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Posts Tagged ‘Freddie Mac’

It is like the Titanic hitting an iceberg as the passengers peacefully sleep in their staterooms.  Deep in the bowels of the “unsinkable” liner the crew desperately tries to shore up the cracked bulkheads; the pumps strain to empty the sea water that is pouring in, while, far above in the ballroom, the band plays on.  Last night, while most of us slept, a shudder went through our ship of state, largely unnoticed by most Americans and hardly reported on “America’s most trusted name in news”.  Instead it was the New York Times that broke the story, just about midnight Friday – long after the stock market had closed – and long before it will open again on Monday.  Fannie Mae and Freddie Mac, the banks that underpin the entire U.S. mortgage industry are, for all intents and purposes bankrupt.

Fannie and Freddie buy mortgages from banks that issue them and then they turn around and resell a lot of them to other banks worldwide. However, it’s not an entirely pass-through operation.  Fannie and Freddie also insure these mortgages so that if the purchasers of houses default on their mortgages Fannie and Freddie promise to reimburse the bank. The banks don’t lose, they can’t lose – Fannie and Freddie absorb the loss.  Fannie and Freddie are quasi-government banks, set up by the government to help make sure people can get mortgage loans from banks by taking the risk away from the banks.  It has always been an implicit understanding that the U.S. government stands behind Fannie and Freddie, and that the mighty U.S. Treasury itself, with its semi-infinite supply of money will make sure that these two banks always have enough money to bail out the banks.

Now, despite Fannie and Freddie’s economic bailing pumps running full speed, they can’t keep up with the rate of Americans defaulting on their mortgages, even those with prime mortgages!  Our ship has taken on a noticeable list, our economic engine has stopped churning the waves, and in the darkness of night the rich people on the upper deck are heading to the lifeboat stations.  Deep within the hull, out of sight of everyone, metal scrapes on metal, men scream and drown, trapped in a doomed ship with no way to escape.  Far above, champagne glasses clink and the band plays on.

The value of Fannie and Freddie stock will now drop on Monday to zero as the government steps in and takes direct control of these banks.  Fannie and Freddie stock investors have lost everything, but that is only a small concern for our Captains of Money. The really scary thing is this: there are a bunch of mortgage loans out there in the process of defaulting and no one knows exactly how much they are worth. It could be a 100 billion dollars worth, maybe more, but that is only the amount of loans currently in default. There will, undoubtedly, be more.

So how bad can it get? What is the worst case scenario? Are you sure you really want to know? OK…  Between the two of them Fannie and Freddie guarantee about $5,000,000,000,000 (five trillion dollars) in mortgages; this is an amount slightly larger than half of entire U.S. national debt.  With the takeover of Fannie and Freddie by the U.S. government, the U.S. government will now assume this liability. And guess who is on the hook to pay off these liabilities? YOU are, that’s right, the U.S. taxpayer!  Yes, my friend, you are the lucky winner today.  Care for some champagne up on the poop-deck?

See those rich folk clambering into their first class lifeboats, the ones who own the banks that own the mortages? You now owe them five trillion dollars.  A lot of them pay less income tax than you do – do you want to know why? Think about it – who do you think writes the tax laws? Heh heh…

Hold on – Hold on – Here’s some BREAKING NEWS –  BREAKING NEWS coming in from the McCain Palin camp! They have just announced a solution to our desperate, sinking, financial situation: They’re saying “DRILL NOW!”  Yes, that’s it!  It has become a chant, taking on a life of its own.  They’re shouting now, “DRILL BABY DRILL! … WE ARE ALL GEORGIANS!!! …FIGHT WITH US!!!  ….STAND UP!!! ….STAND UP!!!”

The Champions of the Rich Folkare waving gaily at us now as they board their lifeboat, semi-hidden by showers of confetti and balloons.  Half the poor, misled, people on our ship are wildly cheering them, believing in their hearts that the solution to the gargantuan gash in our financial hull is cheaper gasoline and standing up to the Russians.

As our the stern of our ship rises up and out of the cold waves, it’s comforting to know that the U.S. banks, indeed investment banks worldwide, won’t lose a dime, even as we U.S. taxpayers drown in debt. The rich folk are in their lifeboats, the financial institutions of the world remain strong, taxes for the rich remain low or non-existent, and the poor and the very poor are huddled in steerage. All is well with the world as our ship begins its final plunge, but from somewhere deep within the recesses of the cold steel hull a redneck chant is rising and growing stronger, even as we slip beneath the waves…DRILL NOW…DRILL NOW…DRILL NOW….DRILL………..

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