July 14, 2008
Column: Guarantees for America’s guarantors
US taxpayers are about to find out what their long-standing and (strictly speaking) non-existent guarantee of Fannie Mae and Freddie Mac will cost them. One way to think of it is this: take the US national debt of roughly $9,000bn and add $5,000bn. Not bad for an obligation still officially denied.
In the end, that astounding prospect might be the outcome. Partial or outright nationalisation of the housing lenders – colossal pseudo-private entities that own and underwrite US housing loans – would add some or all of their $5,000bn (€3,144bn, £2,513bn) in liabilities to the government’s balance sheet. While it is true that the agencies (unlike the government) own housing-related assets that roughly match those liabilities, the still-collapsing housing market makes this a lot less reassuring than one could wish.
Covering the agencies’ losses on their loans and guarantees is going to require an actual outlay, which will fall on taxpayers. You could plausibly call the rest – namely, bringing these “government-sponsored enterprises” explicitly inside the public sector – just a bookkeeping entry. But what an entry! It would surely shake financial markets, raise the government’s cost of funding and put heavy downward pressure on the dollar. Meanwhile, the turmoil impedes or paralyses the GSEs in their crucial life-support role for the housing market.
The remainder of this column can be read here. Please post comments below.
[…] Clive Crook’s blog: Covering the agencies’ losses on their loans and guarantees is going to require an actual […]
Posted by: Fannie and Freddie Get a Helping Hand « The Mustard Seed | July 14th, 2008 at 3:42 am | Report this commentInflation time. The money machine is printing as fast as it can. Comodity play ain’t over.
Posted by: Richard | July 14th, 2008 at 4:41 am | Report this comment“.What will force the issue is the ability of the GSEs to raise new capital and credit from private sources” << Why? This seems to contradict the main thrust of your article. Why is private capital necessary if the GSEs are being monetized, GSEs can simply tap into U.S. taxpayers for bottomless equity and lines of credit?
Jess
Posted by: Jesse | July 14th, 2008 at 6:00 am | Report this commentC’mon Clive, even suggesting (with whispered caveats) that the net sovereign debt would increase by $5b is simple scaremongering. For that to be the case, the entire housing stock of the U.S. would have to have a value of zero. Even if we do enter a *gasp* depression, that won’t happen. It’s just as likely that, once a recovery eventually does takes place, the U.S. govt would find itself sitting on gains from assets it acquired so cheaply.
Saying that the GSEs are “insolvent” on a “mark to market” basis only provides yet another reason why mark-to-market accounting is deceiving, especially when applied to assets that are being held to maturity rather than traded. Mark-to-market losses in a vicious bear cycle can be as effemeral and foundationless as mark-to-market gains in a bubble.
Posted by: Patrick | July 14th, 2008 at 7:06 am | Report this commentPlease could you now write an article about John Maynard Keynes and tell us whether you think he should be restored to cult status. Remember that many of your readers studied economics after his name had been expunged from the canon.
Posted by: David Lehmann | July 14th, 2008 at 7:45 am | Report this commentThe very wrong business model, invented by the US Government, with the purpose to encourage the American people to take home and educational loans at the Fannie Mae and Freddie Maccolossal pseudo-private entities, which in fact are government-sponsored enterprises that own and underwrite US housing, comes to its logic end. There was no magic behind this scheme of financial resources manipulation. The main idea was to create a powerful myth about the American economic growth and prosperity using the long term credit financing mechanism, which was based on the US government money printing machine during last 15-20 years. The reality is that the loans can’t be paid back, because the Americans and Canadians have no real jobs as a result of North American economy downturn. In other words, the money was not supported by real economic growth. The conclusion is that the global market can’t and will not tolerate the US government financial interventions in the form of money pumping in the US economy. At present, the process of revaluation of the US economy takes place and we can expect that the US will be well behind other developed nations.
Posted by: Viktor O. Ledenyov | July 14th, 2008 at 2:30 pm | Report this commentGood piece.
Posted by: A Hodge | July 14th, 2008 at 2:40 pm | Report this commentFor their balance sheet, the point is that the $5 trillion “assets” might actually be worth $4.5 trillion, or maybe $4 trillion if house prices keep going down. thats a half trillion to 1 trillion loss, dwarfing the 80’s S&L crisis for example
Think of Fannie/Freddie as $ trillion SuperSIVs with “no” capital and bad assets, AND mortgage pool insurers with “no” reserves
By no capital, I mean about 1 1/2% against $1.6 trillion of unmarked mortgage assets on their books. By insurers with “no” reserves I cant find reserves of more than 0.1% on their balance sheets. They have been taking the insurance premiums, $ 7 bio/yr? and using them as hand to mouth earnings, rather than putting 50% or more aside as a respectable insurer would.
I(sn’t free and “lightly regulated” market is a wonderful thing when you can always fall back on the taxpayers? Let us not get over optimistic and expect a happy ending soon. Are we going back to the “financial stone age”?
Posted by: Dioak Ghosh | July 14th, 2008 at 2:54 pm | Report this commentI agree with your calculations. The US government financial game is over. Now, it is the time to pay all the accounts. The bad thing is that the execution of very wrong US governmental policies during last 10-15 years will force most of the Americam families budgets into the red and make them very poor very soon.
Posted by: Viktor O. Ledenyov | July 14th, 2008 at 2:58 pm | Report this commentIs it possible to freeze the “ninja” mortages for a year to 16 months and spread that payment over the remaining years? In the meantime, the economy needs to be kick started so that these people have jobs and can pay the mortage. Then the loss will be minimal.
Posted by: KMGuru | July 15th, 2008 at 1:59 am | Report this comment