorce - Obama’s Interest Rate Quagmire, there are pressures coming from all directions that will push interest rates up. The dollar has been losing value against all currencies except the Euro and the Pound, which are having their own fiscal problems. As soon as the problems in the EU start to subside the demand for the safe-haven dollar will also decrease.

When the above circumstances are combined with the need to fund an extra trillion a year in spending, interest rates have to move and move big. The first casualty will be a housing market that, because of government intervention, has not been able to work through its current downturn. Higher mortgage rates mean less affordability putting pressure on both home sales and home values that have little room for bad news.

The major money center banks like Goldman and Chase-Morgan have been thriving because the fed has kept the money flow to these guys at full blast and at little or no cost. They have been using that flood of short term money for everything but small business lending. For them it has been the perfect storm. When their interest rates raise the major money center banks will be in the exact place that stated this mess; an immediate cash squeeze.

As the government issues massive amounts of debt, corporate debt will also be entering the peak of their debt cycle. As stated in the Times article below, corporations will be bringing $700 billion of debt to the market. Competition for money is another factor for an increase in rates.

Currently the only positives for the future of interest rates would be if a if the U.S. has a phenomenal economic turnaround or if a war breaks out somewhere leading to another flight-to-safety.
 Posted on HOT AIR by ED MORRISSEY: Social Security starts cashing in US debt

An AP article by STEPHEN OHLEMACHER: Social Security to start cashing Uncle Sam's IOUs

An AP article by MARTIN CRUTSINGER: China trims holdings of Treasury securities

A New York Times article by NELSON D. SCHWARTZ: Corporate Debt Coming Due May Squeeze Credit

Is Inflation A Worry

Today the Federal Reserve issued their Federal Open Market Committee statement. Wall Street cheered because they dropped the possibility of a rate increase from the statement. They did indicate that the:

“…readings on core inflation have been somewhat elevated.” and “the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.”

Two of the underlying indicators, wholesale prices and factory orders, do not look positive for future inflation concerns. From Economic Slowdown Sooner Rather Than Later the January reading of factory orders showed the largest drop in 6 ½ years and as indicated in a Martin Crutsinger article on the AP, in February wholesale prices jumped 1.3%, also a negative trend for future inflation.

Many prominent economists seem to feel that these indicators are only bumps in the road to prosperity. But any slowdown could also be accelerated by ignoring these economic factors today.

Greenspan May Have Had It Right

Two weeks ago, just prior to the coaster ride the market took, Greenspan addressed a business conference, via satellite, of Hong Kong businessman. Part of that speech from a Martin Crutsinger article on the AP:

"When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,… While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown,"

The average Jason or Jennifer judge the economy from their own direct environmental input, their personal situation and that of those around them. As in everything American there is a rift growing between economists, on one side is the doom seers and the other are the “contemporary” wisdom crowd. The pessimistic group look at the cancers of our economy, the trade deficit, the breakdown of the housing market, the extraordinarily high levels of credit by consumers and government, the outpouring of American manufacturing jobs, health care costs rising at three times inflation the upcoming Social Security dilemma and governments inability to effectively react to these risks. On the other side are a group of highly educated economists and leading financial engineers, some of which are responsible for hundreds of billions of dollars in our retirement accounts, and they claim that since everything looks healthy (our economy), then the patient must be healthy.

Each of the potential detriments are a study in themselves, and some of the contemporary arguments are convincing, but we urge all to take a conservative approach in making any decision that might be affected by a recession in the next 24 months.

Will The Senate Change And Listen To Bernanke

Why should they change just when the party is starting.

Last Thursday Ben Bernanke, the Federal Reserves chief, testified before the Senate Budget Committee. He painted a grim picture for our kids and grand kids if the Congress continues to ignore basic financial realities. He said: “We are experiencing what seems likely to be the calm before the storm,”

What he is referring to is the projected increase, the government faces, in the costs associated with the very soon to happen retirement of the baby boomers. He further states: “These rising entitlement programs will put enormous pressure on the federal budget in coming years,”

Currently Social Security, Medicare and Medicaid together totaled about 40% of federal expenditures, or about 8.5% of America's gross domestic product. In nine years that amount is projected to increase to almost 50% and in 24 years to 70% of the total federal budget.

These numbers aren't new and won't take anyone by surprise, our enlightened elected officials have been using them as political fodder for ever. There are just ignoring them as they seem to ignore any other issue that might constrict their ability to spend more of our tax dollars.

The other concern is that while the deficit grows to meet these financial requirements, the government will have to borrow more, by issuing more bonds, thus paying a larger portion of its budget in interest. (We all know that as demand increases, so does it’s cost.)

Bernanke also said: “Thus, a vicious cycle may develop, in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits,”