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The Two Biggest Pawns in Obama’s “Hide-the-Deficit” Game

14 | By Shah Gilani

You remember Fannie Mae and Freddie Mac don’t you?

They are the two infamous Government-Sponsored Enterprises (that’s mumbo-jumbo for private corporations that have the backing of taxpayers to bail them out when their greedy managers leverage them up like balloons to generate mega bonuses for themselves) that guarantee mortgages.

They guarantee mortgages so those debt obligations can be easily packaged into mortgage-backed securities and sold to investors who want the highest yield possible with the guarantee (wink, wink) that the U.S. government won’t let them default.

Well, those investors were right.

Back in September 2008, before the credit crisis hit a crescendo, when people were defaulting left and right on their mortgage payment, and the guarantees that Freddie and Fannie issued started kicking in, the twin towers of government-sponsored greed imploded, spectacularly.

They deserved everything that hit them – after all, Freddie and Fannie had leveraged themselves up by buying over a trillion dollars of the same crap they were guaranteeing – for the yield and safety, of course.

And yet, Uncle Sam (that’s us, the taxpayers) came to the rescue.

The government put the two into a “conservatorship.” That’s a legal status (make that concept) that lets someone (or an entity) take over control of the corporations, the way a guardian might be appointed by a judge to take over the affairs of a mental person.

For all intents and purposes, this conservatorship was a de facto “nationalization.” But of course we’re a democracy and couldn’t possibly call it that.

Over time, the government – as in the Treasury Department, as in you and I – lent the dynamic duo $190 billion to not sink into the sinkhole they created.

Okay, fast forward to today.  Here’s where the story gets twice as ugly.

In fact, the latest news about Fannie Mae and Freddie Mac might even make you pop a jugular.

The Towering Infernos Burn Again

Yes, the towering infernos cooled off thanks to the bailout. But as soon as the housing market stabilized, they got really hot again.

Meaning they are making money. A lot of money.

In just the third quarter of 2013, the latest data available, Fannie Mae had net income (otherwise considered profit) of $8.7 billion and Freddie Mac had net income of $30.5 billion.

Over the past two years, the dashing duo bounced back enough to pay the Treasury Department about $190 billion in “dividends.”

That’s right, F&F have paid back what was needed to bail them out. They have to pay dividends because they are slaves of the Treasury. They still owe the $190 billion in principal, by the way.

And here’s where it all gets interesting…

Where’s that money going, going, gone? I did say to the Treasury, didn’t I?

To the Treasury it goes – to reduce the deficit, of course.

So, the snakes in Congress are hiding their profligate ways and the Obamarama administration is saying, “Look how we’ve reduced the deficit!”

Don’t you just love nationalization!

They should have nationalized, I mean put into conservatorship, all the Too Big To Fail (TBTF) banks that were insolvent and got bailed out.

As profitable as they all are now, the deficit would be a couple hundred billion dollars less.

But they didn’t because we’re a capitalist democracy, don’t you know.

Oh well, at least this socialist government and our Congress of mostly (but not all) liars, pimps, and panderers is having their regulators and the Justice Department (love you, Eric Holder… NOT!) extract mega settlements and fines from the TBTF banks for not being criminals (heavens, no) but being miscreants. And now we know that most of that money goes to the Treasury… to offset the deficit.

Of course this brings up a lot of issues.

Like what will happen to the reforms Congress is contemplating, as in reforming the two monsters into real private companies?

And what will happen if the two cash ATMs are protected for their deficit-reducing prowess and get into trouble again?

Think about this: Of all the money the two government-slave-entities made in 2013, $75 billion resulted from tax-deferred assets, or one-time tax reversals. $11 billion came from canceling out loan loss reserves. $10 billion came from one-time settlements with the TBTF banks they strong armed. And 60% of the remaining income in 2013 came from their retained investment portfolios, portfolios they are supposed to be reducing by 15% every year.

The bottom-line: Fannie and Freddie are pawns in our government’s “Hide- The-Deficit” game.

The money they made isn’t going to keep rolling off their profit presses. But as long as it keeps coming, they will be protected as productive slaves.

And when all the juice has been squeezed from them and they are emaciated, which will be right about the time the housing market falters and the country slips into the next recession, it will be too late to release them from bondage.

And we the taxpayers will have to come in again.

Same as it ever was…

Shah

14 Responses to The Two Biggest Pawns in Obama’s “Hide-the-Deficit” Game

  1. Sean Cota says:

    Shaw,

    The Fed has had to push the printed money where ever it can. I agree with all your analysis on this.

    At this point, if we are going to print money, we need to get it to Main Street where all the job creation is done. I think what we need at this point is a change in the SBA lending structure so that community banks don’t do the underwriting and get then penalized by the FDIC or the OCC. Then securitize the debt via the Fed and someone like F&F.

    Even if they go bad, you will get real jobs, new businesses, new markets, new taxes, and M&A opportunities.

    We can only grow our way out of this problem, or it will all go very badly. Main Street is the best option.

    Keep up the good fight.

    -Sean Cota

  2. Stanley Sherman says:

    Exceptional piece of investigative work/explanation but what can WE do about it when very few people have the inclination to even understand the details or want to bother to learn economic cause and effect.

  3. kevin says:

    How can it be ,that what we see, is not what’s really there.?
    And money moves from place to place, as though we did not care.
    Transparency is what we seek, and seeking never find
    Because it is invisible just like a state of mind
    It comes and goes, it ebbs and flows and shows up now and then
    Magicians of Finance, we know, are at it once again!

  4. Paul says:

    What you forgot is that Reagan started it all. He never once proposed a balanced budget to congress and said deficits don’t matter. Clinton balanced the budget and if Bush had stayed the course we would have no debt by now. But no Bush gave big tax breaks and started two wars, off budget, managed by Wolfowitz and Chaney against the advice of Sheseki. Smart!!! Then G. W. Bush said, quoting Reagan, that deficites don’t matter. Also where were the WMDs when the UN team on the ground could’t find them? Also Scott Ritter, US Marine, couldn’t find WMDs either. So now blame it all Obama!

  5. H. Craig Bradley says:

    THE SHAM IS HIDING THE HAM

    You have made many assumptions in your narrative about how the Government is milking Freddie Mac and Fannie Mae to hide the true Federal deficit. This also must affect currency exchange rates, interest rates ( they are headed down now), all the derivative bets based upon them, and deficit levels. Another words the sham is hiding the ham. What happens when one variable at the base of the derivatives pyramid is removed or altered? Probably a big realignment of financial risk globally, as we are seeing presently, ergo VIX goes way up and the markets go into cardiac arrest.

    Truth is, we don’t know if the global financial system can handle a “next time”. It might as well be the “last time” for all I really know for sure. We could be 6 months away from a 1929 Stock Market Crash and not know it. In fact, you have previously stated we are in a “generational bull market” that still has lot of upside left. Probably true. Still, the next recession “probably” could make 2007-2009 look like a walk in the park. The fact is, nobody know for sure. We just hope the current arrangements continue for quite some time. I am not entirely comfortable with those assumptions, as things stand.

  6. G13Man says:

    rofl , yeah , we should have taken the banks to the Cypress solution ………………………………………………………………………………………….. and the Fed as well , since they took upon themselves to save their fellow rich acomplacies around the world at our [usa ] expense .

  7. Margo says:

    Just have a question? What would your plan be to really create a solution to correcting the issue with the banks and Fannie etc. The whole pie jobs markets, dismantling the old creating a new addressing the global issue since we are all tied to the same broken down horse. Just a question and thought. Regards Margo Robinson

  8. Myron Martin says:

    You are quite the cynic, and justifiably so. When will the beleagured taxpayer wake up to the fact that that members of Congress need to be elected who are previously experienced and successful businessmen rather than lawyers?

    We need people in Congress who understand economics and have built a business from the ground up. The disunited states need to be run like any profit making corporation, with its key management team compensated on the basis of actual performance on behalf of the shareholders (ordinary citizens) other wise they should all be fired.

    Nice to dream in technicolor, but unfortunately, unrealistic.

  9. Ian Lewthwaite says:

    It would be better to take the hit now, and to hell with Obama – the longer it goes on it will implode eventually not only affecting the USA , but all the remainder of the world and everywhere will be covered with the proverbial s***
    With nothing to loose/ payback /or receive interest on, the world will resort to force of arms against each other regardless of being just – as it will extinguish the last remaining bastion – HOPE

  10. Harry Williams says:

    This is in responce to the LIBERAL pin-head who went so far as to blame Reagan.And again someone who is as blind as they are stupid is saying that its all the fault of someone else besides the one causing the issue i.e.LIBERALISM AND THEIR MAIN RULE,”NEVER CONFESS LOOK FOR THE REPUBLICAN WHO WAS HERE BEFORE WE WERE AND BLAME THEM THE FOLKS ARE CLONES AND WILL BUY IT EVERY TIME”HEE”HEE”HEE”.There has never been a liberal who has done anything wrong in this nation.But here is an example of the Liberal way.
    There are 2 men looking at 5 years in prison for pushing over a rock. Bad men. Yet in LIBERAL CONTROLED SAN FRANSICO.
    3MEN 17 AND 18 year olds got a 14 year old girl so drunk she passed out then taped and took pics of eachother RAPING HER,THEN SENT THE MATERIAL TO ALL THEIR FRIENDS,the girl killed herself and the 3 men got 30 DAYS,SERVED ONLY ON WEEKEND’S SO IT DONT MESS UP THEIR WEEK,WHY? Because the mens families are wealthy and know the elite in LIBERAL SAN FRAN AND THE GIRLS FAMILY IS
    NOTHING,ERGO THE LIBERAL WAY,the truth dont mater its who you know and if you are a card carrier to their agenda. Justice for those who count and lie for or own.

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