Posted on 07/16/2008 1:03:28 PM PDT by mick
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THE FINANCIAL TSUNAMI The Next Big Wave is Breaking Fannie Mae Freddic Mac and US Mortgage Debt by F. William Engdahl July 15, 2008
The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt—the Fannie Mae and Freddie Mac—far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small “sub-prime” high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.
The Royal Bank of Scotland, one of the largest financial institutions in the EU has warned its clients “A very nasty period is soon to be upon us—be prepared.” They expect the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks, pension funds could lose almost 23% by September as in their term, “all the chickens come home to roost” from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and Greenspan lowered US interest rates to levels not sustained since the 1930’s Great Depression.
This all will be seen in history as the disastrous Alan Greenspan “Revolution in Finance,”—the experiment in Asset Backed Securitization, a mad attempt to bundle risk in loans, “securitize” them in new bonds, insure them via specialized insurers called “monoline” insurers (they only insured financial risks in bonds), rate them thereby via Moody’s and S&P as AAA, highest grade. All that was done so that pension funds and banks around the world would assume they were high quality debt paying even higher interest than safe US Government bonds.
Fed in Panic Mode
While he is getting praise in the financial media for his “innovative” and quick reactions to the un-raveling crisis, Fed chairman Ben Bernanke in reality is in a panic mode with little short of hyperinflationary tools at hand to deal with the crisis. Yet, his room to act is increasingly bound by the soaring asset price inflation in food and oil which is pushing consumer price inflation to new highs even by the doctored “core inflation” model of the Fed.
If Bernanke continues to act to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market—its bond market—by raising interest rates, its only anti-inflation weapon, it will only trigger the next even more devastating round in Tsunami shock waves.
The real significance of the Fannie Mae bailout
The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of President Franklin D. Roosevelt's New Deal. It was intended to be a private entity but “government sponsored” that would enable Americans to finance buying of homes, as part of an economic recovery attempt. Freddie Mac was formed by Congress in 1970, to help revive the home loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a $2.25 billion credit line.
The problems in the privately-owned Government “Sponsored” Entities or GSEs as they are technically known, is that Congress tried to fudge on whether they were subject to US Government guarantee in event of a financial crisis as the present. Before now, it always appeared a manageable problem.
No more.
The United States economy is in the early phase of its worst housing price collapse since the 1930’s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, most as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were “Too Big To Fail,” i.e. that in a crisis the Government, that is the US taxpayer, would be forced to step in and bail them out.
The two, Fannie Mae and Freddie Mac, either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or about $6 trillion. To put that number into perspective, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so $6 trillion would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.
In addition to their home mortgage loans, Fannie Mae has another $831 in outstanding corporate bonds and Freddie Mac has $644 billion in corporate bonds.
Freddie Mac owes $5.2 billion more than its assets today are worth meaning under current US “fair value” accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may as well go negative next quarter. As the home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.
On July 14, symbolically the anniversary of Bastille Day, US Treasury Secretary Paulson, former chairman of the powerful Wall Street investment bank Goldman Sachs, stood on the steps of the US Treasury building in Washington, a clear attempt to add psychological gravitas, and announced that the Bush Administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.
The bailout by Paulson was accompanied by a statement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.
The Federal Reserve is rapidly becoming the world’s largest financial garbage dump as for months it has agreed to accept banks’ Asset Backed Securities including sub-prime real estate bonds as collateral in return for US Treasury bond purchases. Now it agrees to add potentially $6 trillion in GSE real estate debt to that.
However, the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses in the two companies were made public. In 2003 then President of the St. Louis Federal Reserve, William Poole publicly called for the US Government to cut its implied guarantee of Freddie Mac and Fannie Mae claiming then that the two lacked capital to weather severe financial crisis. Poole, whose warnings were dismissed by then Fed Chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout
As financial investors warn the Paulson bailout is not a bailout of the US economy but a direct bailout of his Wall Street financial cronies. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to remain in business. In its May announcement, Citigroup’s new Chairman Vikram Pandit announced plans to reduce the bank’s $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup “off balance sheet” liabilities which include some of the highest risk deals in the US real estate and securitization era it so strongly backed. The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result with value of liabilities exceeding the bank’s $90 billion market value. In December 2006 prior to the onset of the Tsunami crisis, Citigroup had a market value of more than $270 billion.
© 2008 F. William Engdahl Editorial Archive
F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation, www.globalresearch.ca. The present series is adapted from his new book, now in writing, The Rise and Fall of the American Century: Money and Empire in Our Era. He may be contacted through his website, www.engdahl.oilgeopolitics.net.
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Damn good point.
Move along there.....nothing happening......mission accomplished.
Financial Sense is always over the top in their predictions. Things are not good, but we still haven’t even seen a month of negative growth. The economy is hanging on, although it is in serious condition and could slip into a recession. If oil prices continue to come down, I think we will see a surprising rebound in the economy.
I dont trust any numbers from gov.con.
After Congress has complete control. Clean out the garbage, the sell it off to be totally private.
If not we will wind up with another bleeding Amtrak.
ping
You’re whistling past the graveyard. For what possible reason would oil prices “continue” to come down? Especially with winter coming?
Yes, let’s encourage folks to withdraw all their funds from all sources so we can have a Big Crash.
Because the run up was way to fast, and was more of a bubble based on emotion, rather than based on fundamental supply and demand. Now that the feeding frenzy is over, look for oil to settle down around $100. If Congress would act on drilling and other initiatives, it could go lower, but that isn't gonna happen.
Bush’s fault, right?
All that happened was the latest rise was halted and reversed. Oil has 3 week support point of $135 and 5 week support point of $131. If it falls down below $130, then something good is happening. And even if that happened, the Iran and Israel confrontation is right around the corner. It will take the blood, sweat and tears of the American Oil industry to even give us a chance to get through the rocky times ahead. Unfortunately the democratic process has saddled us with a bunch of crooked politician's standing in 'Big Oils' way. Coincidently the Autocratic Russians seem to be best poised to take advantage of the current state of affairs. Funny how that worked out.
OKay, so, given the fact that congress will do squat, what will burst the bubble? I’m not trying to be argumentative. I really want to know.
You know what? I agree.
FRE and FNM will go asymptotically to zero, but the Feds will defend the FM’s debts.
Many banks will go under. The dollar will take a pounding. There will be inflation. BUT America is becoming realistic about using its oil wealth, and this realism has had a knock-on effect on futures. Oil prices don’t have to plummet - they just have to remain level - and your economy will keep growing.
FWIW I say this as a disinterested foreign observer.
Oh sure....like I trust the official GOP memo as much as I trust the official GOP officials nowadays :^)
Indeed. What the government is doing is covering it’s own ass from the socialism with more socialism. So in 2011 the Bush tax cuts expire adding further tax burden on the Middle Class. The wealthy have accountants for loopholes so many will not be hurt by that. The poorest and non-productive of our society get the socialist benefit along with the socialist leadership who stay in power and get paid to fleece the system. Oligarchies do this, they create a society of gods and clods. The Democrats approve and not how they always felt great about Fidel Castro and Hugo Chavez.
The Fed will raise rates but marginally but it will not slow inflation down much. The public debt that will likely double from Fannie and Freddie fallout and will continue to be payed for by the collapsing dollar, in other words inflation and paid by the taxpayer.
Since some in government also understand this, it means it is unlikely we’ll see any short or mid-term relief on petroleum products, since the government taxes each gallon of gas.
If Obama comes in, he will certainly raise other taxes on top of this.
Not looking to pretty but in the end, the socialist and corrupt can only survive in the forest so long and block the sunlight from the responsible seedlings with there big, powerful branches but rotten cores. We are in for a very painful but short-term ride for the next four years. And after that, a decade of rebuilding requiring heavy lifting.
This corruption and malfeasance of public monies is the worst in history since the French Revolution as noted in the authors ‘Bastille’ irony comment. I said this a year ago and like Poole, attempted to sway government officials not no effect. Why would they? They were making mad loot hand of fist personally, while forwarding there agenda for the gods and clods society! Is anyone surprised now there was such a massive debate and push from the Democrat/Socialist party to rescind gun rights this last year?!?! Good thing the Supreme Court still have a 5-4 conservative advantage or we would all be disarmed with no way to real way to change the entire system back towards the Constitution after what it appears will be an ECONOMIC COLLAPSE (2-3 years out).
No leaders who participated in this debacle should go without punishment and guys like Greenspan must have at least public humiliation so they don’t surface again in our lifetimes with a new scheme.
We are just entering the stage where a ton of ARM loans are starting to adjust massively upward that were originated during the peak of housing prices in many of the bubble markets (2005-2006). Many of these of the no-doc, teaser rate, neg-am, option arm varieties that was favored by housing speculators who bought without putting any down and those looking to cash out a bunch of their temporary equity increases to go on spending sprees. This will be peaking out over the next 12 to 18 months. Its shocking to many, but this is just getting warmed up.
Ping.
Yawn...
No, the economy is on a deflationary course. To decelerate the train wreck down skilled job creation is needed in domestic energy production, higher ed subsidies and commodities we can export overseas.
Right Whale: 51% of our GDP was multinationals and government with hedges for multinationals and government able to give itself cost of living wages.
49% GDP is small business with no hedges or the ability to give itself raises, rather government and utilites preying on them.
Now, the tall rotten trees of the forest blocking the sunlight will burn along until they are gone and the responsible saplings take over slowly wilting for a season because of lack of sunlight takes over. How long this takes is anybodies guess but your a but pollyanna about the economy. Hope you now understand why 51% said economy ‘Not so bad’ and 49% have had blood pouring out of them since August of last year...
What gets me is things like this. I was at a supermarket the other night, one of those with the built in banks. And since it was after bankers hours, there were these huge metal bars in place.
Then, when you leave, you see the armored cars collecting. Ooohhh.. so intimidating. Maybe there’s a mill or two in this armored car.
So everybody thinks their money is protected MEANWHILE these fools on wall street and capitol hill and various conferences about monetary policy and real estate shenanigans and collateralized debt nonsense hey we aint talking some pissant little bank branch anymore. We ain’t talking some armored car with a couple bags full of dimes.
We are talking about hundreds of billions. Trillions even. And lately, I’ve heard rumors about people using the quadrillion term.
And it can all get wasted or written off or handed out in $300,000 bonuses or bailed out by their buddies at the Fed, meanwhile, Joe Six pack watches the armored car drive away (after he put in ten hours today) and wonders if he can afford to fill his gas tank or feed his kids tonight.
They’ll come down because supply and demand economics does still have an impact on the price of oil (but is now only one of three primary factors). August of this year to about June of next year oil price will ease some. And if we enact the energy independence program we should, it is likely we won’t see $146 a barrel for the next 50 years, if ever.
I told people this in April when I said price was going to $135 plus about oil easing in August. I was a little off on my short-term forecast by a couple of weeks :) Just like a little off thinking it was only going to $135.
Demand destruction is occuring so the Dems get there wish - we are CONSERVING. Isn’t that great? A shame that we are in poor economic shape and we haven’t yet begun to see the real effects of oil hitting the $146 mark. We’re just beginning to see the pain of March and April’s sharp oil rise and companies passing through the increased costs of energy.
BINGO.
Convient the Dems got there wish we will become just like Cuba, yes...
All of my retirement savings are away from it all. Invested in commodities, metals, defense & aero, and lots and lots of energy (oil, NG, drillers, infrastructure companies, etc....)
Dem Hacks named Franklin Raines/// Jamie Gore-LICK etc etc not to mention Johnson of late...
He's not connected to the guy in the street and never was. His daddy was president and his grandpappy was a senator. He's qualified.
I think oil will drop a buit more, and Gasoline will stabilize at $3.50 ish... until next summer.
Agreed.
I doubt I would take financial advice from a guy who wrote books such as:
Anglo-American Oil Politics and the New World Order and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation
That’s like taking structural engineering advice from Alex Jones.
This corruption and malfeasance of public monies is the worst in history since the French Revolution as noted in the authors ‘Bastille’ irony comment.
A big chunk of the oil price spike is psychological, but it is also a reflection of the devaluation of the dollar. If the dollar continues to collapse, you’d expect oil to continue to rise.
Yes indeed, and don’t forget that commercial real estate usually lags the housing market by 12-18 months. Problems there are approaching fast, and will be included in the back wall of the hurricane.
http://online.wsj.com/article/SB120450569895406511.html?mod=hps_us_mostpop_viewed
There is a day after Mick. The Russians recovered from there economic collapse. It was easy for Putin because he did get lucky and as a whole, the Russians are more familiar with socialist governments. I daresay we will not go fascist after an economic collapse. That doesn’t mean some in power will not attempt to keep it or a struggle won’t ensue. But at the end of the day we have innovation and entrepenuars. Much better then oil. We have oil too, the innovators and entrepenuars will get it.
But first things first - Washington will change the easy way or not so easy way. I prefer the economic pain being a wake up call rather then armed revolution.
Live in faith not in fear! I live next to a ninety-two year old women. When I brought up the economy, she said to me: ‘I lived through the last depression and I will live through this one!’ She of course was a young adult in the speakeasy crowd of the Roaring Twenties, very similar to this current generation of spoiled brats on credit. But by 1946, they were named the Greatest Generation.
It will be OK, yes some spoiled brats of human beings will be forced to grow up quickly. Hopefully, we don’t have to fight the last final world war to reach a general global consensus but that too is a possibility. That would be awful (Revelations says this occurs, 200 million combatants and 1/3 of man perishes or in todays numbers, roughly 2.5 billion people) but life will continue to go on. We may change the name of this nation from USA to just simply American Province or whatever but the people and culture will still be here.
Conventional wisdom now thinks that oil will fall because of the Global recession that is beginning. We have however experienced periods of stagflation where prices can rise, while economic activity slows. With respect to oil, you can only produce large quantities of oil in a booming economy. Oil exploration and equipment maintenance requires capital investment, which disappears in a slowing economy. Not only that, but the Middle East is historically a very unstable region. The Russians are, well, Russian Mobsters. So we have the theoretical possibility that oil stays high while a Global Recession occurs. That in and of its self can lead to a crash or depression. The only stable oil producing market in the globe that could halt this possibility is the US Oil Industry. And unfortunately their hands are tied by a bunch of corrupt politicians that lie when they state that Caribou and Sea Lions are more important then Humans.
When the post cold war Russian economy collapsed, they went through some very serious internal conflicts. Remember Yeltsin and the Tanks. When the Economic State comes down, the internal players start fighting each other over the remaining scraps. In Russia that resulted in one particular ruling house attaining complete control. An Autocracy. In the US we will see the various corrupt houses fighting over the scraps. Already saw the Arkansas Mafia fighting the Chicago Mafia in the Democratic primary. We are now witnessing the New York financial market collapsing West Coast Banks. Just the beginning. IMHO.
Got that book today.
Great post. Thanks.
I would disagree with their claim that investors bought into Fannie and Freddie because “they were too big to fail.”
People have to remember that all of these mortgage backed securities were received AAA ratings. I think most of the people that got left holding these junk bonds had thought they were buying safety, especially as the return didn’t indicate junk bond status.
Great post overall. Good read.
So I think investors bought up Fannie and Freddie thinking they were getting safety. Most all were fooled by the fraudulent “gee, we had a bug in the computer model” rating of AAA given to all the toxic waste.
Those dang computer models. They have also been using Computer Models to predict Global Warming. Reality bites.
Good points Mick. You have latched onto trends most don’t. Also, 20 year economic cycles in our nation. The Mayans were a fascinating culture, because they figured out mankind goes through 500 year supercycles. Some think the world will end in 2012 because of there understanding of mathematical precision, but this is just the beginning of a new age, the end of ages or in other words, a time period where mankind defeats death and therefore time becomes rather meaningless. Take care, glad to see have you as an American Patriot and brother.
Yeah, very true. But the Russian population were not armed either. 60 million of us may decide we may have liked it like it was in the 1950’s.
Heck, lets go back to the late 1700's. Humans broken free from the bondage of European Feudalism. The Constitution taken literally as the founders intended.
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