Fannie and Freddie nationalised – let’s take over the rest

( – promoted by buhdydharma )

Original article, by Mick Brooks, via Socialist Appeal (UK):

The Financial Times has hailed the effective takeover of Fannie Mae and Freddie Mac by the US government as “what could become the world’s biggest ever financial bail-out.” Treasury secretary Henry Paulson has promised he will pump in ‘unlimited liquidity.’ Don’t you wish the government would grant you unlimited liquidity? When it comes to the food and fuel bills of the poor and the working class, the British and American governments find that the cupboard is bare. But now it’s not bare. Predictably markets all over the world have breathed a sigh of relief. Fannie and Freddie have effectively been nationalised – and big business thoroughly approves!

Socialism for the bankers and the corporations.  Period.  I mean, quite literally, period.  Nationalise the health industry?  ‘It’s socialised medicine.’  Nationalise the a huge part of the mortgage industry, thereby (for the time being) saving the financial system?  Go right ahead!

In the Financial Times (08.09.08), Clive Crook comments, in an article significantly entitled ‘Nationalisation in all but name,’ “The eventual cost to taxpayers is unknown. If the housing market rallies before long, it could be in the low tens of billions of dollars. If things keep getting worse, it could be in the hundreds of billions. But Fannie and Freddie have made themselves indispensable to any housing market recovery: the cost, whatever it is, will have to be paid.”

IE: They’re ‘too big to fail.’  Funny thing, I thought our system was set up as a competitive one where failures happen all of the time.  I mean, can you imagine the Feds coming to the rescue of the little boutique down the street that closed because it was overpriced?  No?  Of course not!  But let big business and big banking get in trouble, and, viola, ‘unlimited liquidity.’  BTW:  That ‘unlimited liquidity’ is coming out of your pocket.

So who are these guys? Fannies and Freddie are private companies. They both have shareholders. But they’re also Government Sponsored Enterprises (GSEs). In that sense they are hybrids. Their activity has effectively been guaranteed by the government. That has been a blessing and a curse for them.

So the speculators could run up the prices of houses, pricing many completly out of the market.  Except that housing became such an integral part of the market (proping up an otherwise unsound economy) that the banks started in with ARMs.  We now know what happened next.

The GSEs openly hit trouble in the summer. (See http://www.socialist.net/fanni… ) From that time on Warren Buffet, the richest man in the world, has declared them ‘toast.’ Their share prices have collapsed. They are plainly insolvent – they owe many times what they own. Over the past year they have been haemorrhaging losses.  A Congressional committee estimates their losses at $25bn. That is the sum US taxpayers are likely to have to stump up – to save the banking system. But for capitalism they had to be saved. As we predicted in July, “The government quite simply cannot let them go to the wall. Whatever form of words it uses and whatever devious plan it announces (a new word – conservatorship – has been coined for the occasion), they will be effectively be nationalised. Then it will be official – their shares are worth nothing.”

Wheeeeeeeeee!

It was realised that, as Paulson declared “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth. Or, as the London Metro headline puts it, “£3trn deal ‘to save the world’.”

That’s three trillion Pounds Sterling (which closed today at just under $1.76 per Pound.  Let’s see… 1.76 * 3,000,000,000,000 = $5,280,000,000,000.

There are $12trn worth of outstanding mortgages in the USA. Nearly half of them are with Fannie and Freddie. The downside of government sponsorship for Fannie and Freddie was that they had to do what the regulators told them. So, over the past couple of years 80% of mortgages have been guaranteed with the two GSEs. This is because capitalist banks have worked out that all was not well with the US housing market, and they wouldn’t touch the new mortgages with a bargepole.

We are getting left holding the bag for the bankers and the mortgage industries.  Their bosses will make out just fine, and we’ll be paying off this bailout for years and years to come.

Take Fannie and Freddie. According to Gretchen Morgenstern they have credit default swaps of $62trn to their names – twelve times their total holdings of $5.4trn in mortgages. This is a house of cards waiting to topple.  It is also a measure of the US taxpayers’  exposure.

$62 trillion.  Think on that one for a bit.  Makes our announced government debt of ~$7-9 trillion almost pale in comparison.

This sort of thing is typical of the banking sector. Most US banks have a capital adequacy ratio of about 8%. In plain English that means that they can lend about 12½ times what they hold in the vaults. In good times this multiplies their profits. In bad times it multiplies the losses. It means that if only one in twelve of their debtors default, the bank is dead in the water. The sub-prime crisis means that assets they thought they had in their vaults to cover their lending have just evaporated. They all need to recapitalise. It’s not a good time to be doing this. By the end of 2009 US banks need to roll over $800bn in medium term debts. The credit crunch is getting worse, not going away.

And you will be blamed.  The corps won’t.  The bankers won’t.  You will.

What we see is a classic crisis of capitalism reflected in the financial arena. As the sharp increase in American jobless figures reminds us, it won’t remain confined to finance but will spread to the real economy. As we pointed out in July, “It is quite clear from the scale of the crisis that the poison has entered the bloodstream of the capitalist system.”

And we’re the leeches.  We get poisoned, the bosses go (pretty much, except for a few chosen patsies) scott free!  Ah, what a country!

Only a couple of years ago, we were all recommended to admire the genius of financiers. “O brave new world, that hath such people in it,” as Miranda says in Shakespeare’s The Tempest. As we commented in July, “Finance capital and the whizz kids in the City were held up to us as the masters of the universe, as ‘wealth creators.’ Now we see them as hapless bums always begging for a handout. It’s high time to nationalise the banks.” The establishment is being forced to take over banks to save the rest of their system. If it survives, all it promises working class people is more hardship. It’s time to take over the banks as part of a programme for the socialist transformation of society.  

Is it time for a socialist transformation?  I don’t know.  What I do know is that we’re on a tight rope over the Grand Canyon, teetering back and forth, and we’re in the middle of the rope.  Looks like we’re in for a fun couple of months/years/decades.

Is the Pony/Pie/Hide rating system too cutsie?

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7 comments

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  1. Grrrrr….

  2. …the Socialists have got it backwards.

    Why are the GSEs being bailed out?  Because the credit of the Federal government is at stake.  Tyler Cowen:

    But let’s say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

    The problems that the GSEs have are a direct result of their government-sponsorship; they have been allowed preferential treatment in their accounting standards and the Federal government actively encouraged foreign direct investment in them.  As a result, everything depends on the continued solvency of their debt and preferred stock.  Allowing them to go under means reneging on a promise to various foreign governments – a promise which achieved its intended purpose of obtaining hundreds of billions in direct investment.  Further, by having encouraged investors to view the GSEs as being as reliable as US Treasuries, the government tied the credit rating of the country as well as the value of the dollar to the fate of the GSEs.

    Why did the government do this?  To bribe the American people.  To give them more government and lower taxes at once.  To suggest that these entities behaved badly in a vacuum is false.  They behaved badly with official encouragement.  

  3. works better than Trickle Down Capitalism.

  4. and businesses with the most up-to-the-minute cutting edge science and technology, and keep reminding society that no regulation more complex than biblical sheep herders knew is permitted to restrain them, because of the imperative of Liberty,

    Well the big players can be cashed out and safely ensconced before anyone’s the wiser about what they did.

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