George S. May Business Blog

Fannie Mae and Freddie Mac’s Golden Ticket

One of the scariest aspects of the implications of the government bailout is that it left the U.S. government liable for an incredible debt generated by the private sector. That’s not the scary part, the scary part is that taxpayers are on the hook for these companies for over $5 trillion.

These private companies made their debts public, and now their future is linked to the U.S. governments. Any lingering doubt was dissipated after Barney Frank, the Chairman of the House Financial Services Committee, said that the U.S. government does not guarantee the debts incurred by giants Fannie Mae and Freddie Mac.

In very short order, Frank recanted his statement as the Treasury Department issued one of its own assuring investors that indeed the government does stand behind this $5 trillion dollar debt.

This surprising news of course means, that you are now also standing behind this trillion dollar debacle; because the taxpayers have to guarantee the debt of the government, ill-advised though said debt might be.

Representative Frank went on to clarify his position, reiterating in the same statement, we “will make sure that there are no implicit guarantees, hints, suggestions, or winks and nods…we will be explicit about what is and is not an obligation of the federal government.”

But this move does mean that both of these companies now enjoy as close to an explicit guarantee as is possible. These companies are in what is known as conservatorship when the financial bubble burst in September of 2009. This means that the U.S. Taxpayer now stands behind $5 trillion of GSE debt,” according to the Congressional Research Service.

The problem  that many see is that $5 trillion of so-called agency paper is not treated as if it is a debt of Uncle Sam for accounting purposes, says Richard Suttmeier, chief market strategist at Niagara International. “Get it on the balance sheet – that’s where it belongs,” Suttmeier says. “Add it to the $14.2 trillion in [federal] debt and let’s move on.”

$5 trillion is a lot of money – even by government standards — and moving on may be the problem because problems in the housing market continue to run rampant, Suttmeier says. “There’s a general concern on Main Street U.S.A. that ‘my neighbors are throwing in their keys, there’s more for sale signs in my community…do I want to buy a new home, risking there’s still downside risk to housing?’ ”

Noting the Case-Shiller 20-City Home Price Index is still 50% above 1999 levels and mortgage delinquencies are still rising despite the rebound in GDP, Suttmeier says “victory is nowhere in sight, particularly when the drain we’re going to see from Fannie and Freddie is unlimited losses between now and the end of 2012 — on top of the $400 billion that’s already been allocated.”

Coincidentally (or not), the FDIC is allowing U.S. banks until 2012 before forcing them to fully write-down bad or toxic loans, which is “another time bomb ticking,” Suttmeier says. “They’re hoping the public market comes back into the mortgage arena, which is going to be hard to do.”

This again means that while these companies were not eager to share their profits with the American people, they’re more than eager to spread out the losses. The problem with a guaranteed company is that there’s little incentive for them to operate under the normal risk-reward ideology as they would if they were an average company, also known as one too big to fail.

If the U.S. government is to decry socialism, then we cannot by any stretch endorse these strange bedfellows and their golden sheers, bought and paid for by American taxpayer revenues.

The government was under duress to act when these problems began, but now to continue to allow these companies to write off their losses on toxic assets, the debt for Americans continues while the money we earn is used to try and plug the huge holes in the stock market created by such foolhardy and short-sighted investing in the first place.

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