By Mike Colpitts
As 2010 gets underway the sort of money that it will take the U.S. economy to get back on track is beginning to dawn on people. The $1.8-trillion commitment the Treasury Department is making to buy up securities and bonds from Fannie Mae and Freddie Mac is a bail-out of record proportions.
Treasury’s commitment is the largest bail-out of any institutions tax payers have had to endure in the current financial crisis. The two Government Sponsored Enterprises (GSEs) are the biggest insurers of mortgages, insuring about 75% of all loans underwritten these days, and their very existence assures the U.S. of a mortgage market.
But the growing and over-riding concern is a lingering question of mammoth consideration – Will the U.S.A. go broke over the housing bust?
When the federal government took over management of Fannie and Freddie it got stock in exchange for investing tax payers’ money. The two have remained on life-support ever since racking up record losses as a result of foreclosures. The financial commitment provides a limitless supply of money to the two government run entities for four to five more years. The two companies are still running as public corporations with their stock listed on the New York Stock Exchange.
For decades banking was a conservative, secure business, but the real estate bust has transformed the industry. Today distrust has reached such high levels that 1 out of 4 Americans don’t use banks, according to several surveys. Neither Fannie nor Freddie has been able to pay back the money they borrowed from the government. American International Group (AIG) and GMAC find themselves in similar positions, and are likely to need more capital infusions as they become long term wards of the government.
Generation old thinking would have you believe the four would like to be free of government assistance after racking up record profits in the real estate boom writing mortgage guarantees that were sold to investors, who own mortgage securities.
But the banking industry has undergone changes of mammoth proportions. At no other time would it make sense for the government to bail-out Fannie and Freddie, but as bankers took unprecedented risks it became apparent that the government would be the last resort for securing the nation’s mortgage lending market.
Critics say the two should be nationalized as lenders of last resort, while bankers are concerned about their own futures. More banks are going bust and being taken over by the FDIC weekly. Banking industry lobbyists spent money on lavish gifts and made sweet-heart loans to members of Congress, providing more than $255-million in campaign contributions to Congress during the boom.
As Housing Predictor forecasted, this bail-out will cost trillions and take a number of years to unwind the real estate crisis as more homeowners lose homes to foreclosure. The surge of foreclosures in the New Year is forecast to top previous records. However, Treasury’s capital commitments don’t cover the full extent of government’s financial assistance to Fannie, Freddie, AIG or GMAC. The Treasury and the Fed are on a mortgage buying binge of securities, and the Federal Reserve Board of New York made an emergency loan to the companies.
On paper the bail-out may sound like the right move in these uncertain economic times for the nation. However, there’s one big problem with the capital commitments made by the Treasury to bail-out Fannie and Freddie. America doesn’t have the money, and it would have to be borrowed to pay off the securities.
At best these days Fannie and Freddie are on a debt merry-go-round. They are drawing new funds from the government to pay-off securities just to keep running around in circles. Tighter mortgage lending guidelines may eventually help heal the system, but just how much will it really cost?
Will the funds come from China? — Perhaps Brazil or other allies? And what will all this micro-financial manipulation do to the economy and the U.S. dollar? If history is the best teacher one has to be concerned about the possibility of America going broke. Other nations have met similar fates.
Historians believe there is a long list of causes for the fall of the Roman Empire. Political corruption, economic problems and leaders that were more interested in their personal wealth and power than the welfare of the masses led to the downfall of the Roman Empire, which is similar to trends America has seen in its own government in recent years.