marți, 15 iulie 2008

the wizard of Oz and the free lunch - part I

we're living interesting times aren't we? the mother of all capitalistic nations is struggling to save the "socialistic" Frankensteins called GSEs, the Freddie, Fannie and FHLBs that are walking financial zombies... or so it may seem.

now before going further, think about this, it's always easier to accept a sacrifice (or further sacrifices) when this is presented as the lesser of two evils.

let's have a closer look and start by reading the fine print of the menu:

"The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a government sponsored enterprise (GSE) of the United States federal government. It is a shareholder-owned corporation authorized to make loans and loan guarantees.

[...]

It is the leading market-maker in the U.S. secondary mortgage market, which helps to replenish the supply money for mortgages and enables money to be available for housing purchases. As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) own or guarantee about half of the U.S.'s $12 trillion mortgage market.

FNMA's primary method for making money is by charging a guarantee fee on loans that it has securitized into mortgage-backed security bonds. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk, that is, Fannie Mae's guarantee that the principal and interest on the underlying loan will be paid even if the borrower defaults.
"

so make no mistake, by enabling the repackaging and sale of mortgage loans, the GSEs were responsible for providing the money necessary to baloon this Ponzi scheme and inflate the real estate prices into the housing bubble.

all of that while retaining the default risk with an implied government backing, hence allowing the corporate beneficiaries to receive risk free funds to further skim for profit. of course officially the GSEs were helping joe 6 pack to buy the house of his dreams. it's just that in real life, as opposed to dreams, you eventually end up paying when you bite more than you can chew...

all is for the better in the best of the worlds except that there comes a time when things start to go wrong in the real estate business and now everybody in this market feels the brunt. but guess what, according to the officials, although having by far the largest exposure to subprime, both Fannie Mae and Freddie Mac are adequatly capitalized as of last week. could it be that the Wizard of Oz has many tricks in his sleeve and tries to pull a fast one on the populace?

of course, let's not forget that the wizard of Oz was just a poor trickster with a hot air baloon and that sometimes tricks won't make reality go away...

it's just that the week thereafter the previous conforting announcement, since investors were dropping shares like radioactive waste, the government needed to take urgent action to prop-up the empty shells of Fannie &Freddie, in order to prevent the brown smelly stuff from hitting the air venting machine...

so what's to be done? well let's open the king's coffers for the looting. yes you've heard the man, he really asked the Congress for unlimited authority to buy shares and lend to the GSEs.

need a spelling? it says unlimited authority to use the taxpayer's money to prop-up the GSEs gone insolvent because of profit skimming (through excess lending, asset bubble investment and overvaluation of assets), by the corporations that participated in the great Ponzi scheme.

of course, dear citizens, rest assured this is measure is "aimed at supporting the stability of financial markets, not just these two companies.'' and undoubtedly "would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the companies". I thought so...

so now you know how the wizard of Oz got his free lunch...the taxpayer paid for it.

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