Tuesday, July 22, 2008

Fannie and Freddie

Fannie and Freddie

Serge Truffaut

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Serge Truffaut suggests that the financial meltdowns of the last three decades have a common denominator: "People listened to those raving lunatics of ultra free market neo-liberalism who would like the culture of privatization to extend to every human activity, up to and including - this is no joke - consumption of the air we ... breathe." (Photo: o2-products.com)

The rescue the American government effected for mortgage giants Fannie Mae and Freddie Mac is the latest episode in a crisis that has now persisted for twelve months. This episode's peculiarity? Fannie and Freddie were not feeding on the subprime and exotic mortgages that have hurt the whole banking sector.

Fannie and Freddie, as our neighbors call them, hold or guarantee close to $6 trillion of real estate loans. To comprehend their economic importance, let me add that this amount equals half the mortgage loans contracted by Americans. Thus cautioned, anyone will have understood that the collapse of either of them would straightaway result in a chain of bankruptcies likely to plunge the continent into a hard recession like that of 1973-75, and not the weak one the authorities are hoping for.

Those authorities - Federal Reserve boss Ben Bernanke and Treasury Secretary Harry Paulson - had no choice, whatever some may think, but to rescue the two companies once they had observed, like everyone else, that 50 percent of the market value of their shares had melted away in a week. The violence of the speculation they were subjected to is outrageous in that Freddie and Fannie's financial foundation is ... healthy!

In fact, unlike Countrywide, Bear Stearns, Citigroup, Merrill Lynch or IndyMac - which has just been taken over by the government - Fannie and Freddie were not crippled by subprime lending. These companies had not soaked up financial vehicles of which the objective of the extreme complexity was to make the credulous pay for the financial well-being of the swindlers with portfolios stuffed with stock options. Certainly, they had to declare losses last year caused by the indirect use of subprimes, but not in the proportions of the banks named above.

In fact, in the weakening of the Fannie-Freddie couple, the most interesting aspect, or rather the most surprising of those listed before members of Congress, bears the signature of Securities and Exchange Commission President Christopher Cox, the stock exchange policeman. The latter fingered Wall Street actors who threw fuel on the fire by bringing down the share prices of certain companies in the hope of picking them up at ridiculous prices.

Notably, Cox insisted on a disinformation operation, to use his words, concocted in order to weaken the couple in question as well as the investment bank Lehman Brothers. According to his analysis, the stock market failures of these companies are partly attributable to a white collar sabotage operation. We won't be surprised to learn that Cox has ordered an investigation be opened with the objective of ultimately bringing those responsible before the courts.

On top of that, Cox as well, moreover, as Paulson and Bernanke, confided to the members of Congress that they intend to prepare the ground to better frame certain activities presently current on Wall Street. In retrospect, they are finally understanding that, between the consumption of abstruse financial vehicles and the strictly speculative offensives some investors have brutally conducted, the world of finance is confronted with a situation that could worsen between now and the end of the year. Since ...

Since the number of personal bankruptcies on account of real estate indigestion is likely to grow and grow and grow between now and the end of the year. And not only in the United States, but also in Spain, the United Kingdom and Ireland. That is, in the three countries where the sale and distribution of subprimes occurred. Following the example we observe south of our border, households in these countries took on debt like crazy because they believed as in an iron law that the value of their real estate asset would grow. In short, they believed in the nonsense put forward by another profession: real estate agents.

That said, we must remember and emphasize that between the savings and loan failures in the 1980s, the billions and billions written off by Citigroup, Merrill Lynch, German banks and French establishments, we observe a common denominator: governments allowed just anybody to do whatever. And that because people listened to those raving lunatics of ultra free market neo-liberalism who would like the culture of privatization to extend to every human activity, up to and including - this is no joke - consumption of the air we ... breathe.

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