UPDATE: 09-07-08 GOVERNMENT TAKES OVER FANNIE MAE, FREDDIE MAC
Well it happened today. Allegedly after a Morgan Stanley investigation into the finances of the GSEs who were found to be fudging, albeit legally, their capital reserves, Treasury Secretary Henry Paulson in conjunction with the Federal Reserve and other regulators, permitted the newly-formed FHFA (Federal Housing Finance Agency) to assume the conservatorship of Fannie Mae and Freddie Mac. Both CEOs, Syron and Mudd, will be leaving. More current information can be found at OneCitizenSpeaking: " After pulling the trigger: Fannie Mae and Freddie Mac seized by the government -- what's next?"
It seems that the Administration, not Congress, is now in control of the GSEs who insure approximately one-half of the mortgages in the United States. Conspirists can hardly wait for the next shoe to drop ... especially since the days until the end of the Bush Administration are drawing near.
Original Blog Entry ...
There is nothing like a good conspiracy theory involving the Federal Reserve to stir the hearts and minds of conspiracy theorists who believe that the Federal Reserve is the chosen action arm of a shadow government controlling the world. And the names behind the shadowy conspiracies that are usually cited include the Illuminati, the Trilateral Commission, the Council on Foreign Relations, the Freemasons and others of similar quasi-secret ilk.
In light of the recent drastic decline in the share prices of the two major Government Sponsored Enterprises, Fannie Mae and Freddie Mac, that was seemingly triggered by a conversation by an ex-Fed official, conspiracy theorists are once again ratcheting up the talk of a grand gesture by the outgoing Bush Administration to further secure control over America’s financial markets.
July 10th, 2008 (Bloomberg)
“Mortgage lenders Fannie Mae and Freddie Mac are ‘insolvent’ and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.”
“‘Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,’ Poole was quoted as saying in an interview held on Wednesday.”
“Chances are increasing that the government may need to bail out the two mortgage companies, Poole was quoted as saying.”
The crisis …
Whether intentional by design or as an offhand explanatory comment, Poole’s remarks triggered a massive sell-off in the shares of both Fannie Mae and Freddie Mac, thus putting the organizations at greater risk of capital inadequacy and possibly triggering a self-fulfilling prophesy of insolvency.
The response: a breaking of a Congressional regulatory deadlock between Congress and the Administration -- resulting in a potential consolidation of regulatory power and oversight …
Here is the latest media message from Fannie Mae’s and Freddie Mac’s regulator, OFHEO, the Office of Federal Housing Enterprise Oversight.
According to OFHEO director, James Lockhart …
“I congratulate and thank Chairman Dodd, Ranking Member Shelby and the Senate for passing a sound and comprehensive GSE regulatory reform bill. This bill should help restore confidence in the housing markets by creating, on passage, a new, stronger regulator with all the necessary tools to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks. I am hopeful the House will act quickly and the bill will soon be enacted into law.”
“With this very turbulent market it is important to strengthen the regulator of Fannie Mae and Freddie Mac and combine it with the regulator of the Federal Home Loan Banks as soon as possible as all of these GSEs are being asked to do more and more to support the mortgage market.”
The theory …
The goal is simple: consolidate all political control over America’s financial institutions and, by extension, the companies they do business with, by using a the threat of a financial meltdown as a reason for government action. (Not that the government has ever needed either a rhyme or reason for what they do.)
According to the conspiracy theorists, the significance of the OFHEO announcement is that the Administration’s plan to consolidate the regulation of all GSE (Government Sponsored Enterprises) under a single regulator is now well on the way as step one in a master plan to place all banking and financial functions under the control of a single politically-controlled regulator. A big win for the Bush Administration.
The second step would be to further consolidate the regulatory powers of the Comptroller of Currency (OCC), the Office of Thrift Supervision (OTS) and NCUA (National Credit Union Administration) who essential regulate different types of banking institutions.
Followed by step three, the further consolidation of power between the emerging regulatory body, the Securities and Exchange Commission and the “dreaded” Federal Reserve.
Of course, in my not-so-humble opinion, I believe that this is a great opportunity to eliminate the patchwork quilt of administrative rules and regulations which seemingly promulgate overlapping, conflicting and confusing regulations for different entities that offer essentially the same financial services.
Congressional Democrats vs the Federal Reserve …
Tuesday, June 26, 2007 (Bloomberg) …
“Bernanke trips as Congress bashes Fed over lending: Dems have threatened to strip some of the Fed’s power to write consumer-protection rules—meaning the Fed chair could lose support needed to achieve other goals
“Democrats led by House Financial Services Committee Chairman Barney Frank blame a lack of oversight by the central bank for allowing abuses in the subprime-mortgage market. They have threatened to take away some of the Fed’s power to write consumer-protection rules—a blow to Bernanke’s prestige that would also signify a lack of confidence on the part of lawmakers whose support he needs to achieve other goals, including his effort to move the Fed toward defining an inflation target.”
“Frank and Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, are pressing the Fed to make sure lenders treat consumers fairly—a responsibility they say it and other banking regulators largely shirked during the housing boom. ‘I need a good cop out here,’ Dodd said in an interview. ‘I’d like them to be aggressive.’”
About face …
Thursday, July 10th, 2007 (MarketWatch) …
“Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke went before Congress on Thursday and asked for an overhaul of ‘outdated’ system of rules and regulatory agencies that govern financial markets.”
“' ‘Our regulatory architecture and authorities are outdated and less than optimal,’ Paulson told the House Financial Services Committee.”
“Sitting next to Paulson, Bernanke asked the committee to draw up legislation that would give the Fed new powers to govern the payment and settlement systems.”
“'I believe the evidence is now clear we are in one of the most serious economic troubles we have seen because of the inadequacy of regulation.'Rep. Barney Frank, D-Mass.”
Rep. Barney Frank, chairman of the House Financial Services panel, noted that when he took over his committee in late 2006, lobbyists for Wall Street were pressing for relaxation of rules governing their activities and accounting that had taken effect under the Sarbanes-Oxley law, enacted in reaction to the failure of Enron Corp.
"Things have changed," said Frank, D-Mass.
“Frank signaled that he was open to giving the Fed new powers and responsibilities to ease the economic impact of turmoil in financial markets. It makes more sense to give the central bank new powers than to create a new agency, he said.”
“But Frank also acknowledged that Congress will not be able to move on tightening market regulation until next year. Paulson and Bernanke said that they could work within such a timetable.”
While Fed Chairman Bernanke will be at his desk after January 20th, 2009, Treasury Secretary Paulson will be gone with the rest of the Bush Administration as the incoming Administration takes power. Or will he?
"Where there was a strong argument ... that we had been over-regulating the financial system, I believe the evidence is now clear we are in one of the most serious economic troubles we have seen because of the inadequacy of regulation," Frank said.
“Paulson demurred when asked if he wanted the panel to pass legislation to give him emergency powers.”
“Negotiations over the details of any new laws should be interesting. Paulson isn't necessarily seeking tougher laws, preferring instead to streamline oversight.”
“Wall Street and bank lobbyists are sure to weigh in. Indeed, efforts to craft banking and Wall Street legislation have often taken years to reach fruition.”
“Analysts say it's likely that the Fed will receive new powers to oversee investment banks because of the emergency lending program that it started in March for the troubled sector.”
“Paulson pressed his department to develop a blueprint for a new regulatory system. At first, the impetus of such a blueprint was to relax Sarbanes-Oxley, some provisions of which have been called onerous by the financial community, but it now has been given new vigor as a response to the markets' turmoil.”
And one of the most onerous and objectionable provisions of SarbOx as it is called is that a firm’s senior executives must sign their financial statements under penalty of perjury which makes them potentially criminally liable for any fraud which occurred on their watch.
End run around Congress …
The Bush Administration is famous for sidestepping much of the turmoil caused by requesting legislation from Congress by simply issuing signing statements that declare that the Administration has not intention of following the legislation signed into law or promoting greater regulatory actions by Administrative fiat using an Agency’s power for promoting “rules and regulations” without Congressional input or permission.
In today’s financial crisis we see that cooperative efforts between the Federal Reserve and the Securities and Exchange Commission is taking place under a “memorandum of understanding” which bypasses the need for Congressional authority to share information and regulatory power.
July 7, 2008 (Federal Reserve Announcement) …
“Securities and Exchange Commission Chairman Christopher Cox and Board of Governors of the Federal Reserve System Chairman Ben Bernanke today signed a memorandum of understanding (MOU) between the two agencies that will deepen their information sharing and cooperation, permitting both agencies to better perform their responsibilities.”
“Under the MOU between the two agencies, the SEC and the Board would share information and cooperate across a number of important areas of common interest, including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents. The MOU specifically covers bank holding companies and so-called Consolidated Supervised Entities that own securities firms. It builds on and formalizes the long-standing cooperative arrangements between the SEC and the Board, as well as the more recent cooperation on matters including banking and investment banking capital and liquidity following the Board's emergency opening of credit facilities to primary dealers.”
Interestingly enough, and the source of many conspiracy theories, the Federal Reserve is a private institution owned by its member banks and is not subject to direct government control. They are Congressionally chartered to perform central banking services and other actions on behalf of the United States. Characterizing this entity as another government agency is false and misleading.
The conspiracy theory moves forward …
Is this a part of some larger scheme to further deregulate capital markets and institutions for the sole profit of the Wall Street Wizards, their wealthy patrons and that hidden “one government” movement?
Is this a part of insuring that the Wall Street Wizards have access to government cash in case of another financial crisis caused by their negligence and disregard of sound business and banking procedures?
Is this a part of removing impediments to further consumer regulatory protections?
Is this part of emasculating the SEC?
We have seen where the Securities and Exchange Commission has failed to adequately promote transparency in financial transactions by enabling accounting controls (FASB Rule 140) to allow financial institutions and corporations to hide bad debts and accumulated risk in “off balance sheet accounts.”
We are also seeing that the SEC is pushing for a relaxed form of European accounting standards which removes the “net profit” line item from financial reports and allows companies to report results in such a manner as to make it impossible to compare their financial results with the financial results of similar companies.
And we have certainly seen where the SEC has failed to regulate the ratings agencies which provided false and misleading ratings to toxic securities, failed to promote safe and sound standards with respect to the creation, pricing and sale of derivatives and other complex financial instruments, failed to regulate the hedge funds which often act like unregulated merchant banks and, perhaps their biggest failure, the removal of the marketplace protections against highly-leveraged market speculation and short selling. Thus enabling any individual entity or group with sufficient capital to buy “puts” on a stock, sell the stock short to drive down the price – and then cover their short position at a profit and reap additional rewards from the puts that were sold.
Strengthening the Financial Infrastructure?
The major question is whether or not that this consolidation of regulatory power is good for the American public.
In my opinion, this is a step in the right direction. To eliminate overlapping jurisdictions, each with their petty dictatorships and turf wars. To eliminate the conflict between the state and federal regulatory agencies so as to provide one consistent set of rules for the financial community. To eliminate many of the loopholes that are inadvertently opened when a holding company holds both state and nationally-regulated entities in their portfolios.
Whether or not existing consumer protections are sacrificed in the process is up to Congress. A hyper-partisan Congress driven by many individuals who believe they are above the law and who sell their influence to any special interest that can deliver votes or campaign funds.
And as much as I hate to compliment a liberal democrat, Representative Frank is both extraordinarily competent to deal with financial affairs and appears to be an honest (at least by Congressional standards) and upright individual. He can counted on to sound the alarm and do the right thing for the people. Unlike many of his colleagues on both sides of the aisle, Frank is willing to adjust his viewpoint to accommodate existing circumstances, but he does not appear to be willing to compromise his principles. Another honorable democrat like Joseph Lieberman or Zell Miller.
And about that conspiracy?
By their very nature, conspiracies are fun to discuss and provide hours of endless amusing speculation. The mere thought that a large number of self-absorbed, greedy and largely corrupt government officials and private individuals could keep a major secret without trying to profit from their knowledge is not very likely. So we need to concentrate more on where “they” are hiding the alien body that was found in Roswell.
What can YOU do?
Take care of yourself, your family and your friends first before worrying about the fate of the planet and unproven conspiracy theories.
Be glad that their is some legislative movement toward a smaller and more efficient government as regulatory agencies are combined.
Invest in things that you know about and avoid “pie in the sky” highly speculative offers from companies that seemingly have found the way to convert lead into gold – but have never turned a profit. If the deal was that good, they would never go public.
Do not vote for any candidate or current politician who is willing to subvert the safety, security, sovereignty and economic strength of the United States or limit an individual's right of self-defense for their personal philosophy, power, prestige or profits.
Quote of the day: “The beginning of knowledge is the discovery of something we do not understand.” -- Frank Herbert
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“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell “Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar “Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar
“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS