ANOTHER GOVERNMENT RUN DISASTER: FANNIE AND FREDDIE SUCK UP TAXPAYER FUNDS IN THE BILLIONS ON AN "UNLIMITED" LINE OF CREDIT

No business could ever survive, much less pay its executives the $110 million that Clinton cronies got paid for collapsing the two mortgage giants, except the two government run giants...products of the usual government incompetence!

Fannie Mae, the mortgage-finance company under federal conservatorship, said it will seek $15.3 billion in aid from the U.S. Treasury after posting a 10th straight quarterly loss. Why can't we all qualify to receive this never ending government handout?

A fourth-quarter net loss of $16.3 billion, or $2.87 a share, pushed the company to request its fifth draw on an unlimited lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Fannie Mae, which posted $120.5 billion in losses over the previous nine quarters, has taken $59.9 billion in federal aid since April. Its shares, which peaked at $87.81 in December 2000, closed at 99 cents today in New York Stock Exchange composite trading. The Treasury owns 79.9 percent of Fannie Mae’s outstanding common shares.

Washington-based Fannie Mae, which owns or guarantees about 28 percent of the $11.8 trillion U.S. home-loan market, has been hobbled by a three-year housing slump that wiped 28 percent from home values nationwide and led to record foreclosures. Fannie Mae lost $74.4 billion for the 12 months ended Dec. 31, compared with $59.8 billion in 2008.

“Our financial results for 2009 reflected the continued adverse impact of the weak economy and housing market, which has resulted in record mortgage delinquencies and contributed to our recording significant credit-related expenses and net losses during each quarter of the year,” Fannie Mae said in the filing today.

Fannie Mae’s borrowings from Treasury will total $76.2 billion after the next payout, carrying with it an annual dividend cost of $7.6 billion, which the company said it will repay by borrowing more money from the Treasury. “This amount exceeds our reported annual net income for all but one of the last eight years, in most cases by a significant margin,” the company said.

The company said the ability to tap continuing cash infusions from the Treasury this year “is critical to keeping us solvent and avoiding the appointment of a receiver.”

The loss in the fourth quarter was driven in part by a $5 billion writedown on low-income housing tax credits that the Treasury Department barred the company from selling. Rival Freddie Mac took a $3.4 billion charge for the same reason.

These two losers are competing on who will achieve the larger loss, as their management honchos get paid millions and actually get "bonus" payments for their performance!

Losses at Fannie Mae are likely to grow with rising unemployment and costs to implement President Barack Obama’s plans to reduce foreclosures, the company said.

Let me understand this...Obama's plan to reduce foreclosures will grow the losses, what type of lunacy is this plan????

Fannie Mae and McLean, Virginia-based Freddie Mac survived last year on investments the government made in the companies after regulators put them in conservatorship in September 2008. The Treasury on Christmas Eve removed a $200 billion limit on each company, extending unlimited backing through 2012.

The two companies own or guarantee more than $5 trillion in U.S. residential debt, and were responsible for as much as 75 percent of the new mortgages made last year.

This is happening because with the artificially low interest rates, nobody in his right mind would want to own 30 year mortgages that pay 4%-5%...DUH! This is NOT a reasonable market rate for mortgages with such high risk. If mortgage rates were not artificially held down by government fiat, these organizations would not have to guarantee them, as market forces would be at work.

For instance, when I last refinanced my mortgage, I opted for the then available no doc, no income mortgage loan, and with that I was prepared to pay and paid a higher rate for the privilege of obtaining a loan with minimum documentation. This did not render my mortgage loan any less value, but instead provided the owner of that note, a higher rate of interest inherent with the lesser documentation, and allowed me to choose that option for that privilege.

A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to sell or make their house payments, according to a RealtyTrac Inc. forecast last month. Last year there were 2.82 million foreclosures, the most since the Irvine, California-based company began compiling data in 2005.

Fannie Mae and smaller rival Freddie Mac were chartered by the government primarily to lower the cost of homeownership by buying mortgages from lenders, freeing up cash at banks to make more loans. The companies make money by financing mortgage-asset purchases with lower-cost debt and by charging fees to guarantee securities they create out of home loans from lenders.

Fannie Mae’s net worth, or the difference between assets and liabilities, was negative $15.3 billion as of Dec. 31, compared with negative $15 billion on Sept. 30 and negative $10.6 billion on June 30, according to company statements.

For the fourth quarter, Fannie Mae decreased reserves for future credit losses to $64.9 billion last quarter from $65.9 billion in the previous quarter.

The amount of nonperforming loans that Fannie Mae guarantees for other investors rose to $174.6 billion from $163.9 billion in the third quarter, according to the filing. Fannie Mae also owned $41.9 billion in non-performing loans as of Dec. 31, up from $34.2 billion in the third quarter.

The fair value of Fannie Mae’s assets was negative $98.8 billion last quarter, compared with negative $90.4 billion at the end of September.

The Obama administration will wait until next year to seek legislation that addresses the future of Fannie Mae and Freddie Mac, Treasury Secretary Timothy F. Geithner told the House Budget Committee on Feb. 24.

“We are going to propose reforms to the Congress next year to try to make sure we bring about fundamental change in the housing market and get ourselves in a position where the government is playing a less risky, but more constructive role in supporting housing markets,” Geithner said. “That’s going to be a difficult set of reforms.”

The Treasury and the companies’ regulator, the Federal Housing Finance Agency, blocked Freddie Mac and Fannie Mae from selling their low-income housing tax credits, which can only be recognized if the companies expect to be profitable.

The Treasury found that an agreement Fannie Mae had to sell about half of its credits would have cost taxpayers more than the company would gain from the deal, according to a November letter to that company.

Why do we need these corporations to continue to lose our money? If we simply let market forces operate the markets would provide for a "market based" mortgage trading system which would provide real world market pricing, we as taxpayers would not suffer ANY losses...investors who want to take the risk would take the risk and any losses...they take that market risk based on the fees/interest they receive.

Does market based mortgage trading make more sense than constantly having to make good on bad borrowers mistakes?

IS IT ME OR IS THERE A KEYNESIAN IN THE HOUSE; BELIEF THAT GOVERNMENT SHOULD CONTROL THE ECONOMY

The Upside-down World of John Maynard Keynes

An MP3 audio version of this article, read by the author, is available as a free download.

John Maynard Keynes often employed flowery language like "animal spirits" and "liquidity trap" to describe things he did not understand. He was, after all, more of a bureaucrat than an economist. In fact, he would best be described as an anti-economist because he eschewed things like supply and demand and held the opinion that government could run the economy.

So, for example, he could not understand why people would invest resources in risky adventures that helped keep the economy growing at full employment. He therefore substituted "animal spirits" for the profit motive. These spirits allow entrepreneurs to proceed with a naïve confidence and to set aside concerns over losses. Similarly, the failure to invest was also a psychological problem that he dubbed the "liquidity trap." This trap occurs when investors seek liquidity in cash and when monetary policy — in terms of cutting interest rates — no longer produces an increase in investment.

The problem with Keynes is that he thought that if entrepreneurs lose their collective nerve, the government should socialize investment, prop up demand and employment, and provide assurances to drive the economy back to full employment. He did not understand how the economy works so he could not understand how the economy corrects itself once a contraction occurs.

The problem for us is that Bush, Obama, Geithner, and Summers are all following the Keynesian playbook, with Nobel laureate Paul Krugman serving as head cheerleader. If instead we just allowed the free-market process to work, the economy would likely have already bottomed; companies like AIG would be emerging from bankruptcy and the unemployment rate would be dropping instead of continuing to rise.

The market process was curtailed just a few months into this contraction and — over the last 15 months — has been almost wholly replaced with government intervention. Many of the interventions have been rightly described as "unprecedented" in that they are completely untried. This means that neither market participants nor policy makers have experience with them — and it shows.

This slew of interventions has been disorderly. Many interventions, like the takeover of AIG, were total surprises, causing volatility in stock markets. Moreover, these interventions have been extremely large and wide ranging in scope. Measured in dollar terms, the money "allocated" totals over $12 trillion by one account.

Ironically, by adopting the Keynesian position that we have lost our "animal spirits" and are suffering from a psychological problem of fear, the government has undertaken extreme policy changes that greatly undermine the profit motive. Entrepreneurs are no longer looking for new profit opportunities in the economy. Instead, they are more likely either trying to preserve their capital or lining up for a government bailout.

Preservation of capital requires that you place your wealth in low-risk assets like government bonds, cash, CDs, and gold. So people are saving more and paying down debt to protect themselves, but in Keynesian terminology, we have fallen into the very dangerous liquidity trap.

For Keynes, the liquidity trap occurred when frightened consumers attempted to save more and consume less. He reasoned that less consumption would hurt businesses and production and therefore put businesses and labor at risk. These lower incomes would mean, in turn, that the attempt to save more would actually result in a much worse economy.

The liquidity trap is really about hoarding and saving. While hoarding has a bad name among economists, it actually is a very good thing. Typically, people do not hoard resources irrationally or for no reason; they hoard as a way to protect themselves from dangerous situations. Depression, inflation, war, and other calamities are typically what cause people to hoard.

Not only does the increased saving help the economy, but hoarding is actually a good thing because it helps facilitate the process of deflation and deflation helps bring about recovery. If people reduce consumption (demand) then prices fall, particularly in the early stages of production. As all types of resources and goods are becoming cheaper, including labor, the purchasing power of every hoarded dollar increases. All the prices that were bid up during the boom — particularly land, capital, and various asset classes — are thus reset at lower levels. Debt is liquidated and savings are restored and the prospects for a return to prosperity emerge, first among producers and then by consumers. Therefore hoarding speeds up deflation and deflation speeds up the correction process.

But Keynesians are afraid of this process because they don't understand how it leads us back to full employment and economic growth. I have named this fear apoplithorismosphobia. Joseph Salerno has shown that there is no theoretical basis for this fear and Greg Kaza has shown that there is no empirical basis for this fear. Ironically, it is Keynesian policies, such as bailouts, stimulus packages, and inflation that should be feared, because they can threaten our animal spirits for profit and leave us stuck in the liquidity trap for many years.

Hoarding eventually fixes most balance sheets, but in a Keynesian-dominated economy, it takes an extremely long time. During the interval, people can become permanently jaded about the market and investing. They may become permanent hoarders. This is what happened to many Americans who lived through the Great Depression. Frugality and thrift, while admirable, became a kind of psychological scar they wore for the rest of their life.

Keynesian-style policies have resulted in disasters such as the Great Depression, the "stagflation" in the United States from 1970 to 1982, and the aftermath of the Japanese Bubble. Each lasted more than a decade. It would be far better to allow for an unobstructed free-market correction process. With no government safety net or bailouts, there would be more hoarding, faster deflation, more bankruptcy, and a speedy return to prosperity.

While bankruptcy sounds horrible, it is actually a wonderful and orderly process. First of all, it fixes balance sheets quickly. It also provides an opportunity to remove current owners and administrators who operated businesses in a risky fashion. No need to worry about bonus questions here! Some bankrupt firms will go completely out of business and their resources will be auctioned off to other entrepreneurs at very low prices. I would imagine that the dozens of startup firms working to bring electric cars to market would love the opportunity to buy an auto plant in Michigan for pennies on the dollar. Other firms will remain in business with most workers keeping their jobs, but bankruptcy reduces debt and cost and provides an opportunity to renegotiate contracts and wage rates.

The resulting environment after bankruptcy is one of new owners and operators with far less debt who have not had their "animal spirits" crushed. Firms would have less debt and therefore lower cost structures. Some consumers would be flush with hoarded cash and have an opportunity to buy at much lower prices. The economy enters recovery mode and can quickly attain full employment and economic growth. Most importantly, by not bailing out the losers, there is no moral hazard that entrepreneurs will believe they can rely on bailouts in the future.

Because they do not understand how the market works, Keynesians think this is a fantasy. But if you follow the Austrian recipe of allowing liquidation of bankrupt firms and debt, allowing prices to fall without monetary inflation, not propping up employment or subsidizing unemployment, and not discouraging hoarding, you will end up with the quickest possible recovery and minimize the magnitude of economic pain.

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Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama.