Zaphod for President

Happy Sunday Everybody! The boys at the Federal Reserve are at it again. Fannie Mae & Freddie Mac will now become the beneficiaries of unlimited amounts of fiat. This is clearly a back door mechanism by which the Federal Reserve can effectively create money by funneling the inherent need for more credit via the twin Government Sponsored Enterprises.

Just like JPMorgan Chase’s acquisition of Bear Sterns was a smokescreen to prop up the ailing Bank. This is high stakes Pac-Man. When Pac-Man gets sick or has eaten too much, the Feds come along and shove a bunch of smaller ghouls to be sacrificed to Pac-Man to keep him in the game.

The Public simply thinks there is consolidation going on. Citizens do not see that the acquiring entity is really the sick man, not the acquired. One might think, well why isn’t GSE Sallie Mae getting the Federal Reserve treatment? Real simple. Student loans aren’t discharge-able in Bankruptcy. Mortgage debt is unless it is reaffirm by the debtor.

As a refresher, GSE Fannie Mae & Freddie Mac simply buy up mortgages, bundle them and sell them with a guarantee. For example, say you have a spare $100million laying around and buy $100million worth of mortgages. Suppose, $15million of those notes go into default, Fannie & Freddie will repay you! The idea behind this is to make Banks more likely to lend, knowing those notes will be bought and resold. Investors would happily buy up the bundled mortgages knowing the GSEs would repay them in a default. Well guess what? Many loans are in default. As Reverend Wright would say: “….and the chickens are coming home to roost!”

So what now? The Feds are going to print their way out of this mess. Now they have a fully green light to do so. The government really needs to get out of the lending business. Folks really need to revert back to cash and species. Borrowing is truly for suckers, I speak from experience on the subject.

Worst of all, never ever give investors guarantees because they almost always cash those chips in. A free market and more constitutional solution is simple: allow private insurance corporations to cherry pick mortgages to insure. Break up Fannie & Freddie into very small institutions. This will tighten lending standards overnight. It will make credit much harder to come by. Lenders will think twice about loaning 19 year old $500,000.00 for a tiny condo in Manhattan.

Think about it logically. This isn’t scary. Just use common sense. Suppose you’re an investor. You have that handy $100million. Your taxi cab driver has $50million worth of mortgage notes. All of them are no doc, no money down, at 6.5% fixed and are only about 6 months old. The driver says: “they’re insured by a new totally private version of Fannie & Freddie.”

You might inquiry not only into the quality of these notes more carefully, but you’ll also inquiry into the solvency of the insurer. Perhaps, you’ll offer $35million for these notes. This creates an effective rate of return of well over 6.50%, which buffers you in the event of massive default. Even if there was a 30% default rate, you would still be getting your 6.50%. The problem is if your taxi cab driver took the $35million, he would be at a $15million loss. Enter the write-off loss.

The note holders that are holding the bag need to take their losses NOW. Let them write it all down. Let’s flush the bad paper out. Get it done with and over. Again, this will lead to even more stringent lending standards. Why the heck should taxpayers and consumers be punished to bail out greedy careless Bankers?

You can’t blame the borrowers. They wanted the overpriced home. Come to think of it, can you really blame the Bankers? They thought the gravy train would continue forever and they could keep passing the buck to someone else. The problem as always is with the government. Their intent was to make homeownership more widely available. Such a pyrrhic victory because so many are going to lose homes they thought were theirs.

Here is a thought. Borrowers facing foreclosure could sue the crap out of Fannie Mae & Freddie Mac for creating a moral hazard. Then they could name the Federal Reserve as a co-defendant for enabling this moral hazard. I’m envisioning the mother of all class action lawsuits. Every member of the suit could seek injunctive relief against any foreclosure action. But they would need to still keep paying their mortgages. But not directly to their lenders, but instead to their respective clerk of courts or to an Attorney trust account.

This will starve the lenders and their co-defendants. They will beg for more credit to stay afloat. But even the Federal Reserve will be reluctant to give in to such a large demand for new greenbacks. The bottom line is: the Constitution doesn’t call for any of this garbage. No small wonder we’re in this mess.

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