Timothy Geithner Meets Vladimir Lenin (unlimited Fannie and Freddie bailouts)

Last week, while Congress and the nation were preoccupied with the holidays, the Treasury made a Christmas eve announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years. The Treasury's press release notes:

“At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years.”

Put simply, in a single, coordinated stroke, the Treasury and the Federal Reserve have encroached on spending powers that are enumerated for the Congress alone. Under the Housing and Economic Recovery Act of 2008 (HERA), the Treasury has no such open-ended authority. Indeed, the applicable portion of the Act explicitly limits the total amount of mortgage principal (not losses, but total principal) as follows:

"LIMITATION ON AGGREGATE INSURANCE AUTHORITY.—The aggregate original principal obligation of all mortgages insured under this section may not exceed $300,000,000,000."

That's $300 billion of original principal. If there is some loophole by which the Treasury's action is legal, it's clear that it was no part of Congressional intent, and certainly not broad public support. Taxpayers are now being obligated by the Treasury and the Fed to make good on a potentially much larger volume of bad mortgage loans, made by reckless lenders, guaranteed by Fannie Mae and Freddie Mac in return for a pittance (called a “G-fee”)

None of this changes if the Fed is somehow successful in “unwinding” its $1.25 trillion in agency holdings by selling them out to the public and re-absorbing the similar amount of monetary base that now sits largely in the form of bank reserves. Such a transaction does nothing to change the overall quantity of government backed liabilities that must be held by the public in some form. Unwinding the Fed's position simply means that the global economy will be forced to absorb not only the mortgage securities themselves, but also the newly issued Treasuries that will be required to make those mortgage securities whole.

Wait a minute. First he's whining about the Fed boosting the money supply, then he's whining about how hard it will be for the economy when the Fed reduces the money supply. Sounds like the perfect Democrat party politician.

Every dollar of bad mortgage debt that should have been written off is now enshrined as two dollars of government-backed debt. One dollar as the original debt, which will now be made whole, and one dollar of new Treasury securities, which must be issued to make that original debt whole. Accordingly, the holders of both securities will have claims against our national assets and future wealth. A similar two-for-one obligation holds true for bailed-out bank losses.

If the Treasury has to issue one dollar of Treasuries to pay off one dollar of mortgage debt, there is now one dollar of debt, not two. He has the math skills of a Democrat party politician too.

bad mortgage loans, made by reckless lenders

As soon as you hear a pundit try to pin the housing crisis on "reckless lenders," it's time to close your ears and walk away.

Banks do not make money by extending loans to people who do not pay them back. No amount of 'greed' will cause banks to do such a thing. In fact the greedier they are, the less they want anything to do with people who won't pay back their loans. What faster way could there possibly be for losing money than to hand it to someone who won't give it back?

No, the only thing that will make bankers do something like that is a banking regulator whispering, "You don't seem to have very many loans on the East side of Market Street. Shame if we had to come in here and audit everything."

Well, that plus the government offering to take those mortgages off the bankers' hands as fast as they can make the loans. "You sell 'em, we'll buy 'em," said the government.

The bankers weren't being reckless. They got paid on every loan... by the government (in the form of Freddie and Fannie).

The people being reckless were the politicians, who created Fannie and Freddie and who thought having the taxpayers subsidize mortgages for people who couldn't afford them was just another way for politicians to be compassionate and generous with Other People's Money.

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