Using that infallible maxim as our guide, it appears that Fannie Mae and Freddy Mac, the nation’s two primary engines of housing inflation, are on the brink of collapse. Last week I heard on a TV news broadcast the following remark from an unnamed official, “Fannie Mae is financially strong.” That’s a simple statement of fact, that if it were true, would never have been made. The big mortgage GSE must surely be in trouble.
My suspicion was confirmed when I saw this from Helicopter Ben Bernanke’s second day of testimony before Congress, “The GSEs are adequately capitalized. They are in no danger of failing.” Translation: They’re toast. Get ready for a bail out.
GSE, by the way, stands for Government Sponsored Enterprise. Fannie Mae and Freddy Mac are GSEs. They were born out of Franklin Roosevelt’s New Deal, in theory to help people own houses, in fact to allow people to ruin themselves with debt in a historic financial bubble. The GSEs enjoy a discount in the credit markets because there is an implied, but not stated, government guarantee of their debt. They’ve used that discount to generate over $5 trillion of mortgage backed debt. The collapsing housing bubble has left that debt seriously under-collateralized.
Congress will soon move to bail out the GSEs’ debt holders and stockholders at taxpayer expense. It’s a formula we’ve seen repeated many times.
Defenders of the plan say the two mortgage giants never went into the deep end of the risk pool. Fannie Mae and Freddy Mac mortgages have solid collateral and were made to honest, working borrowers. It’s just a lack of market confidence, they say, that is putting a bind on their ability to raise capital.
Let’s assume the part about the good borrowers is true despite what a sagging economy can do to those borrowers.
Let’s just look at the collateral. For an accurate picture of the housing-as-collateral fairytale we can look at the recent failure of another big player in the mortgage business, IndyMac Bank. IndyMac is the second largest bank failure in U.S. history, according to the L.A. Times.
IndyMac’s assets, on the books for $32 billion, consist mostly of mortgages on houses. That figure represents the face value of the mortgages and theoretically the liquidation value of the houses that serve as collateral.
IndyMac’s $32 billion in assets is supported by $19 billion in deposits. The FDIC insures the deposits. FDIC bean counters are trying to figure out how much the agency is on the hook for.
About a billion dollars in deposits are over the $100,000 limit. So, the FDIC has to cover about $18 billion. It should be easy with $32 billion in assets, right? Heck, it sounds like the shareholders might even get a couple bucks back after the sell off.
Collateral is the problem. The FDIC estimates it’s going to have to come up with $4 to $8 billion to pay off depositors. In other words, the FDIC only expects to get between $10 and $14 billion for the assets that are booked at $32 billion.
If that’s true, the value of the real estate behind IndyMac’s mortgages has fallen by half since the mortgages were initiated, and perhaps as much as two thirds.
IndyMac’s holdings are a fair sample of mortgages on U.S. residential property. If the FDIC estimates are accurate (they actually could be optimistic, as government figures usually are) Fanny and Freddy’s $5.2 trillion in mortgage backed debt could be worth less than $2 trillion. Any accountant will tell you that if you owe $5 trillion and you have assets of $2 trillion, though the numbers are impressively large, you are impressively broke.
Uncle Sam, and Uncle Ben Bernanke will not let Freddy and Fannie fail. They will try to keep GSE stockholders and debt holders afloat in the fast draining asset pool by flooding the pool with new credit money, borrowed on behalf of the American taxpayer from the Fed for the purpose. They will nationalize the GSEs by simply buying their stock if necessary. They will have to create a lot of dollars out of thin air to do it. Inflation to the rescue.
Inflation is the perfect con for the bankers and politicians who foist the scheme on the American taxpayer. It’s perfect because the suckers who pay for it never figure out how it works, while it remains wildly profitable for its beneficiaries.
Few working taxpayers will ever connect their increasing poverty and the government’s generous efforts to “save” borrowers, speculators, bankers, and fat cat financiers. But the two are connected like a ball and chain.
For the working taxpayer, everything just gets more expensive, gradually but surely. Pay increases do not keep up with price increases. The financial, political class trims the working, taxpaying class like a farmer shearing his sheep. Only these farmers won’t even leave the hide.
Our elected leaders will successfully blame taxpayers’ growing poverty on foreign workers, “unfair” competition, or political opponents. They will never tell us that inflation is an invisible tax that transfers wealth from those who work to those who control the money supply.
If you ask a politician if this is how government bailouts really work, expect it to be officially denied.