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The new Obama administration needs to understand that greatest heist in history is underway - at least $1 trillion is being transferred from taxpayers to debt holders of failed financial institutions - and take steps to stop it before taxpayers suffer further unnecessary losses. Whitney Tilson explains the financial crisis and makes his recommendation. Rather than sticking it to the taxpayers, these insolvent banks should be put into conservatorship: "..... So what's a better solution? I'm not arguing that BofA (or Citi or WaMu or Fannie or Freddie or AIG or Bear) should have been allowed to go bankrupt - we all saw the chaos that ensued when Lehman went bankrupt. Rather, if a company blows up (and can't find a buyer), the following things should happen: 1) The government seizes it and puts it into conservatorship (as Fannie, Freddie, IndyMac and AIG effectively were, to one degree or another); 2) Equity is wiped out (again, as with Fannie, Freddie, IndyMac and AIG); 3) However, unlike Fannie, Freddie, IndyMac and AIG (and certainly Citi and BofA), everything in the capital structure except maybe the senior debt is at risk and absorbs losses as they are realized; the government would only provide a backstop above a certain level. This is what happened in the RTC bailout; 4) Over time, in conservatorship, while the businesses continue to operate (no mass layoffs, distressed sales, etc.), the government disposes of the companies in a variety of ways (just as the RTC did via runoff, selling the entire company or piece-by-piece, etc.), depending on the circumstances (as it's doing with AIG and IndyMac, for example - these are good examples, except that the debt holders were protected). ......"

But then a caller challenged Frank's continued insistence that the meltdown was brought on by Republican deregulation, citing the 1999 NY Times article concerning Clinton Administration efforts to force Fannie to ease mortgage standards in order to provide more minority and lower-income lending. The caller reminded Barney of his own words as ranking member from a 2003 Times piece reporting Bush's initiative to reign in Fannie and Freddie by creating new oversight under the Treasury Department:

Whoa.  This is bad stuff.  The facts, the numbers, the players.  They all point to our Federal government, the Clinton Administration in 1993, Democrat obstruction of much needed reform, and a Democratic Congress in 2007 as the catalist that blew an $18 Trillion dollar hole in our economy.  Miserable socialist bastardos!! excerpt:  Fannie and Freddie's congressional sponsors-some of whom are now leading the administration's effort to "reform" the financial system-have a lot to answer for. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, sponsored legislation adopted in 2008 that established a new regulatory structure for the GSEs. But by then it was far too late. The GSEs had begun buying risky loans in 1993 to meet the "affordable housing" requirements established under congressional direction by the Department of Housing and Urban Development (HUD). Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, Mr. Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to "roll the dice" on subsidized housing support. View Full Image Associated Press In 2005, the Senate Banking Committee, then controlled by Republicans, adopted tough regulatory legislation that would have established more auditing and oversight of the two agencies. But it was passed out of committee on a partisan vote, and with no Democratic support it never came to a vote. By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)-risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices. There is more to th

A very brief summary of the way that Fannie Mae and Freddie Mac are continuing to bail out mortgage investors through their guarantee programs. Total bailouts to keep these bankster clowns in business is $169 Billion paid to mortgage investors via GSE's. And climbing. excerpt: When you get a mortgage, the rights to your loan payments are typically sold to a secondary source. There is a lot of debate over whether the originator of the loan should keep some of the risk, but currently they can make a loan, sell it, and basically be done with it unless they have lied about its contents and are forced to by it back down the road. So the mortgage is sold to the secondary market, likely Fannie Mae or Freddie Mac. In fact, the GSEs and FHA bought or guaranteed 95% of all new mortgages in fiscal year 2011! Mind blowing numbers compared to when 40% market share was seen as high in the early 2000s.  The GSEs then take your loan and put it in a package with other loans they buy and sell rights to the mortgage payments in that package (a mortgage-backed security). The investor is buying rights to part of the principal and/or interest payments, depending on the structure of the deal, on your and many other mortgages. 

Fueled by easy credit, the real-estate market had been rising swiftly for some years. Members of Congress were determined to assure the continuation of that easy credit. Suddenly, the party came to a devastating halt. Defaults multiplied, banks began to fail. Soon the economic troubles spread beyond real estate. Depression stalked the land. The year was 1836.

This morning Business Insider discussed how the size of the bailouts of Fannie Mae and Freddie Mac already dwarfs the benefits the supposedly accrued to home buyers. Over the entire course of their existence, Fannie and Freddie may have saved homeowners $100 billion in mortgage interest. The government, however, has now had to pledge $400 billion to rescue them. $60 billion of that has already been withdrawn. The Business Insider argument this morning demonstrated that the GSE's were colossal policy failures. But we were assuming then that the policy goal was something as benign as delivering tangible benefits to the American people. If you take away that assumption--that is, if you allow for the idea that the GSE's were cynical rent-seeking operations to begin with--you can see that they may actually have succeeded. If the goal of the GSE's wasn't to provide a net savings but to transfer wealth from future generations, they seem to have succeeded wildly. There was no free lunch or extra value or savings created by the implied government guarantee. Instead, the liability for the interest supposedly saved was just pushed forward in time. And now it has come due. That's right: the GSE's operated on the same basis as an exploding mortgage. Low interest at first, with a huge balloon payment at the end. And like a borrower victimized by a predatory lender, we just hadn't paid enough attention to the details to realize that this is how this deal would work out.

the Fed is now engaging in unlegislated, back-door fiscal policy. excerpt:  "The best way to destroy the capitalist system is to debauch the currency." Vladimir Lenin, leader of the 1917 Russian Revolution Last week, while Congress and the nation were preoccupied with the holidays, the Treasury made a Christmas eve announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years. Put simply, in a single, coordinated stroke, the Treasury and the Federal Reserve have encroached on spending powers that are enumerated for the Congress alone. Under the Housing and Economic Recovery Act of 2008 (HERA), the Treasury has no such open-ended authority. Indeed, the applicable portion of the Act explicitly limits the total amount of mortgage principal (not losses, but total principal) as follows: .......... In a sharp break from the past, the issuance of these Treasury securities will not be accompanied by any revenue to the government for Congressionally approved programs. The Treasuries will be issued, the money will be handed over the Fannie Mae and Freddie Mac, and those funds will go largely to the Federal Reserve and other holders of existing mortgage debt simply to replace the bad, but bailed-out agency securities with cash as they mature. The public gets nothing for something - the issuance of the Treasuries is in itself their expenditure.

Good explanation of this 2007 FASB accounting rule that wrecked havoc in September of 2008 when GSA subprime mortgage giants Fannie Mae and Freddie Mac both failed. When the bottom fell out from under the government backed securitized mortgage pools, banks were forced by this accounting rule to radically downgrade their assets. Since banks can only lend against their assets using government controlled ratios, as the asset value was marked to a market decimated by Fannie and Freddie failures and falling housing values, this accounting rule triggered the failure of Lehman Brothers. Because of credit default swaps used to insure these thought to be publicly guaranteed securities, the Lehman failure triggered a massive default at AIG as all Lehman security holders filed insurance claims. What a mess. The authors here propose an end or at the least suspension of mark-to-market accounting rules as an immediate solution. ".... In the 1930s, because mark-to-market accounting existed, we limited the amount of time available to fix problems. At the same time, the U.S. raised taxes, increased spending and economic interference, and became protectionist. This hurt growth. The reason the Great Depression was so bad is that we took away time and growth.

Interfluidity has some very "Dark musings" about Treasury Sec Geithner's plan to bailout the big banks with trillions of dollars of taxpayer funds. The plan is "enronic" in that it proposes to use taxpayer funds to create a market for the toxic assets threatening to take down the big banks. The banks need to dump these AAA Fannie-Freddie mortgage securities, but the market has factored in a reality roughly discounting the value by 60% to 70%; Housing values having plummeted across the nation. If the Banks were to take the hit, and sell this GSA crap at true market value, they would not only suffer enormous losses for their high risk gambling, bu they would also be taken out of the lending market. Banks regulations require strict ratios between assets and lending funds.

So the idea is to have the taxpayers create a toxic asset market enabling banks to dump their crap at above market prices, with taxpayers takign the hit. This hit is masked by a tricky equation; Taxpayers will put up 97% of the funds for the overpriced purchase of crap, with private sector banks, hedge funds, and bond holders contributing 3%. Such a deal!

Heads the banks and Hedge funds win; tails the taxpayer loses. And loses to the tune of over $10 Trillion. GSA wonderkinds Fannie and Freddie have put $5 Trillion of securitized mortgages into the secondary money markets. Leverage that out at 40 : 1, and you have a $200 Trillion problem. Hummm, $10 Trillion looks cheap. "....I am filled with despair, not because what we are doing cannot "work", but because it is too unjust. This is not my country. The news of today is the Geithner plan. I think this plan might work very well in terms of repairing bank balance sheets...." Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repair

This article provides the facts and figures behind the Treasury's Christmas Eve taxpayer massacre ....  lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow. The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses-a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

Like everyone else, Lewis ignored the fact that the CDS market is private only because the Commodity Futures Modernization Act made it that way. It was regulated underground. Without the CFMA, a transparent public futures market in CDSs could have formed and was, in fact, being discussed before the law put the kibosh on it. Everybody and his brother would have seen prices on CDSs for Lehman Brothers and AIG rising during the summer of 2008, harbingers of impending doom, way ahead of the ratings agencies. What's more, banks sold prime mortgage loans and bought "triple-A-rated" collateralized debt obligations (CDOs) only because the Basel II Capital Accords established lower capital requirements for triple-A-rated securities than for prime mortgage loans. When capital requirements drop, you suddenly have more money you can spend on other things. Basel II made the ratings agencies instantly more powerful and important to a bank's competitive position than the behavior of its own underwriters. Throw in the Community Reinvestment Act, two ill-managed massive entities making markets in mortgages (Fannie and Freddie), and the Federal Reserve - a government-created private banking cartel - and you have a government-led financial disaster. There's plenty of blame to go around, I know. But how anyone could miss the massive role of the misguided, heavy-handed regulation is beyond me. Everyone who ought to know better - from hedge-fund managers to our elected representatives - says we need more regulation, not less. Isn't that curious? The solution is never less regulation, and the fault is never too much regulation. If I were more paranoid, I'd cry conspiracy.

Incredible post from Bruce Krasting concerning the upcoming Obama "Jobs" speech to Congress.  Bruce puts a lot of pieces together and comes up with a view that the Federal Reserve is going to pump $1 Trillion into the economy through a massive Fannie/Freddie ReFi Mortgage plan.  It's audacious.  And it's also very likely to happen.  Beware the unintended consequences.  Great comments to this post! excerpt: "Okay. Put these pieces together. What do you have? Assume for the sake of discussion that the President does announce a major new initiative to ReFi F/F mortgages. Assume further that the cost of the millions of ReFi's would come from existing sources (the $35b of already issued and funded Hope Now Bonds), or better yet, the costs would be crammed down the neck of the banks who are servicing the loans (necessary to get DeMarco to go along). Say, for the sake of discussion, that the targeted mortgages are those who have not yet defaulted, but are desperately in need of a break. That amount would come to about $1.4 Trillion. This is a very big amount. Assume finally that the new mortgage rate would be about 4%. This (if accomplished) would be a very big shot in the arm for the economy as a whole. Now do a flow of funds for this mega transaction.

Must read stuff.  The Obama Foreclosure Settlement Act is a clever exit strategy for criminal Banksters having committed the most egregious fraud.  A $9 Trillion dollar problem, rife with criminal activities, is settled for a mere $25 Billion, much of which will come out of the taxpayers hide thanks to Fannie and Freddie guarantees.  This deal stinks of typical Obama crony banksterism.  Now we need to watch for how many millions the Banksters pour into the newly authorized Obama Super PACS.  Should be interesting. excerpt: As we've said before, this settlement is yet another raw demonstration of who wields power in America, and it isn't you and me. It's bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners. 1. We've now set a price for forgeries and fabricating documents. It's $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It's a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law....... 12. We'll now have to listen to banks and their sycophant defenders declaring victory despite being wrong on the law and the facts. They will proceed to marginalize and write off criticisms of the servicing practices that hurt homeowners and investors and are devastating communities. But the problems will fester and the housing market will continue to suffer. Inv

DEMOCRATS CAUSED THE FINANCIAL CRISIS THE COMMUNITY REINVESTMENT ACT