I feel compelled, after the news that has been circulating about the two great pigs, (Fannie and Freddie), to point out one of Orwell’s classic lines—that even though we talk about democracy, fairness, evenhandedness, equal opportunity in this country, some animals are simply more equal than others.

With over 50% of all those option ARMs, and negatively amortized interest only loans and other exotic mortgages in the trough of these two bloated institutions, they have clearly been deemed “more equal.” The Treasury department, and soon congress, will try to wrangle out a way to shift that immense debt, a sum exceeding $5 trillion dollars, to the average US taxpayer out there, while still floating the time honored statement that the pigs are backed by “the full faith and credit of the United States.” Never mind that adding a staggering 50% increase to our already leaden national debt will do little to bolster that “faith and credit.”  The national debt is already over $9.5 trillion, and increasing by $1.73 billion per day. But if all the toxic mortgage dross at Fannie and Freddie gets eaten by the Feds, we’re looking at a whopping $15 trillion in debt, a sum far surpassing our total gross domestic product on an annual basis.

I have a few conservative minded, Republican, Bush-loving friends who constantly talk about the virtues of “free markets,”  the sacred ground of “profit,” the upstanding nature of our god-fearing American corporations, and all the good they do--this from the “party that wrecked America” as James Kunstler so aptly coined the phrase. Yes, Republican conservatives decry any hint of “Socialism” in fiscal policy, but it is strange how they completely overlook the massive government subsidies paid out to these greedy corporations, (over a trillion to big oil alone on an annual basis). Now Uncle Sam is going to be asking you and I to work just a little longer, and just a little harder, to bail out all the banks who have shoveled their bad loans into the trough of Fannie and Freddie—and the US taxpayer will foot the bill. The “free market” will not work its way. Banks who developed these exotic mortgage products, and recklessly force-fed them to people who they knew could not pay them back, will be rescued by the IRS. And these very same Republicans talk so high and mighty about the evils of taxation. Isn’t capitalism wonderful? It is for the wealthy.

Meanwhile, the little guy out there is increasingly being squeezed in a vise made of interest, late fees and foreclosure threats.  So… you took out an Option ARM for $300,000 in 2005, urged on by the mantra that “housing values will always increase, and you can always re-fi.” You thought the introductory payment of just $995 /month was a really good deal. You thought, foolishly, that you were now a “homeowner,” when in fact you had been levered into a debt trap by wealthy, clever men and women who knew exactly what they were doing. Now your payments are slowly rising, for the exotic mortgage you were fed was slated to increase over 5 years to a new monthly payment of $1350. And as Bob Sullivan of MSNBC Money pointed out in an article penned way back in 2005: “Even at that, borrowers have not even begun paying for the house. In fact, they haven’t even paid all the interest they owe the bank (for those first few years.) After five years of rising payments, the mortgage balance is actually higher, closer to $329,000. At that point, the real stress begins. When the loan payment is reset, because of the rising outstanding balance, the new minimum payment is $2,015 — more than double the initial payment.  And that assumes interest rates are flat.  Were interest rates to rise slowly – say from the current 5.5 percent to 6.4 percent — the new minimum monthly payment would be a knee-buckling $2,243. Welcome to the high-stakes world of the negative-amortization loan.”

Now add in the fact that, in some markets, housing values have already declined up to 50%! You owe a cool $330,000  on a $300k loan after five years of payments, and your house depreciated to a value of $150,000. Is it any wonder that, given the doubling of gas prices, the huge hikes in food, medical and other daily costs of living against a static wage base, people are collapsing under the weight of these increasing mortgage payments and defaulting? Foreclosures in California, ground zero of the housing crisis, are now up 260% compared to this same time last year according to DataQuick.

The bankers who dreamt up this wonderful scheme did not do so to foster the heartwarming notion of “equal opportunity for home ownership” like my Republican friends might argue. They did not do so for love of country, or out of any god -centered or even run-of-the-mill altruistic impulse aimed at helping others. No, they created this product for one reason, to squeeze interest profits from a borrower least able to afford the scheme. They did it thinking they would reap these profits and then pass the risk of default on to someone else by bundling the mortgage into a salad bowl of other similar products, and calling the whole mess a “security.” What an enormous misnomer!  As the crisis unfolded, and borrowers began to buckle under rising mortgage payments, did it ever occur to the bankers to forego the rate increases? Heaven’s no! They continued to reset the loans to higher payments until strapped borrowers failed. And then the banks pressed the process forward yet again into foreclosure--the same old squeeze, the same old threats that worked so well in days of yore.  When the sheer scale of the problem played out, (now 10% of all US mortgages are delinquent), the banks suddenly realized they were going to be the proud owners of all these worthless depreciating “assets” and cried to Uncle Sam to save them. What a scam. The negative amortization loan they created  was nothing more than the same basic scheme the bankers have going now with their credit card game—that is, feed you credit lines with low teaser rates, then wait until the US mail gets your payment to them a single day late, and jack up the interest to 29.99%. Then, each time the cardholder makes that minimum payment, the interest rolls over and piles up ever higher until the borrower is in yet another 30 year revolving nightmare of debt—all over a bargain they thought they were buying at 4.9% on their Visa card. You’ve seen the offers a hundred times. The banks mailed over 6 billion credit card offers out at the peak of the boom in 2005. And we still see appalling ads out there all over the net, with little dancing figures to catch the eye and tell us what a great time it is for a mortgage rollover. It’s obscene.

Now Treasury Secretary Paulson wants us to come to the rescue of Fannie and Freddie, the two great landfills of all this mortgage garbage, because if these two pigs go down, they’ll take down the men who dreamt up the scheme with them—you know, the guys in the suits who make tens of millions in salary and annual bonuses because of the great job they’ve been doing—these captains of industry, these upstanding entrepreneurs, these bloated “capitalist pigs” who have brought the nation to the edge of ruin. James Kunstler’s take concerning this bailout plan  is dead on: “Those responsible for fucking everybody, the investment bankers who engineered the tranches of securitized bundled non-performing mortgages, and pocketed huge fees for doing so, are now conniving to off-load the liability of all this worthless paper on the taxpayers, led by chief conniver, Secretary Paulson.” As the government moved to take over Fannie and Freddie in early September, they were to dismiss the CEOs who relieved their predecessors because of “accounting irregularities” at each institution. The cure was toxic, it seems. Will there be a new line in our 1040 next year with instructions to ‘Calculate your tax from the Tax Tables and enter here. Now multiply that total by  0.50 to compute your Fannie & Freddie adjusted tax. And be damn sure you mail the check before April 15—or else… ’

Even worse, a story broke in early August intimating that it was nervous investors in Asia that really lit the fire under Paulson to rescue the two pigs. With 60% of Fannie & Freddie’s mortgage portfolios owned by hoodwinked Asians, they put the pressure on Paulson to cover their bets. The Chinese are famous in the art of squeeze. Now the US, deeply in debt to Asia, must protect the wealthy over seas. Don’t think this bailout plan has anything to do with really helping American families, though that’s the way it will be spun here.  Analyst Mike Shedlock characterized the scenario this way: “How can taxpayers have any confidence when Congress acts in the best interest of Fannie Mae executives, investors like Bill Gross who bet on a taxpayer funded bailout, and China, rather than the best interests of taxpayers and innocent citizens that had nothing to do with this housing mess? How can anyone have confidence in the system if there is even the remotest possibility that the US financial system was held hostage by China?”

The House version of the bill passed by a vote of 272-152 on July 23rd, and was approved by the Senate three days later. It extends an unlimited line of credit to Fannie and Freddie, and gives the US government authority to buy shares of their stock, in effect allowing the government to use taxpayer money to directly bolster the stock position of a private banking entity--and now this entity is officially in a “conservatorship,” which is really a bit like a Chapter 11 bankruptcy status. An additional $300 billion, twice the amount of the “stimulus package” we were treated to earlier in the summer,  was allocated for mortgage re-fis, ostensibly to get people out of the sand trap mortgages the bankers dreamt up, which are the root of the entire crisis. It will fund conversion of sub-prime loans to government backed FHA paper. Another $4 billion fund was set up to buy foreclosed homes in distressed cities, and a $7500 tax break was to be given to first time homebuyers, perhaps as a way to hopefully re-stimulate the sagging market.

It sounds great on the surface, but a closer look reveals that even this is unlikely to produce and real results in stabilizing or reversing the catastrophic housing market. With as many as 2.5 million foreclosures likely in 2008-2009, the bill, which doesn’t take effect until October, 2008,  would probably only allow about 400,000 of these to be converted to the FHA mortgage over the next two years, so the vast majority will not be helped at all. To put this into perspective, 740,000 homes went into foreclosure in the last 6 weeks! There are an estimated 25 million homes already in negative equity positions, worth less than the amount still owed on them. They can’t be sold because there is already more than three years  worth of homes sitting empty on the market. Bill Gross of the large Pimco Fund suggested that a better plan would be for the government to simply buy up a million empty homes and “blow them up!” Got to create a little demand, eh Bill?  Meanwhile, forget the tens of thousands of homeless in this country—use dynamite  instead of compassion. What a plan.

Mike Whitney, an intrepid denizen of the blogosphere, had this take on the whole scheme. “The Federal Reserve and US Treasury want a blank check to prop up Fannie Mae and Freddie Mac… But by any objective standard both of these GSEs are already insolvent. Thus, the taxpayer is being asked to rescue a failed industry that has been used for private gain so that speculators will not have to suffer the losses. Even worse, Fannie and Freddie have written hundreds of billions of dollars worth of mortgages that have not yet defaulted, but will certainly default within the next two years. This is bound to batter the already faltering economy….By creating a backstop for Fannie and Freddie, the Fed is linking US sovereign debt with mortgages and derivatives that are already known to be fraudulent. This is a big mistake.” That, Mr. Whitney, is putting it mildly.

How we would hate to have the wealthy capitalists actually face the consequences of their own misdeeds. Heaven forbid they take any loss for the tremendous wrongdoing they have perpetrated on the US economy as a “best business practice.” Why, many might soon be inconvenienced yet again. The wires broke a story in mid July that: “UBS caved in to mounting pressure from the US Government yesterday and announced plans to close the Swiss bank accounts of all its American customers and prepared to lift the veil of secrecy that has protected its clients for centuries.” With the phony false front, tax-evading companies in the Cayman Islands already under scrutiny, now the big Boyz in the suits can’t even hide their profits away in the Alps!

Predictably, the stock market, where a lot of these guys have their money invested, has been quite nervous about the banks.  It was the worst June on Wall Street since 1930, with the DOW tumbling from 13,000+ to an anemic 11,345. All three major indices are off over 14% since Jan 1, and the market as a whole has dipped below that negative 20% “Bear Market” threshold twice. How in the world is a capitalist to make any profit these days? You can’t scheme ‘em in the mortgage game any longer, and all the crap on your books is being exposed for the garbage it has always been. Now what? What’s a fat capitalist pig to eat these days to make a living?

The answer is simple—bet that the whole thing will crash. Bloomberg reported that short selling of stocks reached a high not seen since 1931, with over $1.4 trillion bet that the markets will tank. One individual investor was reported to have bagged over a billion in profits by betting against Fannie and Freddie before the inevitable malady of the housing market threatened their survivability. The two great mortgage pigs fell 68% in two weeks of dismal trading, making a lot of these short sellers very rich. Short selling has so hammered the financials that 19 stocks were placed on a list forbidding shorts for a two week period, all institutions that honed the art of this sleazy trading tactic to a fine edge in their own operations. When the sword cut their way, the SEC moved to protect them, an action that could not have put a finer point on the issue: when banks and large investment houses want to put on the short squeeze, they get the green light as regulators simply turn the other way. But when banks get the squeeze put on them, the Feds call time out.

In my humble opinion all stocks should be placed on that list prohibiting short selling. It should be illegal to profit by betting a stock goes down. Shorts give the market that casino-like atmosphere that begs for speculation and rumor milling aimed at starting the stampede that will rake in enormous cash hauls for the shorting investor. It’s a gimmick, not a legitimate investment in a company, which was what the stock market was once about. Short selling has already cost world-wide markets an astounding $11 trillion in equity losses this year according to Bloomberg. What a game! One has only to wonder where the next shock will hit.

The auto loan and credit card industries, both already under great stress, will probably continue to spiral down into the deflationary hell reserved exclusively for usurers. A net report was circulated on July 23rd about a couple who had their auto repossessed by the lending bank. In spite of four years of flawless, on-time payments, the bank called in the loan and picked up the vehicle, stating in a letter that they would sell it at auction and pay the ex “owner” anything left over after they pocketed their equity. They called it “asset seizure,” invoking a clause that allowed them to call in the loan at any time, for any reason. It’s a sure indication of how desperate the banks have become for capital. Unfortunately, should really large banks fall, they will take a whole lot more down with them, and this is why some animals like Fannie and Freddie are simply more equal than others in this world of digital finance. Hasn’t it always been that way? And here you thought we had something really cool going in this country after 1776.  Guess again.

To show how the slide moves next to credit card providers, American Express posted its biggest loss since the 9/11 attack. Scott Valentin, an analyst at Friedman Billings Ramsey & Company had this to say about the hit to AMEX: "Rapid growth of lending balances over recent years in regions of the U.S. with the worst real estate declines caused greater-than-expected losses.” I’m continually amazed that no one running these think tanks and pillars of the economy ever seems to anticipate these downturns, when I called them years ago, and that without my MBA!

Another prophet, and one who has been remarkably accurate in his daily blog posts, is Mike Shedlock (aka MISH), whose recent comments on the state of our banks  were quite sobering, if not downright chilling. “There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back. What cannot be paid back will be defaulted on. The entire US banking system is insolvent.”

It remains to be seen what can be done to tether and safely dock our Hindenburg economy. Bernanke and Paulson have been pulling one scheme after another out of their hat, but nothing seems to stop the inevitable crash that has been underway for some time. Can the financial gurus make Fannie and Freddie fly? On July 28th the nation’s four largest banks announced a new “covered Bond” program as an alternative way of funding mortgages. It may be just another fire hose on the smoldering ruins of the housing market, and it’s strange (if you’ll allow me to mix metaphors) how the “bang, bang, bang” of the falling World Trade center now stands as an eerie haunting symbol of our economy as a whole, as we have watched one bank falling after another in recent weeks.  Will it all collapse neatly into its own footprint, to be hauled away like the steel beams and quickly shipped to China?  Guess who is holding trillions in “securities” issued by Fannie & Freddie- -the Chinese. The Bank of China has made it clear that it expects to be paid back, and they have the financial lever to make good their demand. If the Chinese ever start dumping US securities en masse, I shudder to think what would happen given our present financial vulnerabilities.

The US, already mistrusted throughout the world for its aggressive military policies, is now about to have its FICO score decapitated. The “full faith and credit of the United States” is rapidly eroding, and sliding away into the zone earmarked “Sub -Prime.” Even nations like Brazil and Argentina are now refusing to use US dollars in their mutual trade agreements. Face it, American credit, and credibility, have been broken in the greatest diminishment of national power since the fall of the British Empire--all courtesy of Bush, Cheney and the Republican party. How fitting for a nation of sub-prime borrowers all struggling to hold on to their little slice of the non-negotiable American Dream, so that the payments they make can feed the coffers of the few wealthy folks set up to profit from all that “passive income,”  you know them, the guys who read “Rich Dad, Poor Dad.” We’ll see how much they collect as it all falls down.

John Schettler – August 1, 2008 - Updated Sept 8, 2008

Readers may be interested to follow the progression of this economic crisis in these articles as well:  Stormfront, USSA, Panic
 

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