Fannie Mae and Freddie Mac Failure Forever and Too Big to Fail.
Posted May 10, 2010on:
The Democrats and Obama are stridently backing a Financial Reform Bill that does nothing to address the real problems that caused the financial crisis of 2008-2009. Nothing! Why? Because they are putting the blame, and therefore the regulations, where it does not belong: on the banks. So with the help of the big Banks on Wall Street Senator Dodd and friends have concocted a reform bill that does nothing but regulate and kill the smaller banks with paperwork. This gives the big banks and Wall Street an edge over smaller banks and will help the big banks absorb all competition, or all the smaller banks. The big banks will then control the entire financial sector of the economy. They will have a monopoly on all financial dealings from stock market to insurances to mortgages. Mortgages they will sell to Fannie and Freddie as soon as they are made so they get their money and could care less if the loans are good or not, and with the stock market and insurance markets they are covered because they are just “too big to fail”. Yes, even though that “too big to fail” bail out fund and provision was taken out of Sen. Dodd’s bill, the next crisis (which this bill guarantees will happen by the way) the federal government will hop right in like they did this time and bail the Big Banks out letting the tax payers pick up the tab because to let they go down would indeed take down the entire economy!
Where do the real problems lie? Smack dab on Congress. Sen Dodd and
Rep. Barney Frank! and the way they assured the public that Fannie Mae and Freddie Mac, the two large PRIVATE mortgage holding companies, were doing fine when they were going down with toxic (bad/foreclosed/undervalued) mortgages. So bad in fact that the federal government had to buy up these mortgages and now owns Fannie and Freddie. Actually the tax payers own Fannie and Freddie and any thing the tax payers/government owns is of course failure proof because the government just keeps propping it up with more tax payers dollars—-think the US Postal Service and Amtrack.
This article explains why Fannie and Freddie are failure proof and really have to be failure proof under this Senator Dodd’s Financial Reform Bill that does not address or even mention Fannie and Freddie.
A good thing: Sen. Dodd has basically screwed the American people for 24 years and now the people have finally caught on so he knew he could not be reelected and has now decided not to run for reelection. He “needs to spend more time with his family”.
Morning Bell: Fannie and Freddie Failure Forever
Yesterday, Sen. Chris Dodd (D-CT) told reporters about his financial regulation bill, “We’ve ended the ‘too big to fail’ debate. So no longer do I expect any argument to be made that this bill exposes the American taxpayer.” Really. Someone might want to tell Sen. Dodd that in other news yesterday, Freddie Mac announced that it lost another $6.7 billion in the first quarter of 2010 and therefore needed another $10.6 billion in cash from U.S. taxpayers. Since formally nationalizing Freddie in 2008, the federal government has already spent $50.7 billion bringing the Freddie bailout total to $61.3 billion so far. Combined with Fannie Mae’s raid on the Treasury, the Congressional Budget Office estimates that the American people will spend $389 billion bailing out the two Government Sponsored Entities by 2019. So much for American taxpayers no longer being exposed to “too big to fail.”
In fact, nothing in the Dodd bill does anything to reform Fannie Mae and Freddie Mac. This despite the fact that Fannie and Freddie were key components in causing the very financial crises Dodd claims his bill will forever prevent. Fannie and Freddie were both created for the specific purpose of making it easier for Americans to buy more expensive housing. Starting in 1993, political forces pushed Fannie and Freddie to loosen their once strict loan purchasing requirements. By 1996, regulations required that 40% of all Fannie and Freddie-bought loans must come from individuals with below median incomes. In 1995, Fannie and Freddie began buying subprime securities originally bought and bundled by private firms. One of these firms was Countrywide Financial who, thanks to their status as Fannie Mae’s biggest customer, delivered investors a 23,000% return between 1985 and 2003. By 2004, Fannie and Freddie were purchasing $175 billion worth of subprime securities per year from Countrywide and their brethren… a 44% share of the entire market. There are other factors that helped contribute to the 2008 financial crisis, but Fannie and Freddie’s use of their “too big to fail” status to create and grow the subprime security market was essential.
But Sen. Dodd, who received V.I.P. treatment from Countrywide CEO Angelo Mozilo, never saw any problem with Fannie and Freddie. On July 13, 2008, Senator Dodd said on national television, “To suggest somehow that [Fannie Mae and Freddie Mac] are in trouble is simply not accurate.” Less than two months later the bailouts of Fannie and Freddie began. Keep these facts in mind when Dodd says his bill solves the “too big to fail” problem.
The problems with the Dodd bill go beyond its failure to let Fannie and Freddie wither into extinction. While Dodd has agreed to get rid of the $50 billion bailout fund, the underlying bailout authority still remains. Now taxpayers are expected to front the government money while firms are liquidated. But the irresponsible creditors who let those firms borrow money irresponsibly would still be eligible for taxpayer bailouts. According to The Washington Post, “a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding.” But how does the government know what creditors would have got if the company went into bankruptcy? Why not just strengthen the existing bankruptcy system and actually allow these too big to fail firms to, ya know, fail?
But Dodd and the Obama administration would never allow that. It would defeat the whole purpose of this financial regulation bill, which is to transfer as much power to the federal government as possible. Never mind that these are the same government regulators who failed to see the last crisis coming.