Government Rule Changes Buy Time, But Will They Bail the U.S. Out?

by: Lawrence York March 20, 2008 | about stocks: FNM / FRE    

Lawrence York

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The feel-good rally following the latest Fed rate cut would be believable if anything had changed. Ah, but it has - or will.

On Wednesday, Fannie Mae and Freddie Mac had their capital reserve requirements lowered from 30% to 20% permitting them to hold a greater amount of mortgages with less collateral on hand. We have to assume that the Fed figured out the clock was ticking and soon 28 days would pass so that the ugly problem of nobody wanting the underwater mortgages would resurrect itself. If the government sponsored agencies could just step up, that would get the illiquid securities off the Fed’s Balance Sheet. OK. We’re for that.

But the remaining stench that will likely make the rally vaporize is the new proposals to change the accounting rules–instead of marking mortgages to market, how about holding some part of them for investment purposes? Since these would be classified as long term investments to be held to maturity they could be valued at full principle value manufacturing new capital. Incredible what a rule change can do! And besides, banks are permitted to do it so why not let everybody?

The problem here that the Fed has been addressing only the liquidity issues not the solvency issues. They are not yet recognizing that there has been an enormous amount of value lost. Papering over it is not going to make the problem go away. There’s a disturbing pattern here.

First, the government is operating on a double-standard. They let those who completely failed in their regulatory oversight attempt to fix the problem for themselves and what we get is hoarding of rate cuts, usury, and gouging of the public.

Secondly, there permit special rules for banks to carry off balance sheet risk elsewhere, and yet banks are offered public money at lower and lower rates to boost their profits because letting them fail would disgrace those those in charge.

Third, the government fails to disclose what the losses at Ginnie Mae are ballooning to, hoping they’ll get bailed out somehow by time. It’s obvious that the regulators are violating the first rule of prudent trading–cut your losses, don’t think time will heal a bad problem. It’s also obvious that Regulation SB requiring full and timely disclosure of material events doesn’t apply to the Government sector–most notably Ginnie Mae. We have a crisis and we have irresponsible actions by irresponsible people. The government writes the rules but enjoys immunity from their breach of the rules–and then cleverly changes them if it suits their purpose and can be explained as a public good.

We have serious financial crisis and we need to resolve this it by going back to sound lending standards, not desperate actions to hide, disguise, and ignore the problem caused by the gross inflation of housing values and excess leverage. The bottom line is that the government got its pocket picked by a factor that will likely prove to be considerably more than one or two trillion dollars (China has reportedly $1.6 trillion in mortgage-back US securities). It’s time for a strategy that recognizes this inevitable loss and seeks to protect the public so that they will not have to pay the tab. The time for this action is NOW. Not after the losses are fully realized and others have profited from it.

Continuing reactionary, piecemeal policy actions will only prolong the inevitable. By election time the Fed will be out of bullets having used up all their monetary tools at a time when they need them most. It’s foolish policy to think that time and interest rate cuts will heal a lower or inflated value problem, particularly in a recessionary economy. Changing the rules to perpetuate the charade that an extraordinary amount of US homes are not worth their principle value and will not be for years to come is fraud.

The US Government should own up to the facts and not not rely on luck and unsound accounting rule changes to bail US out.

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This article has 4 comments:

  •  
    Mar 20 08:58 AM
    This is most idiot statement I ever heard (China has reportedly $1.6 trillion in mortgage-back US securities). China has only about 1.45 T foreign reserve and has at least 35% in non US currency. Where is 1.6 T number comes from?
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  •  
    Mar 20 10:52 AM
    A billion here, a billion there, pretty soon you're talking about real money...
    Reply | Link to Comment
  •  
    Mar 20 03:00 PM
    Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

    The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

    Recession, May 1907-June 1908, 13 mo

    Recession Jan. 1910-Jan. 1912, 24 months

    Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

    Recession Jan. 1913-Dec. 1914 23 months

    World War I -- 116,708 killed – 33 billion

    Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

    Recession Aug. 1918-March 1919 7 months

    Recession Jan. 1920-July 1921, 18 months

    Recession May 1923-July 1924 14 months

    Recession Oct. 1926-Nov. 1927 13 months

    The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

    The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

    The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The "dust bowl" covered 50 million acres in the south-central plains during the winter of 1935-1936.

    Labor Day Hurricane of 1935, 400 killed

    Recession May 1937-June 1938 13 months

    World War II – 408,306 killed – 360 billion

    Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

    Recession Feb. 1945-Oct. 1945 8 months

    The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

    Recession Nov. 1948-Oct. 1949 11 months

    Korean War, July 1951 - July 1953 – 33,000 killed in action

    Recession July 1953-May 1954 10 months

    Recession Aug. 1957-April 1958 8 months

    Recession April 1960-Feb. 1961 10 months

    The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

    The Cuban Missile Crisis, Oct. 1962

    Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

    Vietnam War, 1963 – 47,378 killed in action

    The murder of JFK, 1963 Nov

    The Gulf of Tonkin Incident, Aug 1964

    The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

    The city riots of April, 1968 – 30 cities affected

    Hurricane Camille, Aug 1969, 259 killed

    Recession Dec. 1969-Nov. 1970 11 months

    Stagflation of the 1970s began

    Nixon first imposed wage and price controls on August 15, 1971

    Oil Embargo, Oct 1973 long gas lines

    Recession Nov. 1973-March 1975 16 months

    Articles of Impeachment of Nixon started
    (Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

    Deregulation: 1974-1992 this era began when Nixon left office

    Three Mile Island nuclear power plant crisis, March 1979

    Mount St. Helens eruption 1980

    Recession Jan. 1980-July 1980 6 months

    Prime reached unbelievable 20% in January 1981,

    AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

    Recession July 1981-Nov. 1982 16 months

    California earthquake 1983

    The 87 market crash - Black Monday

    California earthquake, 1989

    Recession July 1990-March 1991 8 months

    Iraq invaded Kuwait on August 2, 1990

    The Persian Gulf War, 1991 or Desert Storm Jan 1991

    Hurricane Andrew 1992 very destructive United States hurricane

    The Great USA Flood of 1993

    Intervention in the Former Yugoslavia,

    Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

    9/11 Attack, 2,974 people died

    Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

    Enron bankruptcy in late 2001, employed 22,000

    WorldCom, July 21, 2002, filed for Chapter 11

    Iraq War, March 19, 2003 – 4,000 dead

    Hurricane Katrina, late August 2005, 1,836 people lost their lives

    Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.
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  •  
    Mar 21 02:03 AM
    Enron and Worldcom made your list. If that is your pain threshold you need to make your list like 1000 x bigger.

    That said our currency has lost 95% of its value in the time period you just went through. So borrow and you will be rewarded. Try to save and the goverment and federal reserve will #^#% you. The responsible always pay for the irresponsible. Perhaps letting the government manage the way the responsible pay for the irresponsible is compassionate and orderly but I say its high time the irresponsible feel a little uncomfortable.

    I'd argue that without the federal reserve, greedy banking institutions, and monopolies......in other words a truely free market free from interference half of those recessions or trouble would have been completely avoided and we would all be much wealthier instead of a debtor nation.

    The Federal Reserve leaves the thinking man with two options. Become a person in debt and become a slave of sorts or try be a saver who gets #%&#% by forced currency devaluation. Either way you are going to pay the bankers. That's the part that sucks. The bankers basically collect a commission on every American one way or another. Without the federal reserve savers would not be punished. You either pay through inflation or you borrow and try to beat inflation.

    Now of course one who is smart can accept this forced borrowing and borrow and try to beat inflation and accumulate wealth. The part that sucks is the the freedom to be a hard working member of the middle class who saves is getting tougher and tougher because the federal reserve collects a commision via inflation to help pay those who took on too much risk and failed. Doesn't seem fair. Especially when one considers that the average Joe doesn't even realize that he is being screwed.

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