Thursday, August 06, 2009

Plan to Feed Freddie and Fannie's Toxic Assests to Taypayers

The government of the United States appears to have been completely captured by large financial interests like Goldman Sachs, J.P. Morgan, and even foreign banks. It is bad enough that the TARP has exploded into a 23 Trillion dollar program. A program whereby these interests can take all of their junk "assets" to the Fed and get "loans" backed by our Treasury for the book value (that is what they say the asset is worth) of the asset. And the only recourse if the banks don't pay back the loans is that we get to keep the toxic asset.

Imagine a financial instrument that consists of the right to collect from a bundle of sub-prime mortgages. In theory, if almost all the loans were paying, it would bring in say, a million dollars a month and might have a present values of 100 million dollars. It goes on their books for $100 million. In actuality, only a few percent of the loans are performing, and the way the contracts are written it is not even clear if the holder of the instrument has a right to repo the homes. Goldman Sachs takes that dog to the Fed and gets a loan for the full book value of that asset. If things turn around and the value of that asset bounces back, they pay off the loan. If it doesn't, they let the Fed keep their toxic trash and the Fed is re-imbursed the difference from the TARP funds via a sub-program called TALF.

Once only a handful of traditional banks could take their assets to what is called the Fed's "discount window" and trade off their assets. The goal was to protect depositor's money when a bank had good assets that were just a little too ill-liquid. The Goldman-Sachs subsidiary known as the U.S. Government opened this process up to investment banks (where there were no depositors) like G-S. So these Wall Street high rollers get to take all of their losing bets to the discount window and trade them for book value, but when they make a winning bet they keep the money.

Does that sound like a system that encourages prudent financial behavior to you? I didn't think so either, but that is exactly what is going on and every congressman we've got voted for the bill that authorizes it. It is said that the last official act of any government is to loot the country. What do they know that we don't?

Well, now they are about to do it again. Fannie Mae and Freddie Mac got nationalized with bailout money to the tune of 1.5 Trillion dollars, but so great was the amount of toxic assets on their books that they are still going under. These were private companies where our government simply implied had our backing. Because of that, some of these same investment firms (including those HQed in other countries) bought piles and piles of stock in these two giants.

The U.S. taxpayers are now the biggest shareholder in these bankrupt dogs, but the bankers still have obscene amounts of money tied up in them. Since they own the government now, they apparently have ordered the government to come up with a new plan to build the value of their stock back up at taxpayer expense. President Obama is floating a new plan that uses the same principles of the TALF plan that I described earlier. To quote from the article,"the firms' bad debt would be given to new government financial institutions that would then be responsible for collecting on the debts."

Now when they say "given", they really mean "sold". And you can also assume that this bad debt would be "sold" at a higher price than the debt is actually worth, otherwise they could just sell the debt on the free market, they would not need to use the government to buy it. The foreign and commercial interests who own the rest of Freddie and Fannie would prefer that We the People get stuck with the toxic assets of these giant firms, and leave them with the good stuff. Good for the Wall St. high-rollers and foreign bankers who own the rest of the stock in Freddie and Fannie, bad for the American people.


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