For more than a decade I tracked the activities of Fannie Mae and Freddie Mac for professional reasons as part of my job function. And, I am greatly alarmed with what I am currently seeing …
It appears that the accountants, lawyers and others who enabled the Wall Street Wizards to manipulate the mortgage marketplace to the point of creating an international economic crisis may be back at work. The plan, stripped of its legal niceties and accounting tricks is simple to understand. You separate a failing entity into two parts: old-company to hold the garbage and new-company to hold anything of real value.
You then securitize the all or some of the assets of both companies and offer them to investors on an attractive basis. That basis could be a significant yield premium (via discounted assets) that appears commensurate with the risk of handling garbage. Allowing someone to control or purchase assets for pennies on the dollar. The same thing is done with the assets of new-company, only the discounts are not as deep, the yields not that attractive – but allowing enough money to be raised to pay for the downsized infrastructure and executive salaries and bonuses.
And, you create a new infrastructure platform to keep the actual system under your consolidated control.
Here are my concerns …
One, the real estate market continues to be manipulated by the government to keep prices artificially inflated so that technically insolvent financial institutions do not have to book heavy losses which would shake investor confidence and tip the company towards a formal bankruptcy. Or, in the case of one of those “too big to fail” institutions that was supposed to have its systemic risk to the economy mitigated by the Dodd-Frank legislation, massive intervention by the Department of Treasury or the Federal Reserve.
Two, without a reliable bottom in the real estate market – the underpinning for all of those mortgage-backed securities – there can be no real valuations that are based on sound and prudent accounting principles.
Three, many of the underlying mortgages are still in risk of failing and there is no validated statistical model for determining this risk in an economic downturn with major job losses.
Four, there is no way to prevent insiders who know the true value of the assets from gaming the system in order to guarantee a massive profit.
Five, the ratings agencies still are suspect and might possibly rate dodgy paper as investment grade and thus imperil the economy as has been done in the past. Because the United States government appears to be taking legal action against the ratings agencies and both Fannie Mae and Freddie Mac are operating under government conservatorship, it is unknown how the system may be manipulated for financial and political advantage by the very people who created the first crisis.
Six, with the interchange of personnel between the government and the financial sector, one cannot be sure that the system is auditable and secure. Or that federal regulatory agencies will do their jobs to detect and deter outright fraud. And, before you tell me this cannot happen, I point to Bernie Madoff as well as a number of high profile cases which allowed the companies to pay record fines without admitting nor denying the allegations – and with nary an executive going to jail. Consider the politically-connected Jon Corzine whose company MF Global apparently lost $1.2 Billion dollars, much of it alleged to be untouchable customer’s money – and he walked free.
Seven, there is the possibility that the government will explicitly guarantee the purchase of these securitized loans, thus keeping the taxpayers at risk for defaults in excess of some stated value.
Eight, the government will own and control the consolidated trading platform until the corruption stink becomes so great as to force its sale to a consortium of politically-connected financial firms – or even our enemies, both foreign and domestic.
Why am I mentioning this now? It appears that the FHFA (Federal Housing Finance Agency), the overseers of Fannie Mae and Freddie Mac has announced …
FHFA Outlines 2013 Goals for Fannie Mae and Freddie Mac
Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco today released the 2013 Conservatorship Scorecard for Fannie Mae and Freddie Mac.
The Scorecard details specific priorities for Fannie Mae and Freddie Mac in 2013 that builds upon the three strategic goals announced in FHFA’s Strategic Plan for Enterprise Conservatorships released in 2012.
- Build. Build a new securitization infrastructure, including a common securitization platform;
- Contract. Contract Fannie Mae and Freddie Mac’s dominant presence in the marketplace while simplifying and shrinking certain operations;
- Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
From the Acting Director’s Speech to the National Association for Business Economics 29th Annual Economic Policy Conference … [my comments in blue]
Against this framework, Angelo Mozilo was a saint and Countrywide Financial was a model of good corporate governance and rectitude.
Bottom line …
BOHICA (Bend Over Here It Comes Again) -- it appears that the FHFA is going to create a “new business entity” that would package home loans owned or guaranteed by the companies into mortgage-backed securities, this time using a combined platform developed jointly by the government and financial industry. Thus consolidating control over the major portion of the mortgage marketplace on a single system controlled by the government. Even worse, planning to use this system to implement public housing policies which, in the past, have been purely political and financial plays to confer advantages to politically-connected insiders.
Nothing has changed. The Obama Administration has used new words to redefine the old game – without fixing the underlying market problems or the corruption found in both the political and financial arenas.
Be afraid folks – very afraid. The government will most likely wind up as the sole servicer in the housing market. With access to all of your financial data without so much as having to issue a subpoena. The only solution is to toss the corrupt politicians out of office and into jail – to mingle with those who defrauded the government and private citizens.
Reference Links …
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“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