Friday, August 7, 2009

Clownshoes

Ilargi: I've been thinking a lot about Fannie and Freddie, and I haven't figured out what is going to happen, or how. Whatever it is, it will be shocking, there’s no escaping that.
A bad bank "solution" for Fannie and Freddie is what I see contemplated. With half of the $12 trillion US mortgage market soundly underwater by 2011, and 9 out of 10 Alt-A's and OptionARM’s in that sort of trouble, I am trying to wrap my mind around the sort of bad bank that will have to be, and what it will mean for the people in the street. And I'm sure the loans are not the worst kind of paper in the books, it's got to be the securities. China owns so much of that, it's scary, and that's reason enough to transfer the losses to unsuspecting Americans. And just take a look at this:

In 1999, when [Larry Summers] was Treasury Secretary, he warned lawmakers that Fannie Mae and Freddie Mac had grown so large that if they stumbled, the damage to the U.S. economy could be staggering.

Ten years ago, before the start of the housing bubble that would never have existed if Fannie and Freddie hadn't been there to facilitate it by buying up all the loans from the big lenders, Larry Summers of all people predicted they could bring the entire house down then. So this line should hold no surprises:

The revamping of the firms was almost included in the administration's June white paper that proposed an overhaul to the federal regulation of the financial system. But after determining that they had to craft a careful exit of the government's aid for those companies, Summers and Geithner decided to put the issue off.

A bad bank would serve to:

Absorb the losses the Chinese et al will suffer when half of the US will be underwater

Absorb the losses of the lenders who originated the loans and traded the securities

Allow the game to continue and/or start afresh

Fannie and Freddie have $5-6 trillion in loans on their books. If half go toxic, that's a $2-3 trillion loss right there. Securities written on the loans have undoubtedly been hugely leveraged, and moreover the losses on them are incurred much faster, so we could be easily be looking at $20-30 trillion that is being considered for a transfer to the books of the nation's people.

It’s no wonder that there are such desperate attempts ongoing to make you believe we’re climbing out of the hole. The boys have seen how deep the hole is, and they don't want you to get a look at it. At least, not until all you have left is their losses.

It's nice and all to find out the the Fed is buying more and more Treasuries, in order to keep up appearances of actual sales. But what else did you think would be happening in the face of sales four times bigger than ever before?

I say, watch the Fannie and Freddie drama unfold. If real estate prices in 2011 are where Deutsche Bank yesterday said they will be, the amount of taxpayer money involved and consequently lost in the insane game of having the taxpayer prop up home prices, will be, to use Summers' word, staggering. Just with an extra 10 years of stagger added. When Summers issued his warning, the market was maybe $5-6 trillion. It's $12 trillion today.

If you want to be politically involved in America, here's what I suggest. Contact your representative(s), and demand they publicly reveal the total dollar amount in securities and, more broadly, derivatives, that are outstanding anywhere in the vicinity of Fannie and Freddie. Here's betting that you won't get nowhere. Nobody wants to be seen touching those kinds of amounts. That's no way to build a political career. They'd much rather see them quietly transferred to your accounts and keep their seats. But give it go: forget about auditing the Fed, it's waste of time, there's no authority for that. Push for an audit of Fannie and Freddie instead.

This is not about real estate, it's not even about the economy. It's about politics.

http://theautomaticearth.blogspot.com/2 ... shoes.html