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.

Un-American Freddie Fannie Fury

Fannie Mae is a nickname for the Federal National Mortgage Association. It was created in 1938 following the Great Depression. Its twin, Freddie Mac ─ Federal Home Mortgage Corporation ─ was created in 1970 to further boost home ownership. Both firms have lost over 80 percent of their value as a result of the subprime crisis and are asking U.S. taxpayers and the government to bail them out. Ironically, Freddie and Fannie were the inventors of the mortgage-backed security, the principal cause of the housing bubble and its collapse. The two were complimented for years for their great invention. Now they are scrambling to survive and contain the economic subprime mortgage train wreck they unleashed on an unsuspecting public.

The two “government sponsored enterprises” own or guarantee roughly half of America’s $12 trillion in outstanding mortgage debt. They have combined debts of $1.5 trillion, own or guarantee more than $5 trillion in mortgages and have contracts with other financial institutions worth $2 trillion more to hedge the risks behind those mortgages. Today they cannot raise a dime without government support because they are insolvent.

Both Freddie and Fannie were chartered by Congress to support the mortgage market, but they are owned by private shareholders. Investors have long believed that the government implicitly backs them. That allowed the two companies to borrow at favorable rates, benefiting shareholders and supporting the housing market, but putting taxpayer money at risk. They have used their unusual status and clout to create a regulation free zone around them.

They became highly leveraged behemoths on the implicit guarantee that the government would step in and rescue them if they ever got into trouble. This allowed them to borrow money more cheaply than their competitors, enabling them to make loans more cheaply. That secured more business and rewarded their shareholders, along with their handsomely compensated executives. It emboldened them to trade in highly risky investments. Freddie and Fannie have positioned and portrayed themselves as the political sacred cows of home ownership, thanks to an army of lobbyists, power brokers and political contributors who are shareholders. I agree with former Fed Chairman Alan Greenspan who recently criticized both Fs as fundamentally flawed institutions that privatize profits and socialize losses.

Both Fs made the list of Washington’s top 20 lobbying spenders the last decade. They spent a combined $170 million to cultivate political favors. At the same time, their executives have consistently led the mortgage-banking sector in campaign giving to members of Congress, contributing a combined $16.2 million since 1997. Their lobbyists have played or are playing roles in the presidential campaigns of both John McCain and Barack Obama.

To allow Congress to inject billions of U.S. taxpayer dollars to bail them out is a mistake. America has to get back to the Founding Fathers frontier nation cut throat laissez-faire capitalism that allows losers to die. They should be nationalized and owned by the taxpayers being asked to pay and bear the burden for both institutions greedy mistakes. Their fire sale to taxpayers is in order. The alternative, America becomes more indebted to foreign creditors at our grandchildren’s expense. It’s about time U.S taxpayers got a reward for their continued bailouts of incompetent self-serving bankers witnessed in the bailout of Chrysler in 1979, savings and loans in 1989 and more recently Bear Stearns.

Korean Denuclearization

The recent killing of a South Korean tourist by a North Korean soldier and North Koreans firing off machine-gun rounds at their South Korean counterparts as the six-party talks were to resume in August 2007, are just some of the many surprises and misfires awaiting America after Pyongyang destroyed its nuclear facility at Yongbyon before Korea truly denuclearizes.

North Korea will want the U.S. to take North Korea of the list of state sponsors of terrorism. Dropping North Korea from the list, along with freeing Pyongyang from Washington’s Trading With The Enemy Act, would make it easier for sanctions to be lifted and help ease international suspicions over dealing with North Korea.

The Dear Leader is going to demand that America come clean of listing North Korea on any of its lists of unsavory characters, before he scraps the nuclear program.

The Koreas have been separated by a 248 kilometer-long and four-kilometer-wide demilitarized zone since the end of the 1950-53 war. Minefields and barbed-wire fences guard the approaches to the zone. One does have to wonder how effective they are considering the zone has more wild life species flourishing and growing on the same trails that the four U.S. military defectors took off from their U.S. bases in South Korea, for their own personal rebellious reasons, against America ─ not necessarily because they believed, knew or were prepared for what they defected to.

The North refuses to recognize the line drawn unilaterally by the United Nations Command at the armistice. A big issue is the disputed sea border, brought up again by North Korea, in the course of the denuclearization talks. There will be a lot more misfires at the DMZ and between the six parties at the talks before Korea really comes clean and denuclearizes.