Mortgage Bailout Debacle

CALL TO ACTION: Government Fraud And You

Ok folks, it appears that indeed Fannie and Freddie (which I will hereafter refer to as “Phoney and Fraudie”) will indeed be “bailed out” in some fashion, as will their debt.

Let’s first start with what these firms are. The political types like to claim that these firms are “necessary” or “vital” to the functioning of the housing market in America.

This is a lie.

The Truth is that Phoney and Fraudie are the reason we had a housing bubble.

The Truth is also that these firms have engaged in systematic and intentional compounding of risk at unsustainable, inappropriate and even fraudulent levels, and that we the people have refused to demand that our government put a stop to it.

Yet that is the purpose of government – to stop the “big and powerful” from screwing the “less big and less powerful.”


The Truth is that these firms own or guarantee, in total, over $5 trillion in mortgages, and have another $2 trillion in other debt they issued and “guarantee.” To put this in perspective, the entire public debt of The United States – that is, the debt that you, the taxpayer, are on the hook for, and which is traded in the public markets, is about five trillion dollars. That’s right – these gigantic hedge funds are bigger than the United States Government in terms of their public debt float.

The Truth is that these firms purchased on the open market nearly $1 trillion worth of subprime and ALT-A mortgages, the latter being essentially speculator loans, and levered them up to eighty to one, which guarantees that a loss of just over one percent wipes them out.

The Truth is that there is no logical reason for any firm to ever do that on the open market, because the risk of a 1% swing in investment returns is not only normal, it is totally expected! These firms did this to “goose” the returns made available to shareholders and executives, and in fact, their executives have been pulling in millions of dollars a year in salaries and bonuses.

The Truth is that every one of these securities says, in bold, all-capital, print, on the face page of the prospectus, that it is not guaranteed – this particular certificate face is from July of this year:

(You can do your own search off this page, and see that every one of their debt issues says the same thing.)

Does that document leave any questions open as to whether there is a “federal guarantee” or “federal backstop”?

Do you have any reasonable belief that The Government will prevent you from taking a potential loss?

Can you find anything in that bold, black, ALL-CAPITALS text that leave any wiggle room of any sort?


But, now, we are told that Fannie and Freddie are “necessary” to the functioning of the housing market, despite the fact that they have, for the last decade, caused the very problem we now face!


Simple – they made mortgage money available at terms and rates that were far below where the market would have set them, based upon risk.

As a consequence we had a nation of House Flippers, we had a nation of speculators, and we had a stock market that went on a tear from 2003 to 2007, and every bit of it began with and was fueled by the increase in leverage on debt that exploded higher as Fannie and Freddie “guaranteed” mortgages that they had no capital behind!

The Government sat back and cheered this. Alan Greenspan, Ben Bernanke, George Bush, Henry Paulson. All of them.

Who remembers “Go out and shop!” after 9/11?

Let’s look at who is really being bailed out here, and who is going to get the bill.

Sixty-six global central banks buy Fannie and Freddie GSE paper, with the largest owners being the Chinese and Japanese. As of June 30th, foreign holders held $1.4 trillion of that paper.

I have repeatedly chronicled the threats from China regarding these firms leveled at our government.

Make no mistake folks, the Chinese government has in effect declared economic war on The United States. They expect our government to tax you, United States citizens, to make them whole on bets they took knowing the risk.

THIS is what we are dealing with folks.

Hank Paulson, George W. Bush, the Republicans and The Democrats just sold you out.

All of them.

Now let’s talk about the real impact of something this stupid (trying to bail out these firms), and that’s exactly what it is, STUPID.

Let’s say you have a $200,000 mortgage to get, 30 year fixed, at the present 7% interest rate. Your Principal and Interest (P&I) on that loan is $1322.88.

Ok. The Government takes on the liability for the entirety of the GSE debt – all $7 trillion of it. This doubles the public float. The market will see this as a doubling of the debt of The United States, and as a consequence long bond rates will go higher – and so will mortgage rates, because those are set by, roughly, the swap rate on that money.

So let’s say that the 10 year bond goes up just one percent in yield, and mortgage rates go up 1% as well.

Your payment just went to $1457.81.

Ah, but you say, the government could allow 40 years to pay. Ok. Your payment is now $1381.

Heh wait a minute!

The Government did this and mortgage rates went up, not down!

But it gets worse. Much worse. See, all houses are, essentially, priced on the cost of the money. So what really is happening this weekend?

Well, let’s say that rates go to 8% from 7%, and let’s further assume that the 30 year term remains. Your house value just fell from $200,000 to $182,960, an eight and one half percent instantaneous deflation.

Oh, and that rise to 8% is likely rather understated. 10% is quite within the bounds of expectation. Should that occur, your $200,000 home will immediately deflate in value to $153,232, a loss of nearly 25% on top of what you have already suffered.

Betcha you didn’t know that.

Hank Paulson, The Democrats, George W. Bush and The Republicans have stolen tens of thousands of dollars from you already, and they will steal tens of thousands more from each and every one of you unless you, America, stand up right now and stop it.

We are beyond petitions folks.

You must choose.

American Idol or direct action.

Starbucks Lattes, or direct action.

A beer at night, or direct action.

What is direct action?

It is a concerted, cohesive, and unmistakable act that leaves government little choice but to bow to the will of the people.

In this case, I suggest a general strike.

Nobody goes to work Monday. Everyone, instead, heads to their nearest large town or city and parks themselves in the middle of the street (on their butts), effectively shutting down commerce. At the same time, the people generally must coordinate millions of Americans to simply refuse to pay any debt – of any sort – until this rabid ripoff ends and instead of bailouts Phoney and Fraudie’s executives get a prison cell.

THAT will get Washington’s attention and force them to stop this crap.

It is the only thing that will.

Neither of your Presidential candidates has pledged to stop this, and neither has lifted a finger to do so, even though both are sitting Senators and could have.

Neither political party has done a damn thing to stop this. Yes, some Republicans voted against the Housing Bailout bill, but there was no cohesion, and many of them voted for it.

You can choose America, but your time to choose has just about expired.

We are quite literally facing the possibility of a government funding cost ramp, which can lead to the collapse of government financing. Tax receipts are already way down and will go much lower. Corporate profits, from which are taxed, are also in decline. Add to this a doubling of the public float and we could easily find ourselves unable to fund any of the social programs, infrastructure, or other spending that you think Government owes you.

Down this rabbit hole lies a Greater Depression, worse than the 1930s, or, if the government were to panic (and it will – see the recent examples in Bear Stearns and now Fraudie and Phoney), an all-on hyperinflationary explosion that renders everyone’s savings and investments worthless occurs overnight, followed shortly by the collapse of the government.

No government in the history of mankind has managed to engineer a hyperinflation and get out of it intact, but there is a mathematical point beyond which debt service exceeds income + spending necessary to maintain life (of the government) and at that point such an implosion becomes inevitable. This is mathematics, not politics.

In each and every case where that line was crossed and hyperinflation ensued a dictator or fascist state has risen and overthrown the previous government, frequently by force, and the people’s wealth has been destroyed. All of it.

I repeat for emphasis: History says that this has happened every single time a government has attempted to walk this path.

While there are those who say that we “can’t” have deflation because it would be horrible and we “must prevent it”, if the government continues down its present path what we will get is far worse.

Yes, folks, we are headed for a Depression. It is unavoidable and both political parties are responsible – along with, ultimately, you.

But we must, here, now and today, rise as Americans and stop the insanity of instantaneously doubling the public debt by backstopping the GSEs. This is a quantum leap from where we were just a day ago, and if we permit it to happen, the required increases in debt and money supply to “keep pace” will compound at an exponentially-increasing rate until everything you own has become worthless. At that point commerce essentially collapses, reverting to barter-only, the government becomes unable to tax and thus cannot issue any more debt or roll that which becomes due.

Oh, and if you’re a gold bug?

They’ll come and take that. They did in the 1930s and they will again.

The clock has struck 12:00 and we are about to find out if America is going to turn into a Pumpkin or not.

You, as Americans, must choose.




If you choose to watch American Idol instead of putting a stop to this, we will have taken what may prove to be an irretrievable step toward madness.

Time expires tomorrow, Sunday, before the Asian markets open, when Treasury is expected to announce that they have screwed you out of your accumulated wealth, savings, and your house, in the name of “stabilizing” the GSEs. If they have not received the message from you, America, by then, there is no way to know if we can step back from the precipice, as this step may well be covered in grease.

Karl Denninger – The Market Ticker


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