Tuesday, September 9, 2008

Grand Theft : American Style

Taxpayers take on trillions in risk. You can call it a bailout, you can call it a safety net or you can call it a rescue package,but the bottom line is the American taxpayer is left footing the bill.
This is the biggest nationalization in U.S. history. Freddie and Fannie finance 3 out of 4 new mortgages. And now, the mortgage industry depends neither on willing buyers and sellers...nor on willing lenders and borrowers...but on the U.S. government. The Land of the Free has put its housing under the control of the state! Yes, there is still plenty of room for private initiative and private decision-making. But, ultimately, millions of Americans now depend on the U.S. government for the roofs over their heads.
I checked the U.S. Constitution for clarification. I am looking for a provision stating that the ‘U.S. Federal Government shall enter the mortgage finance business and use taxpayers’ money to rescue irresponsible lenders and dimwit homeowners from their own mistakes.’ It wasn’t there. But so what? If there is anything the government can’t do, I have yet to find it.
Of course, the idea of taxpayers bailing out the mortgage finance industry is ridiculous; taxpayers can’t even finance existing federal obligations. Not even close. This year for example, they’ll be a half trillion short. If you figured it properly, the deficit would be trillions more.
The government is in the business of stacking one monumental fraud on top of another...trying to give everyone the idea that he can live at someone else’s expense. Sooner or later, the whole mountain of flimflam falls down.
But don’t interpret a new bailout plan for mortgage investors as a sign that the financial stock bear market is over.It’s not – at least for banks holding the worst credit exposures. Over time, these institutions will have to confess losses; take write-downs; and raise new, dilutive capital. Many will be taken over by the FDIC, which wipes out shareholders.’ Investors were encouraged by the bailout anyway.
‘World markets soar after Freddie, Fannie bailouts,’ the AP reported.
The Dow rose 289 points yesterday. The dollar rose – to $1.41 per euro. And gold rose a little too – to $807.
Meanwhile, the Federal Highway Trust Fund went broke. Most likely, there will be many more where that came from.
*** Hmmm...even with the Fannie and Freddie bailout (briefly) propping up Wall Street, today it looks like there is no joy in Mudville, after all. Following the bailout news yesterday, stocks surged...but today is a different story. One the U.S. is more accustomed to.
This morning, the National Association of REALTORS released data from the Pending Home Sales Index, which projects home sales based on contracts signed during a given month (sounds like a fun job). The index for July fell to 86.5 down from the previous month’s reading, and down 6.7% from the same month in 2007.
Also affecting Wall Street this morning are lower oil prices. Even in peak hurricane season, prices for crude are staying in the $105 zone – much lower that the highs the United States faced in July.
All signs point to a sluggish economy, but here is the icing on the cake: the Congressional Budget Office says that the government will run a record $407 billion budget deficit this year...and there’s a very real possibility of it going even higher once you figure in Fannie and Freddie.
‘The economy is likely to experience at least several more months of very slow growth,’ the new report said. ‘Whether this period will ultimately be designated a recession or not is still uncertain, but the increase in the unemployment rate and the pace of economic growth are similar to conditions during previous periods of mild recession.’
But will these high numbers have any effect on Obama’s or McCain’s economic plans? Well, if this is any indication, both parties claim that they will extend Bush’s tax cuts if elected.
However, as the CBO points out, and we point out in I.O.U.S.A. – even if the Bush tax cuts were to expire in 2010, that would only solve about 10% of the United States’ financial hole. As David Walker says in the film:
‘When many Americans think of debt and deficits, their knee-jerk reaction is to blame the war in Iraq, or defense spending. Some people think that we can solve the country’s financial problems by stopping fraud, waste and abuse, or by canceling the Bush tax cuts. The truth is, the United States could do all three of these things and still wouldn’t come close to solving the nation’s fiscal challenges.
‘The U.S. already has $11 trillion in fiscal liabilities, including public debt. To this amount, add the current unfunded obligations for Social Security benefits of about $7 trillion. Then add Medicare’s unfunded promise: $34 trillion, of which about $26 trillion relates to Medicare (parts A&B) and about $8 trillion relates to Medicare D, the new prescription drug benefit which some claimed would save money in overall Medicare costs. Add another trillion in miscellaneous items and you get $53 trillion. The United States would need $53 trillion invested today, which is about $175,000 per person, to deliver on the government’s obligations and promises. How much of this $53 trillion do we have? Nada.’
Does this really promise big change in the course of U.S. financial markets?
After all, both companies trade on the New York Stock Exchange. The basic idea is that these companies supposedly belong to shareholders. These shareholders are owners just like the guy who owns the gas station on the corner or the husband and wife team that runs the French bistro on Main Street.
But Fannie and Freddie were never really private companies like these others. Entrepreneurs usually start businesses. Congress created the mortgage giants by charter (hence, they are called government-sponsored enterprises, or GSEs). And the two giants enjoyed many advantages from that parentage. Fannie and Freddie have long operated in a sort of limbo as a result, neither fish nor fowl. Both carry the implicit guarantee that if something went truly wrong, the government would come along and make it right.
And so it has. Bondholders are happy today. Stockholders are not. As I write, Fannie Mae is down 80% today. Freddie Mac is down 75%. I have no flag in either camp, but I certainly have no sympathy for the stockholders. Anyone who gave them a fair look could see that both GSEs were ticking time bombs.

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