Fannie and Freddie impact will be global, systemic

Fulfilling my duties as a citizen, I am now confined to the Southwark Crown Court as a juror, so have little time to update the blog. However the effective insolvency of two US government sponsored banks or enterprises (GSEs) – Fannie Mae & Freddie Mac – will now impact not just all those US individuals, institutions and local governments that may have invested in these banks; not just on US taxpayers who are expected to bail them out; but also on you and I (our banks may well hold Fannie and Freddie securities); the central banks of the world that have bought their debt – confident that it will always be repaid.

Their insolvency now threatens a global systemic financial crisis, and their taxpayer-funded bailout of shareholders, bondholders and an incompetent management exposes the hypocrisy of much neo-liberal cant.

As Professor Nouriel Roubini argues:” Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.”

We know, because of Brad Setser’s sustained and diligent research, that the central bankers of Russia and China have exposed their taxpayers to losses at Fannie and Fred to the extent of about 10% of their countries respective GDPs. Those are huge potential losses……

Roubini has many excellent points to make on this massive crisis of insolvency:

“these were effectively public institutions – not private ones – used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.”

Could not have put it better myself.

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