Thataway!

By Robert Romano



When Fannie Mae and Freddie Mac were nationalized in 2008, why were their debts never put on the federal government's ledger?



That's what Congressman Scott Garrett wanted to know. Noting that the "Treasury has provided $127 Billion to the GSEs to cover heavy losses stemming mainly from defaults on the home mortgages they own or guarantee," he told Treasury Secretary Timothy Geithner in a letter, "it seems obvious to me that Congress and the financial markets should consider the combined $1.6 trillion of debt issued by Fannie Mae and Freddie Mac as backed by the full faith and credit of the United States."



Fannie Mae and Freddie Mac were placed under conservatorship by Congress in 2008 under the administration of the newly-created Federal Housing Finance Agency (FHFA). According to the agency's website, "As of June 2008, the combined debt and obligations of these GSEs totaled $6.6 trillion."



But that was never added to the national debt, which now totals $12.6 trillion. Why? In reply Geithner wrote that the "corporate debt of the GSEs is not the same as U.S. Treasuries, nor should it be considered sovereign debt."



The letter continued, "By statute, all obligations and securities issued by the GSEs must include a statement that makes clear that such obligations and securities are not guaranteed by the United States and do not constitute a debt or obligation of the United States."



In the same letter, Geithner wrote, the "Treasury is committed to supporting the GSEs while in conservatorship and to ensuring that the GSEs have sufficient capital to meet their debt obligations and honor their guarantees." Huh?



Read that again: The Treasury is "committed" to providing the bankrupt Fannie and Freddie with "sufficient capital to meet their debt obligations and honor their guarantees" but those obligations "should not be considered sovereign debt."



In short, Fannie and Freddie debt is backed by the United States , but not the full faith and credit of the United States . Make sense?



In other words, Geithner's answer to Garrett's question, "Which way did Fannie and Freddie's debt go?" was the classic loony line: "Thataway!"



To be certain, Fannie and Freddie's $6.3 trillion balance sheet never was added to the national debt, as ALG News has previously reported. If it were, the nation's credit would surely be downgraded — as well it should.



It may yet be, too. In spite of Geithner's denial, after Fannie and Freddie were nationalized, FHFA director James Lockhart's Congressional testified that "the conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac," as reported by Bloomberg News.



At the time, the agency distinguished between "an explicit guarantee" and the "full faith and credit of the United States ". After his testimony, Lockhart clarified that he meant "an effective guarantee because there's $100 billion backing their equity provided by the U.S. Treasury…That does give them effectively a guarantee of the U.S. government."



So, that "explicit guarantee," "effective guarantee," and "sufficient capital" all went — thataway!



The Treasury is obviously trying to have it both ways: assuming the power of underwriting the mortgages of the American people without assuming the inherent risks involved. Those assets included, according to Bloomberg News, $4.7 trillion in mortgage-backed securities (MBS).



Of that, $1.5 trillion had been sold to foreign investors, as reported by the New York Times. This is where it gets really interesting.



According to the Times article, in 2008 "Asian institutions and investors [held] some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan . China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures… In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33 billion more in Belgium , countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt."



At the time of the bailouts, on October 1st, 2008, Senator Jim DeMint theorized that these foreign entities were the principal cause of the then $700 billion Troubled Asset Relief Program. On "The Mark Levin Show," he said, "I think China and Saudi Arabia are holding a lot of these securitized mortgages. And I think they've basically said they're not going to loan us any more money until we buy them back. And if they don't give us loans every day, we default on our loans [because] we have so much debt as a nation. So, we're going to borrow more money to try to make this situation right. There's nothing else for me, Mark, that explains the urgency in using a sledgehammer to fix something that most of us know a few screwdrivers could fix."



Quite a charge. Of course, at the time, foreign central banks or institutions owned by foreign governments were explicitly prohibited that from participating in the Treasury-administered program to purchase the mortgage-backed securities. Then, the program was arbitrarily turned into a bank recapitalization program by then-Treasury Secretary Hank Paulson.



Since that time, the Federal Reserve has purchased $1.25 trillion of the mortgage-backed securities, a program that just ended on March 31st. Although it has not disclosed which securities it has purchased. The bailout may have gone to those foreign entities after all.



We know it was a full bailout, whoever got it. According to the Federal Reserve, the securities were purchased at "Current face value of the securities, which is the remaining principal balance of the underlying mortgages." The program itself was administered, according to the New York Fed, "by Wellington Management Company, LLP for trading, settlement and as a secondary provider of risk and analytics support; and BlackRock Inc. as the primary provider of risk and analytics support. The program custodian is J.P. Morgan."



And, according to the New York Fed, "Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York . Primary dealers are encouraged to submit offers for themselves and for their customers." These are the same dealers who primarily purchase U.S. treasuries, as ALG News has previously reported, and several of them are indeed foreign institutions.



Certainly, it appears that the same entities who exclusively purchase treasuries from the government are the ones who got bailed out by the Federal Reserve's program. Was Senator DeMint right, after all?



It gets worse. According to the New York Fed's website, the Federal Reserve is not guaranteeing the securities nor by extension Fannie Mae and Freddie Mac: "Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal."



So, if Fannie and Freddie are bankrupt, and they are not backed by the full faith and credit of the U.S. , and the Federal Reserve is not vouching for their assets, what good is that $1.25 trillion in paper the Fed traded the securities for? Either that $1.25 trillion is not worth the paper it's printed on, or those securities are indeed backed by American taxpayers.



Indeed, how were they sold at all if not with the implicit or explicit backing of the United States ?



Geithner, Bernanke, Obama & Co. can't have it both ways. When the full faith and credit of the U.S. is downgraded, and the American people come asking where all of their nation's wealth went, their answer cannot be, "Thataway!"



Robert Romano is the Senior Editor of ALG News Bureau