August 14, 2008
Doug McIntosh
NOTE: This is an essay I wrote back in December of 2004. It is not included in my other essays over at www.gold-eagle.com. Further, given the fact the FEDERALES have just nationalized the home mortgage industry, it rates a second look. It will help explain just why they did this.
Since I wrote this Mr. Raines has resigned and is facing a criminal investigation into his tenure. He is also receiving $100,000 a month in retirement benefits. Who says crime doesn't pay? (Mr. Raines is not only still out of jail, but his corrupt tenure received NO media coverage at all.)
THE PERILS OF FANNIE MAE
Fannie Mae is in distress again. Like the movie serial "Perils of Pauline", Fannie just seems to end up lurching from one life threatening crisis to another. Fannie belongs to that disreputable class called a GSE, government sponsored entity; is neither government or private. In effect, Fannie doesn't know who or what she is. Fannie is an orphan. Orphan Fannie comes to mind, turned loose upon the cold, cruel streets of mortgage lending. Sad to say, Fannie has fallen in with a very bad gang, the endless debt gang, and is being held for ransom. Unless the US taxpayer comes up with hundreds of billions of dollars, poor Fannie will meet a grisly fate. Turned into a Janet Jackson wannabe singing in a Bangkok brothel or something like that. (Remember, my comments about the US taxpayer being stuck for hundreds of billions of dollars was written nearly 4 years ago.)
The reason Fannie Mae has come to such distress is simple. She couldn't say no to any smooth talking mortgage banker she met. All they had to do was say the words, "low risk"; "guaranteed profits"- she was hooked. the private part says Fannie must make a profit. the public part means she is an economic bimbo. The results are predictable. This is the second or third time I have written about Fannie and her problems. In fact, I may very well have been one of the first people to actually comprehend exactly what the Perils of Fannie Mae mean for the US economy. Granted, Fannie is not well known. Granted, she has powerful political protection at the highest levels of our corrupt and brazenly incompetent government. Still, you would think Mr. Magoo(Alan GreenSpan), or the downstream press, or somebody besides me would comprehend the danger Fannie Mae poses to the rest of us peons.
Ah, you say: "What danger is that." Still another doom and gloom tirade from Doomer Doug? Life goes on and Fannie Mae is a small fly in the economic ointment. Oh really? Well here is the story behind Fannie Mae and why it will directly impact the real estate market in general, home ownership in particular and the US taxpayer. Fannie is what is called a Government Sponsored Entity; by that, I mean you should focus on the government sponsored part. Remember what happened with the savings and loans and the federal government guarantee for their deposits? Yes, you are smelling something here and it isn't a rat. Rat droppings to be more precise, in the form of Fannie and her real estate impact. It seems Fannie is now directly impacting Wall Street with its stock price going down. the Fannie's Fanny, I rather like that turn of words, is hanging in the economic wind so to speak is also easy to explain.
Fannie has acheived a string of economic firsts of dubious distinction. You could say Fannie has taken incompetence and corruption to new heights, or plumbed the depths of arrogance and stupidity with a toilet plunger. Whatever else you can say about Fannie, she has proven the thesis that stupidity and energy are a lethal combination. It seems Fannie Mae felt compelled to conquer the mortgage banking world. It seems Fannie felt she had a mandate, a government sponsored mandate to house the USA. It seems Fannie was inspired, she was driven and she was on a mission to raise home ownership rates for political reasons. Fannie Mae would be better off in a rocking chair staring off into space and dreaming of what could have been, if only she hadn't been made to use "generally accepted accounting practices." Like Leona Helmsly of yesteryear, for Fannie Mae, GAAP were for other people to worry about.
Fannie Mae has missed its third quarter earnings report because its outside auditor, KPMG refused to endorse it. While it is not unknown for an outside auditor to do this, it is very rare and always indicates a severe problem in the company involved. Fannie Mae stated its accounting has been under investigation by the Securities and Exchange Commission. Fannie went on to say if the SEC finds it improperly accounted for derivatives used in hedging against rising interest rates, it would show a 9 billion dollar loss for the quarter. Presumably not on drugs or anything, Fannie Mae then contritely admitted some of its accounting practices aren't GAAP. The article goes on to say Fannie Mae has been cited by the Office of Federal Housing Oversight for serious accounting problems and earnings manipulation. Fannie Mae, and its smaller evil sister Freddie Mac, are in serious trouble.
What does this matter you ask? Who cares what a bunch of government clowns turned business CEO and selling stock on Wall Street do? I'm glad you asked that question. I always enjoy explaining this kind of thing. Really I do.
Fannie Mae is a GSE as I mentioned. What you may or may not know is this particular GSE is the second largest financial institution in the United States. The first is CitiGroup. It is true CitiGroup is under investigation by the Justice Department. What that means is the largest financial institution in the US is under investigation for corruption and now the second largest one is too. Further, the second largest one, Fannie Mae, is a cousin to the US government itself. Bad blood and all that. When people tell me I am too negative on economic issues, all I can do is point out just how corrupt the US is today. I don't care if you like me, or whatever. It is a fact the two largest financial institutions in the United States are corrupt, are under investigation and by commonly accepted accounting principles, run by criminals. Really, I don't make this stuff up; in fact, I couldn't make this stuff up.
I usually like to wait for the end of the essay to move in for the kill. I will now do so.
Fannie Mae issues one in five home mortgages in the United States of America. You read that right: 20% of the entire home mortgage industry is directly tied to Fannie Mae. 20%. What Fannie Mae and Freddie Mac do is dump money into the real estate market, finance real estate speculation to be truthful, by buying and guaranteeing repayment of $600 Billion for Fannie Mae alone in home loans from banks and other lenders. Fannie and Freddie then "bundle" them into securities which are resold to investors. Fannie and Freddie have both stock and debt held all over the globe.
How should I put this without launching a torrent of e-mails howling about "is my home mortgage in danger"? Well, the numbers tell me 66% of the American people own homes. How many home mortgages that includes I have no idea. Exactly how many tens of millions of American citizens have Fannie Mae mortgages I won't make a guess about. We are talking about the second largest financial institution in the USA. And institution which has 20% of the entire home mortgage market, has a global impact and is in deep, deep trouble. Of course, the downstream media tells you not to worry. Just like they said when I wrote my first essay all those months ago. You see, I may be a doomer, but damn, I at least understand what is important in the economy. Now what can the downstream press say now? Can they admit the chaos at Fannie Mae and not cause a global meltdown? I think not. I think they will continue to put up a smoke screen and hope for the best.
I will tell you plainly. A Fannie Mae meltdown is beyond the capacity of the US financial system to deal with. Way beyond it. I have no idea of what Mr. Magoo will do. None at all. I do think the USA is running trade deficits, budget deficits, pension deficits and now Fannie Mae is in trouble. Exactly, I ask you, how much can the global financial system take? I have no idea. What I can do at least is let you know what is coming down the pike. Keep your eyes on Fannie Mae. Find out if your 401K, or pension plan or whoever owns the stock. If so, dump it instantly, as in yesterday. Find out who actually owns your home mortgage. Find out what happens, if you have an adjustable rate one, when the interest rate goes up. Mr. Magoo is going to raise them soon. this will have a devastating impact on both the bond and real estate markets. Be warned. Be ready.
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Additional comments 8-13-2008
A few days ago the political friends in high places I mentioned, Senator Chris Dodd and House rep Barney Franks, came through for the corrupt financial industry and the foreign holders of these "bundles." I called it correctly. I called it before anyone was even aware of Fannie Mae, over 3 and one half years ago. So, the crisis with Fannie is not over. The corrupt bankers and their political hack supporters have passed the buck to the American taxpayer. Talk about the straw that broke the camel's back. In another essay, a future one, I will deal with how I see Fannie Mae fitting into a general American economic collapse. I just wanted to put this essay out there so you had some idea of why the two hacks, Chris and Barney, just nationalized the American home mortgage industry. He who tries to protect everything, protects nothing. I will say yet again: the American financial system cannot, absolutely cannot, deal with the meltdown of Fannie and Freddie. This "rescue package" is political theater; a distraction to avoid foreign retribution.