Finish Off Freddie and Fannies Shareholders ─ Save the Creditors

As a taxpayer witness and victim of America’s savings and loan meltdown of the 1980s, I have no qualms advocating that both Freddie and Fannie be nationalized or carved up into smaller entities and privatized at the expense of its shareholders and not be bailed out at taxpayer expense. To allow Freddie and Fannie to continue using Uncle Sam’s credit card as a reward for their denial of the global financial Ponzi scheme and crisis they created as they went bankrupt is criminal. Bondholders and the foreign governmental and institutional creditors who supported their pyramid schemes are the ones to be saved at the shareholders expense ─ not taxpayers.

The last thing either the Federal Reserve or Treasury should be doing is continuing to prop up a dead horse. They should worry about how to constructively pay back the foreign central banks, even though they banked on the misperception that Freddie and Fannie are owned by the Federal government and will be bailed out. They aren’t, and like all mismanaged private corporations should be liquidated, put out of their misery and allowed to utilize the benefits of the new bankruptcy code ─ not taxpayer dollars.

Their debt was perceived as having U.S. government backing thanks to a less than truthful aggressive marketing campaign and should therefore be honored. It must be honored if America wants to continue to gain foreign credit. About one-fifth of the securities issued by Freddie and Fannie, some $1.5 trillion worth are held by foreign investors. In other words, one out of 10 American mortgages is in the hands of foreign institutions and governments. China is one of the largest creditors. Mainland Chinese banks have more than $376 billion of Freddie, Fannie and other U.S. government credit exposure ─ that is on top of the $12 billion exposure to subprime bundled debt the Fs created. The debt was implicitly guaranteed by Uncle Sam. Large Chinese banks typically have about a third of their overseas investment in mortgage agency bonds, according to JP Morgan estimates. Hong Kong bank’s bond holdings in the two Fs, to their credit, is limited to 0.1 percent of their assets.

America can no longer continue on the path of temporary fixes. The financial framework of the 1930s that brought post-depression financial stability has to be updated to meet the financial realities of the 21st-century. It is time to start addressing permanent structural repairs and regulations that properly govern and protect the way U.S. taxpayer dollars are spent and bring an end to the ways they have been repeatedly misused to correct the mistakes of career politicians who are financed by America’s financial and corporate institutional delinquents, including Freddie and Fannie.