Fannie & Freddie Officially Declared Bottomless Pits. GMAC Not Far Behind
While private banks are paying back their TARP money, Fannie and Freddie have been given a new blank check:
It's a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday's paper, the least likely edition to be read. By Sunday and Monday, it's old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises' (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer's stocking"â€it won't even try to estimate the total losses of Fannie and Freddie.
For extra special bonus style points, Fannie and Freddie executives will apparently receive multi-million dollar pay packages that the pay czar will be denying to many private banks.
But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.
In other news, the Feds are also propping up another quasi-governmental agency with more cash
GMAC, the ailing financing arm of General Motors, is set to receive around $3.5 billion in government aid, ABC News has learned. The funds would be the third infusion of federal support for the troubled lender.
The latest government aid would bring the total federal assistance for GMAC to $16 billion when combined with the $12.5 billion that the lender has already received dating back to December 2008. Due to its prior cash infusions, the government already owns 35 percent of GMAC.
GMAC continues to lose money because every time it gets more taxpayer money, it starts offering zero percent financing deals.
Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which does not have the freedom of maneuver conferred by TARP money because Ford is not taking any"¦
GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦
This perhaps might explain why GM, unlike other banks with low stress-test scores, was unable to get any private capital. Because lenders know GMAC will just hand the money over to car buyers with little prospect for getting any value back in return. Incentives for GMAC to take losses to sell cars, always an issue under GM's private management, will only increase as the Administration looks to create some evidence - any evidence - that their GM investment isn't a total dog. Witness $3 billion in cash for clunkers funds that went to buy $1 billion of used vehicles.
Postscript: Related news, the 10 most ridiculous uses of stimulus funds. Seems like there would be a lot of competition for this award.
elambend:
Please also note that those fannie and freddie execs are being paid in Cash, not stocks or anything like that.
December 30, 2009, 4:33 pmLink:
Iwrote this a few days ago:
The bigger story with Fannie and Freddie is that Obama & Co just pledged unlimited financial assistance to Fannie and Freddie, presumably because the current $400 billion pledge may not be enough. WTF????
Fannie and Freddie are the 800 pound gorillas in the corner of the room that we continue to ignore. Fannie and Freddie exceeded their initial mandate many years ago, and no one stopped them. They were never supposed to each have a trillion dollar balance sheet -- they exploited a loophole to do this. As they grew, they were vehicles for the stealth de facto nationalization of most of our mortgage industry. This also led to an unholy alliance between DC and Wall Street.
Ironically, Fannie wasn't created in the 1930s to promote home ownership but was instead intended to create liquidity for small banks so they could make small business loans. The "mom and apple pie" home ownership angle was a later construct. Talk about mission creep. LBJ sold Fannie to the public in 1968 to help pay for the Vietnam war. Freddie was created in 1970 to give Fannie competitive company. Aside: back in the 1960s LBJ couldn't just print money the same way Bush did and Obama can.
As they started to mushroom in size, Fannie and Freddie were a contributing factor to the S&L failures of the 1980s. Combined with bad practices in securitization and derivatives thereto, they're a big cause of why we're in the mess we are today.
I haven't researched what follows in depth, and I've seen little written about it. So the following is based on my imperfect understanding of the facts ... please correct me if I'm wrong:
We used to have a multi-trillion dollar securitization market that was off-balance sheet to our banks. Most of this securitization market funded mortgages, but it also funded other kinds of consumer debt. Securitization put banks into the loan origination business -- others bought and held this paper.
This market has largely disappeared. Towns in Norway won't put their pension money into US financial assets ever again.
So what replaces this? Right now the Fed is using its balance sheet to buy and hold Fannie and Freddie paper. Some issues with this:
1) How long can the Fed keep doing this ... a couple of years and a couple of trillion? Does the Fed become the permanent lender that supports most of our mortgage market? Can it?
2) I suppose the answer to #1, is at least a partial yes, so long as we maintain basic credit quality. The Fed could even turn a profit. Fannie and Freddie actually made money so long as they stuck to plain vanilla conforming mortgage standards.
But there's a tension between (A) "propping up the mortgage market" and (B) only make creditworthy loans. The Fed can make money on (B), but could lose a shitload of money on (A).
Recall that our mortgage world went to hell when we deliberately gave up on requiring down payments -- it really is that simple. Obama & Co seem intent on continuing the practice of giving money to anyone with a pulse -- you know, to "spread the wealth around." Developing ....
3) A big macro issue -- if we get no new money from abroad -- and if all our money gets tied up propping up the mortgage market and funding ballooning federal deficits -- will there be any money left over to fund the true private sector? Is this a valid concern? If so, "Holy Permanent Recession With Double-Digit Unemployment, Batman!"
December 30, 2009, 4:45 pmLink:
I've posted here before about GMAC getting co-opted to subsidize GM auto sales. Because of this, Obama and the UAW have their very own Zaibatsu -- something prohibited to the rest of us by the Bank Holding Company Act.
TARP money went to our big banks to improve their capital ratios, and thus to signal that the US would backstop these banks, thus damping down fears that might have led to a self-fulfilling liquidity crisis. Through the FDIC, the US was already on the hook if these banks had failed -- so in concept this was a sensible investment at the time. Even back in late 2008, you could have expected that in all but worst-case scenarios, the US would get paid back and even book a profit on most of these investments.
These were in fact investments for GAAP purposes as the US got preferred stock and warrants in the banks. As I understand it, for US budget purposes these investments were treated as spending in fiscal 2009... but it wasn't just money out the door. The US got a financial asset with potential upside. Ironically, many Congressional Democrats see the return of this money -- already "expensed" under US budget accounting -- as being "free" money that can and should be pissed away as additional stimulus.
TARP got perverted when it was extended to GM and Chrysler. GMAC makes no sense, except as way to further kick back to the UAW. CIT didn't deserve government help -- but its bailout saved Goldman some bacon. Fannie and Freddie could turn into the hugest money sinkhole of all.
Developing ....
December 30, 2009, 5:04 pmstan:
If a politician can't win running against all this crap, he won't ever win.
December 30, 2009, 10:45 pmCorky Boyd:
Ford and Toyota should be very afraid of the GMAC move. A bottomless pit of zero interest (taxpaye's) money is grossly unfair competition. Rather than fighting it, thay should seek to become users of GMAC's services, and sue for it if necessary.
If JP Morgan offered zero interest loans to Pulte Homes for instance and locked out all others, they would find themselves the target of some heathy civil suits. And possibly criminal action. But this is the very way the administration is trying to clear the playing field of competition for their own companies.
January 2, 2010, 7:33 pm