How to fix Fannie Mae and Freddie Mac: Nationalize 'em

William Poole has long warned that mortgage titans Fannie Mae and Freddie Mac had grown so large that they posed a serious threat to the U.S. financial system.

It looks like the former Federal Reserve policymaker had it right. Stocks of both companies are in meltdown mode this week, sending ripples through U.S. markets, on fears that they don’t have the capital they’ll need to survive rising mortgage defaults.

So let’s admit the obvious, Poole suggests: Fannie and Freddie should be nationalized.

In America, nationalization is among the dirtiest of words. It conjures the image of the government grabbing control of private-sector assets.

But Fannie and Freddie, which buy or guarantee mortgages to support the housing market, are strange animals. They are owned by shareholders, but they were chartered by the government, and they’ve grown to their gargantuan sizes ($843 billion in assets at Fannie, $803 billion at Freddie) because investors worldwide believe their debts have the implicit backing of the U.S. Treasury.

If Fannie and Freddie face a wipeout of their capital because of loan losses, then, Uncle Sam couldn’t possibly allow the companies to collapse. So why not just nationalize them now, turning them into full-fledged government agencies and thereby taking away the uncertainty on Wall Street about their ability to continue buying home loans?

Poole, who was president of the Fed’s St. Louis branch until he retired in March, said in an interview with Bloomberg News this week that nationalization was "the only practical course" for Fannie and Freddie.

Though he’s often labeled a curmudgeon, the 71-year-old Poole isn’t alone in his view of what to do with Fannie and Freddie, which combined either own or guarantee a total of $5 trillion of U.S. home loans, nearly half the entire market.

"We have to stop pretending these are private companies," said Christopher Whalen, a managing director at research firm Institutional Risk Analytics.

There has always been an inherent conflict in the structure of Fannie and Freddie, Whalen notes: Their shareholders would reap the benefits if the companies took big risks and won, while it was presumed Uncle Sam would have to pick up the pieces if the companies blundered.

In Washington, Treasury Secretary Henry M. Paulson Jr. and others want Fannie and Freddie to get back on their feet on their own. But if the companies try to raise massive sums of new capital by issuing stock, they will severely dilute the ownership of their current shareholders (that’s a big reason the stocks have nosedived).

And what if, six months from now, the loan losses turn out to be so massive that any additional capital the companies raised in the interim is burned up?

Politically difficult as it may be, Whalen says, if you make Fannie and Freddie government agencies now, "you take a major source of instability out of the market. You don’t have to worry about it anymore." That would be one less issue for the housing market, which obviously has plenty.

Given the dilution risks they already face, shareholders of Fannie and Freddie ought to welcome a buyout even at these depressed prices, Whalen says.

In terms of stock market value, all that’s left of Fannie and Freddie now is about $18.2 billion, combined. Wall Street wouldn’t even notice that amount disappearing from the public market.

Comments

[Steve Matulis]

"...Their shareholders would reap the benefits if the companies took big risks and won, while it was presumed Uncle Sam would have to pick up the pieces if the companies blundered."

Why not call it what it is? Privatized gains,socialized losses. "Uncle Sam" picking up the pieces really means "all of us taxpayers", since this is where Uncle Sam's money comes from -- taxes.

"nationalize them now, turning them into full-fledged government agencies and thereby taking away the uncertainty on Wall Street about their ability to continue buying home loans"

This means common shareholders get zero. While this takes the uncertainty out of Freddie and Fannie's share prices, it will cause financial institutions to collapse further as investors pull out and put their money into energy / commodities / etc.

To make a long story short, confidence is shot because all of these organizations, from Fannie and Freddie to all but a few banks in our land, are ALL insolvent and being propped up with smoke and mirrors right now.

[rc whalen]

The Ugly Girls, Fannie Mae and Freddie Mac, have failed, it is only now a question of the reckoning. The sane policy is to nationalize and then merge FRE and FNM. Once this is done, Treasury should run the newco under the Greenspan/Shelby Rule, where anything that can be sold should be sold. That means total assets drop to $200-300bn for conduit only and interest rate/systemic risk goes away. We never hear of the GSE called ever again. That is the good news. If Treasury moves swiftly to resolve this situation, we can end up better off on the other side.

[plankbob]

Health care also needs a fix that could include some form of nationalization.
Socialized medicine is NOT to be feared.
Do you hear of any citizens of countries that have national health systems clamoring for one like America has? No.

[tornadoes28]

Nationalize them? What is this, Venezuela? That is the dumbest idea I've heard. My God , this is the United States, not China.

[robert NO longer in LA]

Well, bush has Fema'd us again! What a man! What a war president! bush has FINALLY achieved something....something that Marx and Lenin, Mao and Bin Laden have failed to do....DESTROY AMERICA FROM WITHIN. Be sure to re-elect all those party stooges in Washington DC, and remember to stay faithful to the Dem Party in Sacramento, LA and SF. Just keep rewarding the two parties' stooges when you vote in November...you're getting a Bill, and a danged BIG one!!! Great job bush, cheney, feinstein, boxer, pelosi!!!!

[HighwayMan]

Let them fail! The market will correct itself. It may take years, but in the long run we'll all be better off.

[Jack]

All we need now is George W. Doofus to stand before microphones and assure us everything is okay. When he did that the last time, the Dow dropped like a rock.

[356man]

Hey, if we are going to go on a nationalization kick, why not start with the oil companies, then use their obscene profits to prop up the real estate ripoffs. Throw health care in there, too--then our whole lives can be run by one giant Post Office/DMV/Your Government Agency Name Here group of folks. I can hardly wait...

[Drew]

I really cannot believe that we have Americans on this board saying to Nationalize? This is against American values, we are a free market and just because the interests of a few affected the whole economy and I am not talking about the mortgage bubble. Did we not all hate the Russians not too long ago? What happened to the American spirit, the problems of the economy can be traced back, maybe it is time we punish those responsible. It is simple, we cannot have a Federal Government this big, there is not enough revenue coming in. America was never meant to be a nationalized state or have fiat money and we as the people have let the reins go and it is time to get them back for our children’s future. the problem is the Government people, where do you think the money to "Nationalize" this is going to come from?

[anonymous]

This makes total sense. Let's shove this problem down 100% of the taxpayers throats. Afterall, the problem is about 10% of taxpayers. Looks like Bush logic to me.

[Vette]

This is so wrong how can we have such a dump in the market I feel someone need to fix this and soon

[LS]

Here's a simple fix: Outlaw shorting of stocks. Shorters exploit and accelerate these situations by drastically increasing the trade volume of a stock. If Bush had any brains or guts he would issue an Executive Order temporarilly stopping the shorting of Fannie Mae and Freddie Mac stocks.

[London Limey]

to the person who made the comment about it being a dumb idea and the US is not china, he is right about the second part. china has a trade and budget surplus, massive amounts of liquidity (possibly too much), and unlike the US, its not financed on the back of treasuries sold in the open market. after all, why would they borrow money when they have lots already. there is no chance of a china defaulting on any debt. if fannie and freddie were allowed to collapse it was would have a knock on effect on all those treasuries issued and sold by the US government, and would cost the US taxpayer trillions of dollars. thats a lot of money even for the richest nation on earth and america would have a sudden economic depression that would make the 1930's look like a picnic.

at the moment the fed just needs to keep a close watch but be ready to jump in at a moments notice. they need the plan in place now and hope they dont have to act on it.

one final note: the fed is doing as much as it can and is very active. am not seeing much from the white house and have not through out the whole course of this administration. tax cuts are not the only instrument available to Bush. he should never have run up such a large national debt and budget deficit. he should have encouraged a stronger dollar than the devaluing inflation producing currency it is now. if he had shown as much determination in reforming social security and promoting financial prudence with regards to the budget, as he has over foreign policy, things might not be as bad as they are.

[freddie wac]

Look, if China hold the majority of the stock and loans then the the obvious solution is bankruptcy.

[Wouldn't You Know It]

An important reason why these two entities had private sector elements to their structure was that it prevented politicians from meddling in business decisions. Granted, free enterprise didn't do well with the mortgage meltdown and all, but the perverse political incentives (interest rate policy, tax benefits of homeownership, lack of regulatory framework for intermediaries, etc.) leading free markets into the mess were partially to blame. What will happen if these two are nationalized and effectively being "the market" for mortgages in the U.S. Would you trust the likes of Ms. Richardson or Mr. Dodd to decide how to run these nationalized companies and make the management decisions on who to lend your, the taxpayers money to? I have NO faith in the ability of politicians to run a business capitalized by taxpayers. Watch your taxdollars at work if that happens.

[Angelique]

Yes, nationalize and we don't have to worry about this instability in our market in the short term, but in the long term we have to worry about the combination of increased monetary power and socialist policy undermining the basic principals of our government.

The problem with "government backed" is that we are not eliminating risk, we are putting it squarely on the backs of taxpayers. Every mortgage has a certain risk factor, but the bank enjoys less risk when the government agrees to step in and bail them out. As a result banks give more loans to risky borrowers. Don't think they are doing these borrower's a favor: the government is encouraging home ownership among Americans who are likely to end up facing devastating bankruptcies and foreclosures. While individual banks and investors may be to blame for supporting subprime loans and being complacent about inflation, these investors would have been reigned in long ago if shareholders did not intuitively know that in the end the US Treasury (read: US Taxpayers) would protect their assets.

This economic policy all points to a commonly accepted that appears no where in the laws of economics: growth of our GDP must be protected and encouraged at all costs. Occasionally it is healthy for the economy to slow down, and even contract after periods of inflation. FDR went too far when he created Fannie Mae and Freddie Mac, and it's time to end it.

Tu ne cede malis, sed contra audentior ito.

[Derek]

The irony of government intervention.. FNMA & GNMA were created to help provide affordable financing so the middle class could afford to buy a home. But cheap financing lead to higher asset prices and not quite so affordable housing. So at the end of day what did we do other than exacerbate volatility?? Good idea, but bad execution. They will be nationalized, and anyone who pays taxes or holds US dollars will foot the bill - not pretty.

But here's an opportunity - have the U.S. purchase preferred stock in FNMA & GNMA, stabilizing the capital structure. Next, increase their capital requirement to avoid future bubbles (the exact opposite of what the dumbest man on earth, Chuck Shummer, had done). It may take a decade or more, but at the end of the day Government will get some kind of return this "investment". The Commons be damned, they placed their bets and they lost..

[bkl]

If Bank of America issues mortgages and doesn't want to hold them in its own portfolio, why is it the government's job to buy, package, and resell them for Bank of America? Let Bank of America bundle and sell its own mortgages.

Fannie and Freddie should be allowed to fail and disappear. The claim that Bank of America can't issue a mortgage without their help is fiction.

[snake eyes 4u]

just because i'm public-spirited enough to pay all of my taxes, you think i'm some kind of chump, huh? why not let those worldwide investors take a bath instead of the few remaining taxpayers in the above-ground economy who pay for your police, fire, teachers, road services, etc. let 'em die!

[TDK]

Derek said: "increase their capital requirement to avoid future bubbles". Of course that's right and of course exactly the opposite happened. As the mortgage backed security market started tanking last year OFHEO reduced the margin requirements so that Fannie and Freddie could help deleverage the banks by taking on more leverage. The gov't has been bailing out the banks and hoping that confidence in Fannie and Freddie would stem the crash, but it's looking like we've only put it off. Yet another example of what Kevin Phillips called the "socialization of risk".

[Mariano Guerrero]

By nationalizing Fannie and Freddie, the U.S.A. would be capitulating to Latin American political thought process that has proven the state owned companies DO NOT work! Although the fall of these entities would hurt all Americans, it’s the price to pay to for letting things get out of hand, lets face it… our regulating institutions and over-greedy businessmen failed! But let’s not add shame to the failure by recognizing a Chavez, Morales, Kischner and all other 3rd world minded SOBs that over that past 50 years have driven other 1st class developed American countries (i.e. Argentina, Columbia, Venezuela, and etcetera) to there current situation of under-development, instability, injustice, inhumane and so many more negative adjectives.
If Fannie and Freddie, must fall lets make sure that those responsible (within the companies and within in the government regulators) pay for their incompetence and corruption. We must also hold the politicians accountable for their part in this mess.
And let’s learn from this.

M.G.

[Surfside7]

The "implicit" guarantee that the federal government has "bestowed" or "endorsed" on these hybrids creatures (FNMA & Freddie) creates a situation where the government can't just walk away from the mess. The government needs to nationalize these entities; there is no other choice. To delay will just prolong the agony.

The government must not cut in the stockholders of these two entities with a Bear Stearns style "bailout". The stockholders and the management of the two entities must be penalized (and heavily) with the management (including past managers) having to disgorge their unlaw gains (bonuses, incredibly high pay, etc.) Racketeering statutes should be utilized to get these monies back from these transgressors.

FNMA and Freddie have been political spoils operations for many years. Franklin Raynes was never prosecuted for his operation but of course he was placed there by Democratic party operatives and the money circled around.

The government needs to rechart a course to step out of the housing industry. None of these crazy loans (no money down, no docs loans, cash flow (Alt A) loans) would have been made if institutions and individuals had thought they might lose their funds if the loan didn't perform.

The government needs to get rid of the HMDA law and the High Cost Mortgage rules. Certain perameters need to be set so that banks and companies don't victimize consumers (similar to Usury Laws). Its obvious that high cost mortgages are usually tied to risky, imprudent and unworkable loans. Further, with regard to HMDA, banks and mortgage companies don't care what color or nationality you are; they should, however, feel comfortable that the borrower has the means and propensity to pay back the obligation.

[Goldie]

If taxpayers money will be used to bail out, then the taxpayers should get benefit. Either nationalize or let them fail on their own.

[LT]

Either let them fail or nationalize them.

If the taxpayers keep bailing out these idots than they should be nationalized.
WE'RE PAYING ANYWAY !!!

[meredith]

Thanks, Hugo! (This article WAS written by Hugo Chavez, wasn't it??)

[paving]

Hugo Chavez hasn't been running Venezuela for the past 50 years, only the past 8 and Venezuelans on the whole are better off.

Only a brain-dead ideologue fails to see that these companies are "private" for only one reason and that is to allow a few more people to skim from the top and to create an incentive to "innovate" eg push the stock price higher. The idea is that if you inject the element of greed into a socialist-by-design plan it'll generate more profits. In reality it simply generates more greed, risky investing and ultimately the disastrous loss of many large and small fortunes.

These companies were founded to make sure that the land and property of the United States was not solely owned by a tiny percentage of the people, super rich people like Carnegie and Rockefeller for example. The American dream of owning a house exists because of the government organization known as Fannie Mae and its IMPLICIT support of the common people of American in their goal to own a piece of their home.

Without this kind of government support we would nearly all be renters.

if you value home ownership as you should then you should value the fact that the US government used its weight all these years to convince a bank to loan you money to buy a house. Now that the government organization tasked to do this has over-leveraged itself IN ORDER TO BAIL OUT OTHER FULLY PRIVATE COMPANIES and prop up it's stock price IN ORDER TO INCREASE PROFITS for stockholders it's time to restrict this privatization as it is doing us a dis-service.

Fannie Mae doesn't need a profit-motive. End of story. Nationalize it.

If it becomes clear that our financial maturity in this country is such now that we can do without a government-backed mortgage lender than let's phase out Fannie Mae in a controlled fashion that allows the GOVERNMENT TO RETAIN THE ASSETS.

If you let this "private" company, which owes all of its wealth to the US Govt, sell off it's assets we the people (taxpayers) will see none of this wealth but a bunch of bankers who buy up those assets will.

The current Administration has completely and utterly screwed the pooch and the average citizen in an effort to suck every last possible penny out of the public trough for the benefit of a wealthy, powerful and connected few. Don't fall for their line or their ideology.

The focus here must be on what can be done to save the mortgage industry right now, not on the ideology of what you think in fantasy land should be the world. Once the industry is stabilized we can re-visit its structure, which surely must change.

[Copilot]

interesting, what about military? Seems like nobody has any problems with military run by the government? Some of us have these very deep fears when it comes to nationalization, but times change and something must be done to prevent the total collapse

[pleides]

Investors are making a run on Fanny Mae and Freddy Mac. It is interesting to see how this crisis is different than ones in the 1930s.

Investors have been massively enriched under the Bush years.

President Bush II has resulted in an increase of the national debt that, perhaps, is only surpassed by President Bush I and Reagan. Many of us remember that, under Clinton, we were prosperous, our financial markets were sound, and we were paying down the national debt.

It seems that President Bush II’s most urgent economic policy has been tax cuts on the rich—that is – the investment class.

When Bush invaded Iraq, he was the first leader of a great power since Hitler and Stalin in 1939 to invade a sovereign state.

Under Bush, the rich have prospered and, at best, the middle class has stagnated. Most are worse off than before.

Many of us are ashamed that our nation can, with justice, be compared objectively to Nazi Germany and Bolshevik Russia. Many of us are ashamed of those who cannot appreciate the dreadful historic precedents our current President has created.

As of today, every major environmental initiative President Bush has had EPA create has been ruled illegal by the courts.

Climate change is a pressing issue suppressed by Bush for most of his reign.

It is time for a complete repudiation of those excesses.

It is time for a comprehensive repudiation of his policies across the board. The whining classes – especially those investors who expect succor from the US government as they make a run on those institutions created to bring the benefits of prosperity to the middle classes – will see severe punishment in the times to come.

[Doug]

For all of you people screaming about "the dangers of nationalization" and let them fail even if it takes years to repair, I can't wait another day. It cost me $4.65 per gallon for gas on the 4th and I almost had a heartattack yesterday when I got the grocery receipt at Ralphs.

I believe in a Free Market system, but I know that when the Market gets rough, the Market RARELY takes care of it's self. Those those in the private sector with power and cash that are suppose to step in, don't. They just hold their purses and ride it out, while everyone else who isn't rich goes through hell.

The government has to do something. All the talk about this isn't Russia, this isn't China is stupid. Russia is doing fine with all that oil it's sitting on. China has a booming ecomony and more cash than it knows what to do with. We can't keep the stranglehold policy that the US must be a Free Market, while the other governments of the world are happy to come in and "help" an American company.

I don't know if it means buying stock in Freddie and Fannie, a full takeover, or what. All I know is that the government can't sit on the side. By the end of the year we could have a lot of business failing, companies like GM, AIG, and United that will take big chunks of the country with them if they go under.

If this is only the begining, we can't wait it out.

[Uncle%20Billy%20Went%20to%20Washington]

I wonder if the rest of the world thinks that the U.S. is "too big to fail."

[Michael Snyder]

Once again with more of another bad idea... I'm consistently dumbfounded by how much we've become just like the "Great Red Menace" we stood ready to defend ourselves from for generations. California leads the way with legislation on everything from dog ownership to processing zucchini with NY running alongside towards a photo finish at the Orwellian nightmare.
The real responsibility for this crisis lies at the feet of the Wall St. geniuses who decided you really didn't need to know what mortgages you were purchasing when you invested in one of their mortgage backed derivatives. This allowed them to manipulate the "value" of these instruments without proving their worth. Sure, a few folks racked up a lot of commissions, but every rancher knows, get that hay wet after it's cut & it's worth half the price. You don't have to wait for the mold to form, common sense tells you it will & that mold will kill your horse. Conversely, if the broker hustling "mortgage backed securities" can't tell you what mortgage(s) you just bought, it's only a matter of time before your investment cholics. (cholic is often fatal to a horse)
Nationalizing any business is simply transferring control from the existing marginally competent management with little accountability to completely incompetent management with no accountability at all. Instead of looking to the taxpayer to save Wall Street's ass we should be looking to government to jail the incompetent fraudsters who built this house of cards. Instead we pay them lotto sized severances and look to the workin' Joes to once again foot the bill.

[Bill Riley]

The Government-Created Subprime Mortgage Meltdown

The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria.

The original lobbyists for the CRA were the hardcore leftists who supported the Carter administration and were often rewarded for their support with government grants and programs like the CRA that they benefited from. These included various "neighborhood organizations," as they like to call themselves, such as "ACORN" (Association of Community Organizations for Reform Now). These organizations claim that over $1 trillion in CRA loans have been made, although no one seems to know the magnitude with much certainty. A U.S. Senate Banking Committee staffer told me about ten years ago that at least $100 billion in such loans had been made in the first twenty years of the Act.

So-called "community groups" like ACORN benefit themselves from the CRA through a process that sounds like legalized extortion. The CRA is enforced by four federal government bureaucracies: the Fed, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The law is set up so that any bank merger, branch expansion, or new branch creation can be postponed or prohibited by any of these four bureaucracies if a CRA "protest" is issued by a "community group." This can cost banks great sums of money, and the "community groups" understand this perfectly well. It is their leverage. They use this leverage to get the banks to give them millions of dollars as well as promising to make a certain amount of bad loans in their communities.

A man named Bruce Marks became quite notorious during the last decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He once boasted to the New York Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation, and the Fleet Financial Group. And that is just one "community group" operating in one city – Boston.

Banks have been placed in a Catch 22 situation by the CRA: If they comply, they know they will have to suffer from more loan defaults. If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars. Like most businesses, they have largely buckled under and have surrendered to their bureaucratic masters.

Consequently, banks in every community in America have been forced to hold a portfolio of bad loans, euphemistically referred to as "subprime" loans. In order to compensate themselves for the added risk of extending these loans, many lenders have increased the lending fees associated with mortgage loans. This is simply an indirect way of doing what banks always do – and what they must do to remain solvent: charging effectively higher rates of interest on riskier loans.

But this is discriminatory!, complained the "community organizations." Thus, if one browses the ACORN web site, one can read of their boasts of having "predatory lending laws" passed in numerous states which outlaw such fees, prohibiting banks from protecting themselves from the added risk involved in making forced loans to "subprime" borrowers.

These are price control laws, and price controls always cause shortages. Normally, banks would respond to such laws by extending fewer riskier loans. But in this case the banks are forced to continue making the marginal loans by their bureaucratic masters at the Fed and the other three federal bureaucracies mentioned above. So-called predatory lending laws therefore force the banks to "eat" the losses. This is undoubtedly a contributing factor to the bankruptcy of dozens of mortgage lenders over the past year.

Then of course there is the issue of the Fed’s monetary policy having created the housing bubble, characterized by a spectacular escalation of real estate values in every American city over the past decade or so. This created a further problem for the financial institutions that are victimized by the CRA. They are forced to make a certain amount of bad loans, but because of the Fed-created explosion in housing prices, many thousands of subprime borrowers no longer qualified, by a long stretch, for conventional mortgages based on their incomes.

The only way these borrowers could qualify for their mortgage loans (even ignoring their bad credit ratings) was to take out adjustable rate mortgages, some of which had astonishingly low first-year rates in the 3 percent range, and sometimes lower. This is what has largely fueled the subprime mortgage meltdown – the inability of thousands of subprime borrowers to afford their mortgages now that their rates have adjusted upward. Thus, the combination of the Fed’s enforcement of the CRA (with the help of political pressure groups like ACORN) and its post 9/11 monetary policy in general are the reasons for the bursting real estate bubble and the "subprime" mortgage meltdown.

Don’t expect to read about this in the "mainstream media," however, which generally views groups like ACORN as heroic champions of the poor, laws like the CRA as anti-discrimination laws, and places all of the blame for the subprime mortgage meltdown on greedy capitalists, especially mortgage brokers. Encouraged by such reporting, the odious Senator Charles Schumer of New York has promised federal legislation that will reign in these miscreants, while the Bush administration is proposing an indirect bank bailout by having the Federal Housing Administration cover many of the bad "subprime" loans. This will create what economists call a "moral hazard" by encouraging even more bad loans to be extended in the future. Every banker in America will be glad to extend loans (at high rates of interest) to the most uncreditworthy borrowers if he thinks there is no possibility of default with the FHA effectively guaranteeing the loan.

[hhGrEd]

so not that the stocks have hit an altime low now would be a good time to make a move and buy up some shares right?

[baba booey]

Howling at the moon

I am not the only guy who knows that it is impossible for the vast majority of people to make a long-term profit in the stock market, and in fact the majority of people must show a loss, which I infer from Howard S Katz of thegoldbug.net, who handily calculates the proof, in that "From 1966 to 1982, the DJI dropped 22% in nominal terms, but correcting for the depreciation of the currency, this was a drop of 74%." Yikes!

In fact, he says that "if you took the establishment's advice and bought 'good, sound stocks for the long pull' in February 1966, then you had to wait until 1995 to get back even in real terms, and today you have a miniscule average annual profit." Hahaha!

It took 29 years, and all that inflation, before you broke even? And this does not even account for the expenses or taxes you have to pay? Hahaha! So, tell me: How many people financed their retirement on that that kind of gain? Hahahaha!

Mr Katz's title was, "Why I Am a GoldBug", and towards that he writes, "The 10-year commodity upswing of the 1970s was preceded by a (much milder) easing of money and credit from 1963 to 1971", which comes out to eight years, but now "the current commodity pendulum was preceded by a 20+ year easing of money and credit"!

He concludes that the new commodity bull market "therefore has the power to go twice as long. If we date it from 2001, then we can be looking for the ultimate commodity top around 2021." That's 13 years from now! A 13-year bull market! Whee!

I can sense that you are wondering "What does this have to do with gold and how I can make a lot of money in gold?", which is what I was wondering, too. It turns out to be easy; since gold is expected to again be the numero uno commodity in a commodity bull market of 13 more years, he says, "So I plan to be a gold bug until approximately that date"!

Junior Mogambo Ranger (JMR) Jeffrey M says that since we are talking about gold, in a manner of speaking, the US economy has been in a recession since 2002, since "GDP as measured in gold has dropped from 33.8 billion ounces of gold in 2002 to 19.9 billion ounces of gold in 2007," which is about a 41% decline! Yikes! That's a big drop in GDP!

But this makes perfect sense if you are unlucky enough to listen to The Loudly Irritating Mogambo (TLIM) droning on and on, relentlessly pounding, pounding, pounding the same belabored point, which is that "gold rises in value to the extent of the devaluation of the currency in which it is priced," which has a big, fat QED at the end because this rise in gold that produced the 41% drop in GDP when measured in gold, is perfectly reflected by the 40% drop in the exchange value of the dollar (as measured by the dollar index), which has recently broken below the 72 level, down a similar 40% from about 120 in 2002!

It's almost magical! I waited and waited for the applause that never, alas, came, and everyone else in class was looking at me with this look of ill-concealed contempt on their stupid faces, which is distinguished from their usual disrespect for me and my Fabulous Mogambo Ideas (FMI), which in turn explains my self-righteous vengeful hostility to them all, which is another, more disturbing, subject entirely, so let's not go there.

I soon learned why they were so unusually antagonistic to me; I had not read the homework assignment like I was supposed to, and they had. Big deal! They did not know that I had to spend a lot of time last night arguing with the wife and kids about the financial benefits of them eating what appears to be a really, really cheap canned dog food imported from some weird country, with a label written in a language nobody even recognizes, thus generating real savings in the food budget! It seemed like a no-brainer to me!

Their ears were, unfortunately, rudely deaf to my helpfully translating the label to prove to them that it will provide adequate nutrition to their stupid lives, especially considering that they don't need a whole lot of energy to just sit around on their fat butts all day, watching TV and playing video games, talking on the phone with their stupid friends, yak yak yak, about (I suspect) what a horrible father I am, and how much they hate me, and how they are going to kill me by putting poison in my food. You know - the usual.

But I did not have to read the stupid assignment to know that BEA.gov says that in 2002, GDP was $10.5 trillion, while in 2007 it was $13.8 trillion, for an economic gain of 31%, but the punch line is "But you're a big fat loser (BFL) because the dollar's buying power went down by 40%! Hahahaha! Loser!"

The class is quiet, too stunned and bewildered to respond. Seizing the initiative, I explain, "Okay. Putting your petty little Earthling grievances and stupid ideas aside for one moment, if you can, imagine that you invested $100 in the stock market in 2002."

Most of the class was already bored and confused, and I hated them all the more for it, but I relentlessly droned on, "Now, fast forward five years, and I laugh when I notice that the passage of time has not been kind to you!" Hahahaha!

"But I laugh even harder to see that you are still stupid, as you happily drool on your brokerage account statement when you notice that you 'made' a $32 gain on that original $100 investment, notwithstanding all the money which you had to pay in expenses (of at least 2% a year on ALL the money you have invested, in order to have your account 'managed'), for a total of about 3.2% of your money, but you also have to pay 15% of the long-term capital gain as a deduction from the $32 'gain', or $4.80!"

By this time, even I was getting pretty confused, but I managed to bluff my way through a little more by saying, "And it doesn't take a smart-mouth accountant rudely telling you that your records are a 'mess', because you are an incompetent boob about accounting, to make you realize that you netted, after all is said and done, a lousy $27.20 on the original $100 investment after five years!"

There were a few impatient calls from the audience to "Shut the hell up! A 27% gain is pretty good!" and "Is there a point to any of this, you Revolting Mogambo Halfwit (RMH)?" To this kind of rude audience response I rudely say, "I laugh uproariously, 'Hahahahaha!', at you and your stupidity! But I already knew you were all stupid, or else you would have realized what a warm, charming, and perfectly delightful person I am, a real peach of a guy, a 'darling' some would say, but none of you did! Proving that you are all stupid, stupid, stupid! Hahahaha! Stupid!"

Judging by an onslaught of spit and obscenities hurled at me, I knew I had hit a nerve with them, so I helpfully went on, "And to show you the price of your stupidity, the buying power of the whole $127.20 wad, including both the original $100 investment and the $27.20 net gain, has lost 40% of it's buying power! This leaves you, the idiot 'investor', with a measly, pathetic $76.32 in real, inflation-adjusted 2002 buying power! Less than you invested!"

They all inexplicably shut up, obviously confused, which made me laugh all the louder. I patiently explained, "You invested $100 in 2002 buying power to get back, after five years, $76 in 2002 buying power! Hahaha! Your 'fabulous' investment made a paper gain, but produced a real, inflation-adjusted loss of 25% of your money! Hahaha!"

My voice dripping with acid and sarcasm, I smile and say, "Nice investing there, Mister and Ms America! You can fund a REALLY nice retirement by losing 25% of your buying power every five years! Hahaha!"

Well, JMR Jeffrey was apparently not ready for my scathing criticism, biting humor, witty asides, clever rejoinder, or Raw, Seething Mogambo Hatred (RSMH). Trying to quickly defuse the situation, he adds that "The situation is even worse in terms of silver", in that GDP measured in ounces of silver went from 2,276.5 in 2002 to 1,034.2 in 2007. A 54% fall in GDP in five years! GDP declined by over half!

I howl in fear. I howl in dismay. I howl in outrage. OwwwWWWWWwwww!

http://www.atimes.com/atimes/Global_Economy/JD02Dj03.html

[Roland]

Since Fannie and Freddie are "too big", reduce their sizes. This might be done via a diet, such as a 9 for 10 diet. For each $10 of principal that they collect, they are allowed to make $9 of new loans. This slims them down slowly, in a controlled manner.

If it is determined that the federal government must inject capital, then it should simply buy newly issued preferred or common stock, expecting to later sell it in small pieces via the NYSE.

[David]

Let them suffer....this is what you get for no oversight and doing bad investments.....either way, the market is a mess and Fannie and Freddie are just helping...but eventually things will correct itself....

[John T]

The issue is not about shorting stocks. Its that the GSE 's are insolvent. Its akin to tide having gone out & the Emperor has no clothes on. There is systemically too much debt in Australia US, UK, Ireland & Spanish economies. If you check the total amount of debt across the above nations versus GDP you will then get to see the big picture problem. As Warren Buffet has been saying for years http://www.berkshirehathaway.com/letters/growing.pdf

[Joe From the Beach]

The shareholers of both Fannie and Freddie are toast. The existing failed management of the two GSE's should fall on their swords.

Neither group is that important.

The important part are the creditors of the GSE's.

The GSE's debt must be given an unequivocal full faith and credit pronouncement by the US government.

There is no other choice, as failure to do will bring down the US banking system, including, maybe,the Federal Reserve itself.

How can this be done without run away deficit spending?

Simple

A drastic reduction in defense spending.

Sue for peace, worldwide.

[Buckoux]

"Nationalization" is a ruse to collectivize (and thereby politicize) any poor, or unpopular, management of a segment of a nations economy. It's good for the politicians who propose such a bromide and of very dubious benefit for the public. Health insurance and mortgage lending, or mortgage lending and health insurance, are pretty much the same financial service; small payments against a large bill. Collectivizing either will only result in reduced quality and quantity at a higher cost.

That said, the real genius of America is in converting what was once an expensive luxury, into an affordable necessity by the utility business model. A mixture of private capital from the public to create a beneficial monopoly subject to local government regulation. As always the devils are in the details, just as it is with nationalization, and are the goblins of transparency, oversight, accountability and regulation. But then these four qualities of good management, or lack of, is the real topic regarding the issues of Fannie Mae and Freddie Mac in their present circumstances.

One can put the lipstick of nationalization on these pigs, but their "oink" still gives them away. Clean out the sty before making it into a collective farm.

[tew]

This reflexive position is actually ironic. It is the closeness to government - the political influence in and on Fannie and Freddie - that is in large part to blame for their poor position. The answer isn't to further embed corruption and poor decision making into the government and onto the backs of tax payers.

A better answer is to allow competition undistorted by these aweful creatures. So much the better if home loan interest rates are slightly higher and fewer loans are made. Real estate prices will be less inflated and home ownership will be at hand for millions of Americans who save and choose to live within their means.

Nationalization is not the answer - it's an invitation to further decline.

[Steven J. Kovalesky]

It's an interesting range of comments posted...

...but I think there's pieces of the "puzzle" that are
being majorly over looked.

In an article in the online Wall Street Journal on Friday
it stated the Growth Fund of America from American Funds,
part of Capital Research & Management Co. was recently
the mutual fund with the most Fannie Mae and Freddie Mac
stocks; thus major American personal (can you say 401K)
and Corporate Retirement funds were (are???) directly tied to these two companies.

They have (or had until recently) over 50 million shares of Fanny Mae and
over 25 million shares of Freddie Mac.

Let's do the math over the last 9 month period.

9 months ago 50 million shares of Fanny Mae was worth, at $67 a share,
$3.35 TRILLION dollars...
9 months ago 25 million shares of Freddie Mac was worth, at $63 a share,
$1.575 TRILLION dollars.

As of the closing bell on Friday, those same shares...
50 million shares @ $10.10 was worth $505,000,000. or a LOSS of
$2.845 TRILLION dollars and
25 million shares @ $7.75 was worth $193,750,000. or a LOSS of
$1.381+ TRILLION dollars... a combined LOSS of
$4,226,250,000. TRILLION DOLLARS !!!!!!!!!!!!!

I am NOT stating that Growth Fund of America has lost this amount
of money; I don't know... but someone or everyone has.

Of the research I've done, most of the "paper" that these two companies
hold is 30 year fixed and relatively sound.
Their problems seem mainly to have come not from their own
"due diligence" but from the nefarious "paper" written by companies
such as Ameriquest, Countrywide, and the like that submitted
an untold amount of fraudulent mortgages.

I would think a better solution would be for the government to seize
ALL the assets from these companies, going as far as to take them
from the banks that purchased them (returning their original purchase
price) as well as the personal fortunes amassed illegally by their
executives and turning it all over to Fannie Mae and Freddie Mac.

Remember, Fanny Mae and Freddy Mac DO NOT write mortgages!!!
They only guarantee them as SOUND based on the information provided
to them by the companies THAT DO write the mortgages.

Every company that lied by "cooking the books" so to speak about the
ability of an individual to repay the mortgage that they were entering
into, strictly so that those companies could make $8-15 thousand dollars
per mortgage, violated their contracts with Fannie Mae and Freddie Mac..
thus violated the law and deserve much more of a punishment than any
really have received.

[Duric Aljosa]

Bankrupt - A person, firm, or corporation that has been declared insolvent.
Bankruptcy - The condition of being unable to pay debts.
Recent Ufo Report: Unapproachable Financial Obligation.

[Rick Metz]

Here goes.!!! The gov offers a tax incentive for investing in Fanie Mae/Mac. The gov will give 1/2 the value of your investment as a tax incentive up to a $2K investment. You can invest more but you only get up a $1K tax credit.

If you are already invested in fannie mae/mac and lost money then you can reinvest but can only claim the difference of your loss and the benefit from the credit.

You can invest each year to the given amount as long as the program is in palce but your investment can not be withdrawn until 4 years.

If you are a share holder already and sell at a loss and wish to reinvest you can only claim the loss or the 1 K which ever is higher.

In this way the tax payer gets the benefit of an investment the gov is probably already going to make on our behalf.

Rick

[Michael Carrigan]

Here is a simple principle that Congress, the Executive branch and the US public (i.e. debtors) should keep in mind:

The rich rules over the poor and the borrower is servant to the lender.

We need to become a nation of investors instead of borrowers. It's the only way to have control of our destiny.

First, we need to recognize the true financial condition of the United States. The 2008 Social Security and Medicare Trustee reports show a combined unfunded liability of $101.7 trillion in today's dollars, an increase of $11.5 trillion over the prior year. The shell game has to stop. Putting debt on the next generation is wrong. We need to cut benefits and future promises.

Second, reward taxpayers for becoming investors instead of debtors. Get rid of both the mortgage deduction and taxes on interest/dividend income and capital gains. The federal government gets their money right off the top without risk from the wage earner. They then get taxes on interest, dividends and capital gains on the remainder of those wage earnings that are placed in taxable accounts. The current system encourages wage earners to take out bigger mortgages to offset taxes as earnings rise, and has led to excessive volatility in real estate values.

Get rid of the deduction for business interest expense but offset the negative tax effect with a credit for making principal payments on business debt. This would deleverage the banks quickly. A whole lot more analysis would go into underwriting loans after taking out expected leveraged returns.

Eliminate the deduction for business depreciation expense and instead give a deduction for capital expenditures paid by cash. This would encourage investment. Capital expenditures are real. Depreciation is an accounting estimate that fails to take inflation into account and that unnecessarily smoothes financial performance.

Third, cut up the national credit card. Any loan you take out becomes a fixed commitment to service the debt until paid. Make sure you have enough in expected income above that, or you're worse off. If you have any doubts about the certainty of that expected income, then reconsider the loan. Congress and the Executive branch have been remiss in racking up the national debt and off balance sheet liabilities for Medicare and social security.

The economy will expand just fine by taking the steps above. We will see more entrepreneurial ventures and an increase in investment expertise. We need to be a nation of investors instead of borrowers, and that goes for our government too.

[Joseph]

That would be the solution the Federal Government would love. Full power over our housing industry. The Constitution doesn't authorize socialism in this country. It was government intervention that caused this mess in the first place. These companies only got this large and influential because our government made it so.

Well how are people going to afford housing? They might be able to without a handout or loose lending if we had a truly free market and a currency that wasn't back by more "I owe yous". These low down-payments are ridiculous and our system only encourages debt. Instead of creating real capital we rely on getting a higher credit score while remaining poor and paying int rest to Chase Manhattan.

We keep talking about these silly solutions that only further perpetuate the real problem. Why put a band-aid on a gunshot wound rather than operate? Are we afraid, too lazy, or just too distracted by these discussions over whether or not we should socialize our housing market to fix these real problems? Why do we not question the fact that a private bank the Federal Reserve decided without any approval from an elected body or us that they were going to take this huge burden and place it upon the backs of everyone in this nation so that stockholders can continue to ride around in their Maserati and make poor investments simply because the government has their company's back and will bail them out no matter what.

[Tom Con]

Most of you who post fail to understand what this is really about. This is about security of mortgages. Thus if bank a lends tom con an amount for a mortgage bank a goes to fannie or fred and gets it insured. Thus if Tom Con fails to pay, then Fannie or Fred will either pay Bank a the loan amount or will aquire the loan outright and Bank a;s problem becomes fannies or freds problem.

What has happened now is that you have tons and tons of hedge funds out there that are presumably guaranteed by fred or fannie and these loans are part of portfolios all over the financial world. NOw the owners of those portfolios feel very comfortable knowing that at least some of these loans are secured! But what if fann and fred were no longer able to guarantee payment? In the event of a disaster? What then? Ah, problem, big big big problem. The entire financial market could concievably become an unknown commodity and we would be back in august of 2007 only worse.

Markets would collapse world wide, not only that but it is probable that china and others would demand payment anyway from the us and that would add insult to injury.

But what is the solution? To saddle the american people with these loans and to further open the flood gates by allowing new loans? This places the entire government at risk! Should the housing market deteriorate anyway then we are looking at absolute disaster.THE GOVERNMENT ITSELF COULD GO BROKE!!!!! Or if not, then the dollar devalues to untennable levels...same result.

So what to do? I dont know, but you do not risk the entire government on this. If need be let fannie and fred collapse under controlled circumstances take the lumps now...and give the next generation a fair chance. YOU DONT SELL OUT YOUR FUTURE TO WHAT IS AN UNLIKELY OUTCOME!!!!! FOR IN THE END THE MOTIVATION IS NOT THE WELL BEING OF THE PEOPLE BUT THE WELL BEING OF HEDGE FUND MANAGERS THAT IS BEING SERVED. All those who trusted Fannie and Fred knew very well that these institutions were private!!! NOWHERE DID IT SAY THAT THE GOVERNMENT WOULD BACK THEM!!! Why would our congress make us the fall guy?

I WOULD HAVE PREFERRED NATIONAL HEALTH CARE TO THIS, AT LEAST WITH THAT EVERYONE GETS HEALTH CARE WHAT DO WE GET WITH THIS? NOTHING THE DEMOCRATS ONCE AGAIN HELP THE RICH ONCE AGAIN BETRAY THE MIDDLE CLASS.

[MADISON ZIEGLER]

I ALSO THINK NATIONALIZATION IS WHAT FANNIE MAE AND FREDDIE MAC NEEDS TO BENIFIT EVERYONE, ESPECIALLY SHAREHOLDERS, LIKE ME, I AM WORRIED, I HAVE INVESTED 105,00 , HALF AMOUNT IN EACH, I ASK YOU SHOULD I BE WORRIED ABOUT SHARE IN THE PREFERRED STOCK GOING DOWN, OR DO YOU THINK IT WILL GO BACK UP TO A LEAST WHAT I BOUGHT IT AT, WHICH IS ABOUT $25.00 PER SHARE.--PLEASE RESPONSE AND SEND TO MY E-MAIL----PACKERFANFL@LIVE.COM----THANK YOU FOR YOUR TIME............SINCERELY; MADISON

[Bill Parks]

The economic crisis boils down to who issues America’s money supply – the federal government or a privately owned banking system. If the federal government issues our money, it can extend the money into the economy as loans using the interest as revenue, it can spend money directly into the economy for programs and projects without taxation increasing the money supply without inflation, and it can stabilize the money supply by fine-tuning taxation – the money creation process benefits American citizens. If a private banking system issues the money, they can only issue money as debt, their creating the moneys to pay the interest the consequence of a pyramid or Ponzi scheme – the money creation process benefits only the bankers.

The US government should Nationalize the Federal Reserve, buy the whole banking system and issue all legal tender money on the authority inherent in the nation’s sovereignty, as ruled by the US supreme court in 1884.

[DazedandConfused]

Can someone help answer the following question / issue for me? This article states that Fannie and Freddie (combined) have roughly $1-2 trillion in assets. I'm trying to figure out why/how the CDS market fits in -- because I think it makes this much worse (though I don't quite understand how). The credit default swaps markets (which I recognize covers more than just U.S. loans and/or Fannie and Freddie loans) is $62 trillion (notational amount). Is the FED/Treasury just not allowing the CDS market to unravel?