Likelihood that the taxpayer are ever repaid for Fannie and Freddie’s monumental losses: Approaching nil.
The government’s failure to overhaul mortgage giants Fannie Mae and Freddie Mac is pushing the U.S. toward nationalization of the mortgage market, and would-be homeowners will be the losers if competition between private companies isn’t restored.
That’s according to Jim Millstein, the former Treasury Department official who oversaw the reorganization of American International Group Inc., who thinks the government will have to get into the business of reinsuring mortgages if it wants to restore the private sector’s role in mortgage securitization, and reduce taxpayer exposure to Fannie and Freddie.
Millstein, the Treasury Department’s chief restructuring officer from 2009 to 2011, says neither the Obama administration nor Congress has put forward a workable plan to lift mortgage giants Fannie Mae and Freddie Mac out of conservatorship.
There’s no plan to address this in Obama’s little blue booklet. If he gets his druthers, banks will be forced into lending to people who would not normally qualify for mortgages, again.
Increasing the fees charged by the companies and taking all of their earnings threatens to make Fannie and Freddie “permanent wards of the state,” Millstein argues in an editorial he co-wrote with Phillip Swagel, a professor at the University of Maryland School of Public Policy.
Read the rest. The authors lay out a plan that’s more serious and less state-centered than anything that has come out of the current president or his team. They also note that Congress’ current plan is counterproductive.
The Treasury Department’s decision to claim Fannie and Freddie’s earnings as dividends is intended to make sure that taxpayers recoup the $141 billion they’re still owed from bailing the companies out (Treasury has invested $187 billion in the companies and received in $46 billion in dividends). But the government’s “cash sweep” prevents Fannie and Freddie from building up capital reserves that would protect taxpayers against potential losses on $4.5 trillion in mortgage guarantees, Millstein and Swagel argue.
Freddie and Fannie were the wrong business model, if one still wants to call it that, from the outset. As such, F&F have never been anything other than “wards of the state”. In principle, there is little difference between Green Energy grants gone bad, like Solyndra or A123 battery, bailing out AIG or GM and Chrysler, or providing low-interest/ no interest loans to borrowers whom conventional banking wisdom would consider utterly unworthy.
That conventional banking wisdom had its reasons, generally centuries of experience in assessing the risk of lending with respect to the cost of money. Yes money, aka capital, is a commodity like any other. It can be borrowed. It can be sold. It can be stolen. But, in every case, first it has to be produced. It is the product of its producers’ industry and thrift, aka unconsumed profits, aka savings.
As such, borrowing money is not much different from borrowing, say, a tractor. Whoever lends it out will want to have some assurance of having it returned at a specified time, and in a condition to be used again. Also, he will want to be compensated for wear and tear, any damages, as well as for rearranging his scheduled work to accommodate the time when it was unavailable. None of this is “rocket science”. By what stretch of the imagination did people ever allow themselves to be persuaded that mortgage-lending is principally different?
So, what could ignoring the mostly sound “conventional wisdom”, in favor of “borrowers” receiving “goods” well beyond their worth from a lending institution not legally accountable to its “depositors”, the taxpayers, ever end up as, other than a giant Ponzi scheme?! That “tractor”, the mortgages, was essentially stolen, albeit legally, by government from some of its governed, to be given to others, upon a “promise” which any sensible person could have seen was not worth the writing on the paper, and would never be enforceable.
All the above was by design, according to the motto: “Owe the bank a million, you have a problem. Owe the bank a billion, the bank has a problem.” We, taxpayers, are here “the bank”. That’s how Socialism “works”, has always “worked”, and is meant to “work”, until it “runs out of other people’s money.”
So much for FDR’s “Economic Bill of Rights”, to which F&F is just one of many “heirs apparent”. — Many more to come, all 300 Million of US, if we don’t finally put the cabosh on the government’s sticking its nose in business which is none of its business, like mortgage lending, or picking green energy “winners”. — The capital markets ultimately pick winners (and losers) as they see fit, not the government, and do so much more efficiently and ethically. The F&F debacle proves that, if nothing else.