92Pursuant to the collusion illustrated between the justice department and the Too- Big-To-Fail (TBTF) banks, there has been an elaborate relationship between the Department of Treasury (staffed primarily by former Bankers, including Secretary Lew, who receives a stipend of 1 million dollars per year from CITI while he participates in “high-level public service”) and the TBTF banks to quietly kill the Government sponsored entities (GSE’s) Fannie Mae and Freddie Mac. As you likely know, Fannie Mae and Freddie Mac provide the government sponsored insurance that makes the 30 year mortgage affordable for middle income Americans to access the housing market and begin to aggregate wealth (Fannie Mae was a New Deal program created to ensure stability in the housing market and be a stop gap for the very type of crisis that occurred in 2008).
In 2008, then Treasury Secretary Hank Paulson (former CEO of Goldman Sacs) used the power of his office and the engulfing fear of the burgeoning fiscal meltdown to “takeover” the GSE’s against their consent (ie. They did not request a bailout and the bailout was not approved or even voted on by the boards of either company. Keep in mind that the GSE’s are owned by private shareholders who elect a board of directors). Paulsen than ordered the GSE’s to purchase billions of dollars in toxic assets from the TBTF banks at 100% face value, which was an additional bailout to the banks in addition to TARP funds. This was all possible because the Treasury directed the FHFA, which is the GSE’s government regulator, to change a major accounting rule, which overnight changed the balance sheet of the GSE’s from solvent to insolvent.
To purchase these loans, the GSE’s were forced to borrow billions of dollars from Treasury, and in exchange had to provide treasury warrants (free stock options) for 79% of the company. In addition, the GSE’s were ordered to pay 10% interest on the money they were forced to borrow from Treasury. All of this is public information, and Paulson gloated about this takeover in his autobiography. Responding to then President Bush , who asked how this was all being accomplished, Paulson stated “they won’t even hear their heads hit the floor” in reference to his attempted killing of the GSE’s.
Why would Paulson want to kill the GSE’s? Private Mortgage Backed Securities (PMBS). Prior to the collapse, TBTF banks had been venturing into the mortgage world with PMBS; basically low quality loans that the GSE’s wouldn’t purchase due to credit risk but that were very profitable to banks as long as the loans didn’t default. These are the loans you read about, the Alt-A and the Sub-prime no down payment interest only loans with huge ballooning adjustable rates. These loans were designed to keep people in their newly purchased homes (buying and selling a home creates a windfall of fee income for banks) for a 5-7 years, and then to hopefully and slowly allow for repossession and resale when the balloon adjustable rate kicked in and caused the home to be repossessed by the bank (stripping the owner of all interest and fees paid, equity gains, and the banks hoped to capture what they thought would be an ever increasing home value via repossession). Obviously this very profitable scheme went off the rails when mass foreclosure hit because to many TBTF banks got involved in the scam. As the financial crisis reached its peak, all PMBS left the market and the GSE’s were the only game in town (as they were intended to be. Fannie Mae was a New Deal program created to ensure stability in the housing market and be a stop gap for the very crisis that occurred in 2008).
As the only game in town for Americans seeking financing to purchase a home, the GSE’s, which were and are still under conservatorship of the Treasury via the FHFA, clawed their way back to profitability. By this time, President Bush was long gone and President Obama had diligently worked to steer the American Economy back onto the road. Unfortunately, President Obama’s treasury Secretary, Tim Geitner, was another Wall Street stooge and had convinced his boss that the GSE’s were a big part of the 2008 melt-down. Wall-Street hit-man Ed Demarco had been installed as the director of FHFA, the agency tasked with overseeing the conservatorship and regulation of the GSE’s.
Demarco and Geitner met during a series of meetings in late 2011 and early 2012 that have recently been discovered via FOIA’ing the Treasury secretary’s schedule. We now know that Geitner and Demarco were discussing a modification to the conservatorship agreement that controlled the GSE’s (that had never been agreed to by the GSE’s in the first place) and in early 2012 the FHFA, acting on behalf of the GSE’s as their conservator, decided that it would be in the best interest of the GSE’s to start paying the treasury 100% of their proceeds rather than the ten percent dividend. Previous to this, FHFA had been directing the GSE’s to borrow additional money from Treasury so as to pay the 10% dividend to Treasury (because you know, it’s only the worst downturn since the great depression and the GSE’s are flush with cash from all of the home sales they have been making….). Of course, all of the additional money the GSE’s were forced to borrow from Treasury were then subject to the 10% dividend.
Did I mention that the terms of the loan from Treasury stipulate that all money paid back to Treasury are interest and do not apply to the principal loan.
You read that right, the GSE’s have no mechanism to pay back the principal to Treasury.
Geitner, Demarco, Treasury, and the FHFA all state that they entered into the “net worth sweep” to save the GSE’s from having to become further indebted to Treasury and that all of their models showed the GSE’s not being profitable ever. Wouldn’t you be surprised to know that the GSE’s became wildly profitable just 2 months after the 100% net worth sweep was implemented.
President Obama may have come to his senses in 2013, and realized that Wall Street had basically talked him into doing away with the GSE’s. The administration changed course and Demarco was forced out as director of the FHFA. Using a controversial recess appointment, the administration installed former congressman Melvin Watt as the new director. Director Watt seems to be working behind the scenes to recapitalize and preserve the GSE’s, but he is facing stiff resistance from Wall Street interests.
As it stands, the GSE’s have paid back 218.7 billion against 189.4 billion “borrowed”, and the amount paid back will increase shortly at the close of the 2014 fourth quarter. The GSE’s continue to operate with zero cash reserve, a very dangerous play for 25% of the nation’s economy basically walking without any type of safety net.
If you ask Rep Ed. Royce (R- Califorina) of California, the GSE’s haven’t paid back “one damn cent”. If you ask Sen Charles Schumer (D- New York) the GSE’s have paid back treasury in full. Community bank organizations, credit unions, civil rights groups, and various others have been lobbying the Obama administration and Congress for GSE’ release.
TBTF mouthpieces like the Wall Street Journal and the American Enterprise Institute have continued to lobby for their elimination. 2015 looks like it will see a conclusion in one direction or the other; Rep Jeb Hensarling (R-Texas), who will be the chairman of the House financial services committee, recently asked the CBO to produce a report on what housing would look like if the GSE’s were no longer on the scene. The parameters of the scenario Hensarling asked the CBO to generate were designed to make it look like GSE’s elimination wouldn’t be a big deal and that PMBS would step in to replace the GSE’s with affordable home mortgages. Nothing is farther from the truth.
Additional Reading:
http://www.americanbanker.com/…
http://www.housingwire.com/…
http://www.insidesources.com/…
http://www.nationalmortgagenews.com/…
http://www.americanbanker.com/…
TBTF hit pieces:
http://www.wsj.com/…
http://www.aei.org/…
http://www.sifma.org/…
http://financialservices.house.gov/…
https://www.aei.org/…