To America, with Shame: Fannie Mae, Freddie Mac and the free fall of the U.S. economy

By John Sakowicz

This is the fourth of a multipart series on the state of the economy and how we got here.

Let's talk about evil. The evil I'm talking about is not just the $29 billion taxpayer-funded bailout of Bear Stearns, about which I have previously written. It's not the billions of dollars that are now being lent from the Fed's "discount window" to Wall Street's broker-dealer community—those like Merrill Lynch, UBS, Morgan Stanley and Lehman Brothers—on a daily basis. It's not even such banks as Citigroup, Bank of America, Wachovia and IndyMac that lent recklessly during the subprime era and are also borrowing heavily just to keep afloat during the current credit crisis. And really, it's not the recent bailout of Fannie Mae and Freddie Mac that the U.S. Budget Office conservatively estimates will cost taxpayers $25 billion to $30 billion.

No, the evil I'm talking about is the evil that lies buried in one paragraph of the 694-page housing bill that was passed by Congress and signed by President Bush last week. It is the evil of a monstrous national debt, some $10.615 trillion, authorized in Section 3083 of that bill called "Increase in Statutory Limit on the Public Debt." The 10 zeroes found in $10.615 trillion represents an increase of $800 billion, and the first time the limit on the government's credit card has grown to 14 digits.

But the real evil—an evil that underlies even the evil of our national debt—is the attitude of the Bush administration illustrated in what Dick Cheney said to former secretary of the treasury Paul O'Neill during a Cabinet meeting on Jan. 19, 2004. "Deficits," he dismissed, "don't matter."

It is the evil of the fall of America, as we lose our leadership position in the global marketplace. It is the evil of the fall of a once great nation—under God, with liberty and justice for all—as the dollar collapses and our trading partners lose confidence in the United States to pay its bills and honor its agreements.

Hoping to stretch a safety net under hundreds of thousands of families losing their homes to foreclosure is not such a bad thing, right? Trying to limit the shock waves in credit markets as they ripple from the housing sector all across the American economy and the world financial system is not such a bad thing, right?

Well, the answer is yes. And no. As usual, it kind of depends on with whom you speak. During the week of July 28, I attended six D. C. press conferences as politicos rolled out their plans for the housing bill.

"The bill will make a big difference not only in the housing market, but also in the entire economy," said Sen. Harry Reid, Senate Majority Leader. The White House agreed in a rare show of bipartisan agreement. "It's good that the Democratic Congress has finally acted," said Tony Fratto, the deputy White House press secretary.

This is all true.

As many as 400,000 Americans families will be saved from foreclosure in the near future. Up to $300 billion will be available in refinanced mortgages to help borrowers at risk of losing their homes by trading in "unaffordable" mortgages for mortgages backed by the government. Also, there will be grants of $4 billion to local governments to buy and refurbish properties that have already been foreclosed upon, and in many cases, also abandoned.

There will be loan limits on reverse mortgages, popular with many senior citizens, and the maximum fees that lenders can charge seniors on these mortgages will also be reduced. First-time buyers who purchase homes from April 9, 2008, to July 1, 2009, will be eligible for a tax credit of $7,500. There will be new housing tax benefits for veterans, too. And of course, there are also tax breaks for homebuilders and other large corporations.

For all consumers—not just past homebuyers—there will be new laws requiring fuller disclosure and clear language used in variable-rate mortgage contracts. And there will be stricter broker oversight. New minimum standards will be set for licensing mortgage brokers and bank loan officers. And the Feds will authorize state and local housing agencies to issue up to $11 billion in tax-exempt bonds to refinance bad mortgages not eligible in any other program.

Almost unnoticed in the bill is a small provision for creating a permanent affordable housing trust fund, with the long-term goal of building more rental housing for people too poor to buy homes. (Why didn't anybody think of this first, before all the subprime borrowers were preyed upon and lent to?)

This all sounds good. So what's the problem?

Here's the problem. The housing bill just signed by the president is the latest in a series of extraordinary interventions by the Bush administration, Congress and the Federal Reserve to bail Wall Street out. And it gives broad—and unprecedented— authority to the Treasury Department.

On the surface, the bill looks good. It safeguards two mortgage finance giants, Fannie Mae and Freddie Mac, by presumably spending only a few billion to prevent the collapse of the two companies which own or guarantee half of the nation's $12 trillion in mortgages. Look more closely and you'll see two corporations controlled by Wall Street's robber barons, and used by them as their personal Speed Queen heavy-duty, industrial money-laundering machines.

Look even more closely and you'll see the little-noticed Section 3083. You see a national debt ceiling raised by $800 billion, because we are blackmailed into thinking our economy will collapse if we don't raise it. Imagine that $800 billion spent on our nation's schools, healthcare or decaying infrastructure. Imagine an $800 billion investment in alternative energy and our nation's energy independence.

Again, remember that this bailout insures up to $300 billion in refinanced mortgages. The remainder—$500 billion—could conceivably be spent on other bailouts that loom ahead.

Even Secretary of the Treasury Henry Paulson, the architect of the rescue plan, said he never expected to be given this much new authority. The only real limit on his spending is the new $10.615 trillion debt ceiling.

Critics in Congress who voted against the bill voiced concern that we were rewarding Wall Street's greed. They argued that we, as a nation, were rewarding predatory lending practices. They argued that we were rewarding massive fraud. They specifically argued that the housing bill bails out the banks and broker-dealers that are joined at the hip with Fannie Mae and Freddie Mac through the trillions and trillions of dollars of those bogus insurance policies against default called credit-default swaps.

Finally, critics in Congress were outraged we were rewarding lobbyists—lobbyists hired by the fat cat executives at Fannie Mae and Freddie Mac—at a cost to taxpayers of tens of millions of dollars. Yes, you, the taxpayer, paid for Fannie Mae and Freddie Mac's lobbyists for this bill. How's that for adding insult to injury!

"This bill has fallen prey to the special interests on Wall Street and K Street at unjustifiable expenses to taxpayers and homeowners on Main Street," said Sen. Charles Grassley, R-Iowa, who voted against the bill even though he had worked on many of its tax provisions in committee.

"The bill should have barred the mortgage companies from spending millions to lobby Congress to raise our national debt," said Sen. Jim DeMint, R-S.C.

A look at the history books shows that there is no precedent for this bailout. Not the 1989 response to the savings and loan crisis. Not even the creation of the Home Owners' Loan Corporation in 1933 that was part of the New Deal. There's also no precedent for this national debt. Yet no one seems worried.

During the week I spent in Washington reporting this story, I have concluded that we are a nation of disinterested and mostly happy bystanders. Polling data tells us this much: As long as our paychecks clear every two weeks, we are happy. As long as our beer is cold, we are happy. As long as we have a warm puppy to hold, we are happy. As long as we can fill up our Chevy Mastodons, we are happy. As long as we have HBO and Showtime, we are happy. As long as we are not foreclosed upon and homeless, we are happy.

A $10.615 trillion national debt is more than we want to think about. Fannie Mae and Freddie Mac are also more than we want to think about. We like to think of the United States as a participatory democracy It is—but only in theory. Participatory democracy is for the disgruntled and for kooks.

This is what we're not told: Fannie Mae and Freddie Mac are not essential to the mortgage market. If they were phased out over five or 10 years, the market would absorb the business they left behind. That's the way competitive markets work. Fannie and Freddie exist only to guarantee debt-backed securities, like CMOs, CDOs and SIVs.

These are securities that were underwritten by the robber barons of Wall Street and that were pushed by the new master race on Wall Street—the prime brokers working in the shadow banking system—and that are now held by chumps who were lied to: pension plans, insurance companies, mutual funds, hedge funds and other institutional holders.

Fannie and Freddie were only in the insurance business, a business now corrupted by credit-default swaps and other swaps and derivatives, things that didn't exist 10 years ago. So why bail out Fannie and Freddie? And why give them special advantages that suppress competition?

Because Fannie and Freddie spent more than $170 million for lobbyists in the last decade, more than what our No. 1 defense contractor, General Electric, spent.

Because senior executives at Fannie and Freddie get annual pay packages that they don't want to lose. In 2007, Freddie Mac paid chairman and CEO Richard Syron $19.8 million, even though the company's stock lost half its value. Meanwhile, at Fannie Mae, president and CEO Daniel Mudd got a 7 percent raise. Total compensation: $13.4 million, including a $5.4 million stock award. Again, the mortgage company lost billions during 2007.

Other government agencies can't hire lobbyists or award exorbitant CEO bonuses, so why Fannie and Freddie? Because Wall Street's balance sheets are too inextricably linked to Fannie and Freddie. As the stock prices of Fannie and Freddie go, so does much of Wall Street.

But mainly because other federal bailouts are looming on the horizon. William Poole of the Cato Institute, a chief executive at the Federal Reserve Bank of St. Louis from 1998 to 2008, said last week, "Congressional inaction and taxpayer indifference over the last 15 years has committed us to a generation of bailouts."

With a debt ceiling of $10.615 trillion, our children, and our children's children, will be paying the price. And this is evil. We have mortgaged their futures.

I am deeply ashamed of my generation's apathy and willful ignorance. Here and now, I apologize to my children and any future grandchildren for blowing it.

It's too late to get out of the bailout business. Too late. The stock and bond markets sank. Treasury securities sank. The dollar sank. The national economy sank. The world economy sank.

In my generation, everything sank.

We may be a nation of the stupidly happy, but at this time in our history I am reminded of Pablo Neruda's "Song of Despair": "You swallowed everything, like distance. / Like the sea, like time. In you, everything sank."

At the Group of Seven (G7) conference in Tokyo this year, Gilles Moec, chief economist for Bank America London, said it all. "The problems are going through financial markets in all parts of the world, right now. There's not much we can do about it—not the G7, not anybody. The danger is that a real depression will turn into a self-fulfilling prophecy."

http://www.bohemian.com/bohemian/08.06. ... -0832.html