Pulling The Plug On Fannie Mae and Freddie Mac

Glug glug glug.... can you hear that? It's the sound of Fannie and Freddie's liquidity slowly going down the drain. And that's the sound we heard BEFORE the OFHEO. Now it's just one big FLUSH.

The OFHEO (Office of Federal Housing Enterprise and Oversight) announced this past week that they will be lifting the capital restrictions (in other words, the 30% extra capital reserve requirement) on both GSEs in an attempt to free up more credit so Fannie and Freddie can help "ease" the unstable housing situation. Funny. No, absolutely hysterical.

Let us summarize...

In 2004 (near the height of housing and mortgage hysteria in this country) the OFHEO instituted higher capital reserve requirements (Fannie and Freddie had to keep 30% more "cash on hand") because it was discovered that there were accounting irregularities on their books. Irregularities that allowed their executives to literally make millions of dollars of profits by overstating earnings to hit basic productivity goals, as we understand it.

Yes, you read that right. Fannie and Freddie were lying about their earnings. Anyone suprised? But wait...

Fast forward to 2008. The United States is in what will become the worst housing crisis of our history and quite possibly the worst recession if not depression we have ever seen.

Both Fannie and Freddie have just posted MULTI-BILLION DOLLAR LOSSES. Losses that were 2-3 times what analysts predicted. They are cash strapped, if not damn near insolvent.

So let's remove any restrictions on the flow of credit from them. Let's increase their ability to take on risk and add even riskier loans to their portfolio. The following graph shows the percentage of subprime loans ALREADY on Freddie's books that are deliquent:



Who's passing out the crack pipe at these "meetings"? These firms are both upside down and insolvent. Their loan pipes are spiraling towards mass foreclosure on the subprime, Alt-A and prime side.

Increasing the loan limits and encouraging them to take more risk is going to help?

Not a chance, folks. This is a big set up for a taxpayer funded bailout, and yet another brilliant example of Wreckonomics.

Fannie was created by the government during the Great Depression, and Freddie was created in 1970. They are both what are know as "Quasi-Governmental" agencies. In other words... semi-private companies. You can buy stock. They report earnings. They have a board of directors, CEO, CFO, etc. BUT... they are basically controlled by the Federal Government. The OFHEO.

The goal here is for these companies to take the bad mortgages off the books of the big banks (that are all teetering on the edge of failure as we speak). Once this happens, it will be much easier for the sheeple to accept a taxpayer funded government bailout.

Once again... the wicked web is weaved, and we are the flies getting the juice sucked out of us.