To hear
the establishment media tell it, you would think that Attila the Hun was fixing
to sack the Imperial City. Would that Donald Trump were that bold or dangerous.
Then again, he is a showman of no mean talents. So if there is a maquette
of Fannie Mae’s planned new $770 million headquarters somewhere around
Washington DC, he could start the sacking right there. Hopefully, he
would not hesitate to shatter it with a fusillade of tweets—-or even take
a jackhammer to it while wearing a Trump hard hat.
Fannie Mae is surely a monument to crony capitalist corruption,
and living proof that massive state intervention in credit markets is a recipe
for disaster. But rather than shut it down after it helped bring the nation’s
financial system to the edge of ruin, the beltway pols have come up with an
altogether different idea.
To wit, they plan to move Fannie from her already
luxurious NW Washington headquarters to this hideous new glass
palace to be built in the heart of Washington DC. Could there be a bigger
insult to the 15 million families who lost their homes to foreclosure owing to
the crash of the giant housing bubble that Fannie Mae and the crony
capitalist crooks who ran it helped perpetuate?
And that’s to say nothing of the $180 billion of taxpayer money
that was pumped into Fannie Mae and the other GSE’s after the house of cards
came tumbling down in August 2008. In fact, while the politicians on
Capitol Hill have dawdled for eight years without any statutory changes or
mandates for even minor reforms, Fannie Mae’s management and its phalanx of
K-Street lobbies showed exactly who rules in the Imperial City.
It is the larcenous rule of
these syndicates of beltway racketeers, in fact, that has put Donald
Trump’s name on the Presidential ballot.
So let it be granted that his manners and policy knowledge
appear to be on the meager side. Yet it is malodorous tales like
that of Fannie Mae’s swank new palace which demonstrate why a
disrupter on horseback is exactly what the Imperial City deserves.
In truth, the government housing guarantee programs at Fannie
Mae and Freddie Mac have been an abomination from the very beginning.
Not only did they inappropriately subsidize home
mortgages by upwards of $60 billion annually—–most of which went to affluent
middle-class households not entitled to taxpayer help in the first place—-but
they were also based on the kind of Washington artifice upon which
today’s rampant crony capitalism thrives. Namely, the specious claim that
the GSEs are unique, creative “public-private partnerships”
that enable a “secondary market” for home mortgages, and thereby remedy
the alleged failure of the free market to provide cheap 30-year housing loans to
the public.
In fact, the so-called secondary market for mortgages was no
such thing. Freddie and Fannie have always been a de facto branch
office of the US Treasury and their securities have been just another
variant of treasury bonds. That finally became official when the U.S.
Treasury threw them a $180 billion lifeline on the eve of the financial crisis.
The reason that became necessary,
of course, is that the GSE’s had been minting fabulous book profits over
several decades by drastically under-reserving for losses,
confident that Uncle Sam would bail them out if a crisis ever came.
In fact, when the mortgage meltdown did come, Freddie and
Fannie had virtually no accumulated reserves and capital and would have
exposed investors to tens of billions of losses. Needless to say, the implicit
“call” on the US Treasury that had always been embedded in the below market
rates on Freddie/Fannie paper was instantly exercised by Wall Street’s
then plenipotentiary in Washington, former Goldman CEO and US
Treasury Secretary Hank Paulson.
To be sure, the proper course would have been to force
investors ranging from the sovereign wealth fund of China to Norwegian
fishing villages and Wall Street hedge funds to take their lumps for not
reading the indentures (which contained no legal US guarantee), and to
prosecute Freddie and Fannie and their executives for blatant and
monumental accounting fraud.
But the accounting fraud was never even acknowledged, let
alone prosecuted, owing to the beltway fiction that the GSE’s are
“off-budget” public-private partnerships.
This convenient scam was first invented by Lyndon Johnson to
magically shrink his “guns and butter” fiscal deficits. But since then it
has metastasized into a giant business fairy tale—namely, that behind the
imposing brick façade of Fannie Mae’s soon to be superseded headquarters,
as pictured below, there is a real company generating value-added services
that are the source of its reported profits.
In fact, there is nothing behind those walls except a stamping
machine that embosses the signature of the American taxpayer on every billion
dollar package of securitized mortgages it guarantees and on all the bonds it
issues to fund a giant portfolio of mortgages and securities from which it
strips the interest.
That’s
right. It is the unwitting taxpayers of America’s flyover zone who
underwrite Fannie’s balance sheet and enable the racketeers who run it
and fed off its massive money shuffling operations to live high on
the hog.
Here’s how the scam works. Fannie and Freddie typically
booked 90% gross profit margins owing to the fact that they have essentially no
cost of production beyond the trivial expenses of their automated
underwriting systems and highly computerized back-office operations. Their
real cost of goods would be the large accounting provisions for
future losses that would be required were they not wholly guaranteed by
the US Treasury.
Indeed, the pointlessness of their faux financial statements can
be easily demonstrated by the counterfactual. That is if we wanted to have
honest socialist mortgage finance, a handful of GS-14s could run Freddie
and Fannie out of the U.S. Treasury building.
Civil
servants could emboss the taxpayers’ guarantee on every family’s home mortgage
just as proficiently as the make-believe business executives who
populate Fannie Mae and the other GSEs today; and in the process we
could dispense with the sheer waste involved in applying GAAP accounting to the
operations of a mere government bureau.
I laid this out more fully
in The Great Deformation, yet the mythology
about Fannie and Freddie is virtually immune to these obvious
truths. Indeed, the beltway discourse has been so corrupted
that a whole new raid on the treasury has been launched by
speculators who bought up their worthless securities after the
2008 collapse and subsequent bailout. And now they are pounding the table
for a bailout of the remnants of the last bailout.
To its credit, the Obama administration had
previously recognized that absent Uncle Sam’s bailout of the roughly $6
trillion of Freddie/Fannie mortgage guarantees and debentures,
the junior equity securities in their capital structures (preferred
and common stock) would have been worthless.
In fact, at the time the GSEs were essentially nationalized
by the Bush Administration in September 2008, the thin layer of
equity represented by their shares had been leveraged
at approximately 100X, and would have been obliterated in a proper
bankruptcy.
Accordingly, the Obama folks had simply decided to
treat the remnants of Freddie/Fannie as a wholly owned
government investment fund and swept back to the US Treasury 100% of
the phony “book profits” posted each quarter.
What that amounted to, of course, was just an off-budget scam.
The US Treasury loaned its credit card to the GSEs and then booked the
resulting profits as income. Needless to say, it did not enter any
off-setting liability for the risk being incurred.
This maneuver has resulted in more than $200 billion of phony
deficit reduction since 2009, but something even worse. Namely, a huge lobbying
campaign by Wall Street speculators demanding an end to the Treasury profits
sweep so that they can capture an estimated $40 billion windfall gain on
the worthless stock they bought for pennies on the dollar.
This stinks to high heaven, but it did not slow
down the crony capitalist hucksters led by hedge fund
operatives Bruce Berkowitz and Bill Ackman one wit. During the
peak of their recent lobbying campaign, the even postured themselves as
the benefactor of America’s middle-class homeowners.
There is no viable alternative,” to
Fannie Mae and Freddie Mac, Ackman said today in a Bloomberg Television
interview with Stephanie Ruhle after the Sohn presentation. “Preserving the
30-year prepayable fixed-rate mortgage — it’s like the bedrock of the housing
system — is critical. We think the only way to do it is by preserving Fannie
and Freddie…… Ackman said mortgage rates would jump without the
government-sponsored enterprises.
Oh, puleeze!
If evidence was ever needed that massive statist
interventions like Washington’s subventions for homeownership end up generating
random income distributions and windfalls to the politically mobilized, the
recent hedge fund campaign to “rescue” Fannie and Freddie is surely
it.
In an alternative political universe not corrupted by crony
capitalist mythology about the elixir of homeownership, of course, there would
be no need for a Treasury Bureau of Home Mortgage Finance. The decision to own
or rent would be made by 115 million American households based on their best
lights, not the inducements and favors of the state.
Markets would clear the interest price of mortgage debt and set
credit terms and maturities consistent with the risks involved. Undoubtedly,
rates would be a few hundred basis points higher and 30-year fixed rates
mortgages quite rare.
And like in the seemingly prosperous precincts of Germany, the
home-ownership rate might be 55% or any other number not selected by pandering
politicians of the type who pinned the disastrous 70% ownership goal on
the wall during the Clinton-Bush era.
At the end of the day, having 40 million renter households and
25 million mortgage-free owner-households provide (in their capacity as
taxpayers) trillions of subsidized credit to upwards of 50 million
mortgage-encumbered households is absurd.
To be sure, this perverse arrangement could be
dismissed as just another expression of the capricious and random shuffling of
income among American citizens that is the tradecraft of the Washington puzzle
palace.
Unfortunately, as underscored by this latest attempted
hedge fund raid on the treasury, the reality is not so anodyne. In order
to hide this random redistribution mischief, what amounts
to the Treasury Bureau of Home Mortgage Finance has been gussied-up
to form the simulacrum of a profit-making enterprise.
In that posture, the GSEs have been repeatedly plundered by
insiders like Franklin Rains, the 90 million dollar man who drove Fannie off
the cliff; and by fast money stock speculators who managed to drive the
combined market cap of Freddie and Fannie to the lunatic level of $140 billion
during their heyday at the turn of the century; and by the Wall Street dealers
and so-called fund managers who inventoried trillions of GSE debt securities in
order to scalp profits from the economically pointless spread between regular
treasury bonds and the GSE variant of the same thing.
All of these hundreds of billions were pocketed by adept cronies
and speculators in the various debt, equity and preferred securities of the
GSEs during the decades culminating in the 2008 financial crisis. Given the
trauma of those events, Secretary Paulson’s desperate and ill-disguised
nationalization of Freddie and Fannie should have put an end to the plunder.
But it hasn’t because there is no end to the zero cost-of-goods
carry trades by which speculators scoop up and fund financial assets—busted and
not—during the Fed’s money printing marathons. That’s what has been happening
since the Fed went all-in on ZIRP and QE in 2009, and this play on the busted
securities of Fannie and Freddie is a perfect example.
Likewise, there is no end to crony capitalist marauders like
Berkowitz, who have the temerity to demand make-wholes from the state. Nor is
there any shortage of K-Street hirelings—lawyers, accountants, and
consultants— who are skilled at the manufacture of specious public policy
rationalizations for outright thievery.
So two years ago came
the patented crony capitalist rush. At the peak of the
speculation, the equity shares of Freddie and Fannie had risen from 10 cents to
$6, and the preferreds had erupted from $0.25 per share to $12, meaning
that some speculators had garnered paper returns of 45-60X.
And why did this revival miracle transpire?
Quite simply because Berkowitz’s Fairholme Capital and his posse
of punters—-John Paulson, Perry Capital, and Pershing Square, among others—have
taken turns bidding up the paper, and then laying the legal and political
groundwork for overturning the Obama Administrations correct decision to sweep
the profits.
Yes, they had a fig leaf of rationalization for their raid on
the treasury. Berkowitz and his sharpies blather that Freddie and Fannie have
now returned $230 billion to the US Treasury, thereby repaying the original
$180 billion drawdowns, with some change to spare.
But what hay wagon do they think even the clueless officialdom
of Washington rides upon?
Roughly $50 billion of that was
for writing up a “tax
asset” that had earlier been written down seven
years ago, owing to the fact that absent nationalization the GSEs had no
prospect of booking even accounting income in the future.
And the remaining $170 billion represents dividends paid to the
Treasury since 2009 based on using Uncle Sam’s credit card to issue the bonds
and guarantees which fund the assets from which these so-called GSE profits
and dividends are scalped.
Awhile back, a courageous US District judge threw a monkey
wrench into the works—at least on the judicial front. But the hedge funds
are not done, and will now surely revive a legislative drive to
accomplish their egregious plunder of America’s innocent and unaware taxpayers.
During the peak
of their campaign to fleece the nation’s taxpayers for the second time
around, the leader of the hedge fund gang, Bruce Berkowitz, appeared on CNBC
demanding that Washington exercises its “fiduciary
responsibility” to distribute billions in paper profits that have not been
earned and are not owed.
Indeed, so shameless are Wall
Street’s princes of plunder that Berkowitz told a skeptical CNBC questioner
that “we’ve helped before with AIG”, and that he now merely seeks a “win-win”
to “help with jobs, help with the economy, help with the dream of
homeownership”!
In short, the purportedly well-mannered and knowledgeable
politicians of the beltway have sat on their hands for eight years while Wall
Street bandits have been launching the blatant raid described above, and
while Fannie’s management has been fixing to build and occupy the glass
palace also shown above.
Hopefully, someone will sack the Imperial City, mannered or not.
