Busted: Bankers and The Global Economy

September 6, 2008

Fannie & Freddie: It Was Going to Happen

the addiction of lady liberty

the addiction of lady liberty

After plenty of scuttlebutt and shuffling, the Treasury Department is close to finalizing plans to effectively take over beleaguered mortgage twins Fannie Mae and Freddie Mac. Both government-backed firms have lost 80 percent of their value.  When central bankers began to refuse investing in the twins, the writing on the wall became very clear. Central Bankers were not going to voluntary lose a penny. Confidence was down and out. Like most investors, they expect a solid investment. The original fantasy of the U.S. federal government and trust in their prowess was not going to do the trick. The imminent failure of the U.S. mortgage buyers, Fannie Mae and Freddic Mac, made them a very shaky bet indeed for investors that wanted a solid investment. What investor doesn’t want a solid investment? Point made.

Remembering the moral hazard that brought about the “major correction” of the U.S. mortgage industry and the failure of the entire banking and finance system as far as the world is concerned is important. Foreigners can easily see the folly after the fact and are going to limit how they buy into that folly. The nation of the United States is still trying to close its’ collective eyes in the hope that the reality of the disaster will go away. It’s too early for that now.

In mid-July, the Treasury Department and Federal Reserve announced their desire to make funds available to the Fannie and Freddie “if necessary.” Congress approved the proposals later that month. Fannie and Freddie have become the only source of funding for banks and other home lenders looking to make home loans even though many illegal home loans continue to be made by desperate bankers. Still, the ability of Fannie and Freddie to guarantee and finance is seen as crucial to the recovery of the battered home market and the broader U.S. economy. Otherwise, their is little hope of a nominal recovery by the admission of Feds.

The fact is that the nation and even the world has become addicted to securitized loans. Fannie and Freddie buy loans from banks and mortgage institutions and free them to seek more loans. The mortgage twins then attach a guarantee, selling securities backed by the loans’ income stream. The profits of compound interest in the industry just aren’t considered profitable enough. In the eyes of this writer, this behavior is little different than a dog going back to its’ vomit despite that pain and decline caused by the behavior: sharp decline in home prices and the rise in mortgage delinquencies and foreclosures. It is some of the most carnal and impulsive behavior seen to-date and a refusal to admit the reality of bad decisions and the very likelihood of more abuse. This is more than a financial issue. This is a character issue.

 ~ E. Manning


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