Second Anniversary: Fannie & Freddie Government Protection Program

It's hard to believe, given the incompatible realities of the anemic economy and the stalwart insistence of the Federal Reserve, Treasury Department and Andrew Ross Sorkin that things would have been so much worse without the bailout, that it was exactly two years ago that the government first moved to subsidize the ailing government sponsored entities (GSE's), Fannie Mae and Freddie Mac, whose stock prices now hover at around 30 cents. 

Yet, today marks the second anniversary of that first step in what became a multi-trillion dollar bailout and subsidization of the entire financial sector. On Sunday, September 7, 2008, the government announced it would buy $200 in preferred stock in Fannie and Freddie (their stock prices subsequently plunged as trading opened on September 8, 2008), followed by another $200 billion round of purchasing in February, 2009. As a quiet Christmas Present last year, Treasury Secretary, Tim Geithner, raised the cap on how much stock the government could purchase to keep the entities afloat - from $200 billion a pop, to - ready for it? - an unlimited amount.

In the past two years, the Treasury Department has explicitly purchased $220 billion of mortgage-backed securities (MBS). It has increased guarantees for the Government National Mortgage Association (GNMA) to $398.4 billion and for the Federal Housing Authority to $365.9 billion. The Fed has bought another $1.4 trillion of GSE mortgage backed securities. And, according to the July Sigtarp report, the government is providing an implicit guarantee of $5.5 trillion for Fannie/Freddie and $1.3 trillion for the Federal Home Loan Bank (FHLB).

Considering that the balance of sub-prime loans at these agencies was only about half a trillion dollars worth, it would seem that this method of excessive, strategy-devoid subsidizing remains - well - haphazard, expensive, and reckless. Far more efficient and economical would be extracting the non-performing loans from their securitized container and forcing their restructuring to benefit the borrower and thus, the related security in which that loan lives, rather than throwing a whole pile of money at the general entity without pinpointing and separating of the worst loans, and thus, providing a more cost-effective remedy to the problem.

Since almost everyone's mortgage lives somewhere within the GSE framework, it's in all of our best-interests to find a solution. This kind of bottom up approach to bailing out and subsidizing has always made more financial sense - to me, anyway. 

No Jobs = No Recovery

The Department of Labor released its weekly initial jobless claims today. They weren't good - at 484,000 people, the highest level in 6 months they were up by 2000 people since last week, and 14,250 since the prior week. The department also revised its previous claims estimates upwards. The trend and the reality continue to be unfortunately, dismal. We are still losing jobs.

And yet, news outlets continue to report this negative information as merely some kind of unanticipated interruption in the economic recovery we're all supposed to be enjoying (according to Tim Geithner, Ben Bernanke and the rest of Washington, anyway). This morning's interpretations of the claims?  They were higher than analysts' expectations.'  I continue to be amazed, not that economists keep getting it wrong, but that the media hasn't figured out that they are consistently overestimating the 'recovery' and underestimating the true deterioration in the economic condition of the country.

Ten Reasons the Goldman Settlement Hurts Us

I did a segment about this on Dylan Ratigan's show earlier today: 

1) The fine of $550 million is a drop in the bucket for Goldman. It's about 4% of the $12.9 billion it received from the Federal Government through AIG. (which is only part of the largesse the firm enjoyed courtesy of our government (see my bailout reports.)) It's equivalent to less than $1500 of an average person's salary.

2) Contrary to popular media stories, $550 million is NOT the largest settlement for a Wall Street securities firm we are expected to believe it is, the $650 million settlement with Drexel Burnham Lambert in 1988 was (not to mention the $600 million settlement with Michael Milken bringing that tally to $1.2 billion.) 

3) The settlement went along party lines. It was the two Republicans who voted against settling - probably because it involved money, but it's nicer to think it's because it involved no confirming or denying any wrongdoing, and the shutting down of future potential investigations and charges. The Democrats voted for it because they thought it was actually meaningful, or wanting to convey that it was. Not sure which is worse.

4) Mary Shapiro, the Obama SEC head appointee who agreed to a mere $33 million dollar fine on Bank of America's behavior when Ben Bernanke and Hank Paulson pushed its merger with Merill, that was subsequently overturned in courts because it was ridiculous, cast the deciding vote. Way to go, Mary.

5) It took just half an hour to gain approval - that's a fraction of the time it would take to reach a settlement for a marijuana case. All that shows is how absolutely, disgustingly biased against people our justice system is. 

6) The settlement closes the possibility of further investigations into any of Goldman's other deals. It closes the possibility of further investigations into similar deals at other firms that participated in the toxic asset shuffle.

7) It validates Tim Geithner's saving of AIG with its backdoor benefit to Goldman and others. (Because of the above, the CDO business remains impervious to investigation or change. If Goldman had been found to have made more than  'a mistake', we might have circled back to the relationship between AIG and Goldman, or AIG and other firms, regarding CDOs, which might have made Tefflon Timmy look bad. 

8) It validates the closing of the investigation of AIG by the Department of Justice and the SEC two months ago, showing that not only do we have weak regulators, we have a misguided justice department.

9) The timing coming so close after the announcement of the Senate's approval of the so-called sweeping financial reform package was meant by the SEC (and Obama administration) to show its power and effectiveness, but instead, it showed its complete capitulation to Wall Street. Along with the toothless reform package, the settlement solidifies the status quo on Wall Street.

10) It confirms the fact that our regulators have no interest in examining the types of deals that were central to the financial markets and credit meltdown, anymore.