Fannie And Freddie Went To The Hill To Fetch A Pail Of Bailout

OK, you are a home loan lender. By the miracle of Fractional Reserve Lending you are creating money. You have limited reserves and therefore a limited number of loans on your books. In the next city is one of your pals. He is also a home lender. He too is maxed out. In every city there are others like you.

The manufacturing sector has been exported to other shores. More that 700 military bases, a permanent war condition with North Korea, a losing war in Afghanistan, a faltering war in Iraq and a pending war against the rest of the planet has further hampered the once great economy. On 911 the President advised the shocked American people to 'spend'. How can we keep spending if there are no cashed-up lenders to borrow from? Without more borrowing there would be nothing to drive the economy because we have no savings.

Before Fannie and Freddie went 'to the Hill to fetch a pail of bailout' they were the saviours of the mortgage industry and the economy. Today they, and the economy are on life support.

"I'm Going To Make Him An Offer He Can't Refuse"

They came to you, Mr. Home Loan Lender, and said "I will buy the mortgages on your books". You gasped "That would mean we have cash and can loan even more". Then you found out that Freddie and Fannie also bailed out other lenders. Hey, "that's unfair" you muse. "Not to worry Mr. Lender, there is lots and lots and lots of easy credit out there". In fact, thanks to this magic of easy credit and ready cash at your disposal you can loan money to ... well ... anyone!

The nice El Salvadorian family wearing the MS13 tattoos can get a home, of course they pay cash, but the delivery driver with four children and a sick wife living next to the MS13's can sign up for $400,000 dollars. All he needs to do is adjust his statement a bit.

To Market To Market, So Sell A Fat Debt

Now F&F have a huge inventory of loans. They get a bit greedy and lose perspective. They decide to list on the stock market. They are a sure thing. Everybody buys their stock. Yummy - good dividends. The institutionals love it. F&F are a great place to put your pension money. "Safe as houses" they say. F&F also issue Bonds. These too are delicious. The world buys them, the Chinese buy them, so do the Japanese and the Russians.

CDO/SIV/MBS/BLAH/BLAH

F&F still have your mortgages. So they decide to sell them too. Not one at a time of course. No, they roll them up into enormous bundles and give them fancy names. We are familiar with some of those names. We have heard of 'Collateralized Debt Obligations", "Structured Investment Vehicles" and "Mortgage Backed Securities". They are complicated and mind snappingly huge.

Give Me One More Acronym, Oh One More Acronym

While we are discussing oddly named funds we must mention Credit Default Swaps. A CDS is a wealth sucking behemoth, exuding planet neutralizing dark energy only slightly less dangerous than a Borg invasion. We won't deal with that subject here because we are trying to keep this article on the lighter side.

Raters Of The Lost Integrity

Who would buy things like CDO's? Well nobody if they were not safe. F&F have friends in the ratings game. These are companies everyone trusts - I mean trusted. For a fee they will rate your product: "Triple A" (AAA). It works like this: "Hey rating guy, I'll give you $200,000 if you will send a bean counter over to rate our funds as 'safe'. The rating guy is like you Mr. Mortgage Lender, the easy cash soon dulls his conscience.

If You Rate It 'AAA' The 'The Insurers' Will Come

OK, now we are cooking with Ethanol. We have a product worth nothing, which a rating agency says is safe which we will sell for an obscene bomb of money. Investors from everywhere are ready to buy big. In fact some of this stuff we are selling is so hot we can insure it - and we do. To sell this worthless paper you need a supplier, a rating agency and an insurer. If it turns out that the supplier is on the skids, the rater is dishonest and the insurer is broke you have, well ... September 2008.

Mirror Mirror On The Wall Street

Who is the fairest of them all? Yes we have turned debt into profit. We have not made the Statue of Liberty disappear; no we have made piles and piles and piles of Federal Reserve Notes manifest from nothing. We have learned at the feet of the Great Greenspan. The bull is smiling.

You Can't Hide Your Liar Loans

Meanwhile things on Struggle Street are not what they were. Remember that first easy mortgage? That delivery driver just can't seem to meet the payments. Well, it serves him right. He told you he was on $120,000 a year - wink wink nudge nudge. You signed for the deal - more winking more nudging. He got his loan, you got your cut and no black helicopters came to visit. So you did it again and again. Initially sleep was hard to come by as your conscience tried to check your honesty, but you reasoned that the one eyed door man with liver disease sitting in your office would either get his loan from you or from the guy down the road. So you signed him up.

Your books are starting to look, how shall we say, less than pretty. One after another your customers are dropping away. Loans everywhere are upside down. (Like Al said in 2006 - just a little shameless self promotion.)

F&F Waterboarded?

Your losses are bad but those 'suits' that bought your loans are really feeling it. Your customers lied to you. You were less than strait with your lenders, they were downright dishonest to their suppliers, F&F were fraudulently malfeasant with their ratings buddies, and the raters; well those guys worship at the "Temple of Economic Doom". Nobody but nobody told the truth. "Won't they get those conmen?" you ask? They will get some of them. People like you for example, who now have to be finger printed, but there will be no 'Chinese Water Torture' for anyone higher up the lender tree.

Fox On The Run

The 'Medja' was no help. When the market began to tank Fox and CNBC kept up pressure to buy. Naysayers and doomboosters were branded and ignored. Nouriel Roubini, Peter Schiff, Bob Chapman and Meredith Whitney were scorned. Instead we hear: "It will never end, the American Dream is here to stay." "Everybody needs a home." "The fundamentals are sound." "We believe in a strong dollar policy."

You Just (Margin) Call Out My Name And You Know Wherever I Am I'll Be Hiding

I've told you over and over and over again my friends,
Perhaps now you believe we're on the Eve of Deleveraging.

The moment had arrived. Fannie and Freddie couldn't meet obligations. Soon redemptions will be withheld there and everywhere else. (That means NO MONEY FOR YOU). Mom and Pop investors don't matter in this scenario. Your pension fund is long gone. In fact, get this, not only will you lose your pension fund and any F&F investments - you will have to kick the can for the bailout. The great sell off is everywhere. Margin calls are no longer reserved for Mondays, they are now occurring seven days a week. We are all reminded that leverage is wonderful on the way up but miserable on the descent.

I Like Chinese

China is our manufacturer in chief. When you buy a computer, baby formula or television made in China your dollars travel there. In order to pay its workers, Chinese manufacturers convert US Dollars to Reminbi. The PBoC and others end up with USD's. They use the USD to buy US bonds. Many of them are F&F. Some say that over $200,000,000,000 of China's foreign reserves are in F&F related securities. Foreign purchases of this nature are the main force propping up the dollar.

There was no choice, Fannie and Freddie could not go down or China, Japan and the rest would stop buying bonds and supporting the dollar.

My Pension Lies Over The Ocean, My Pension Lies Over The Sea

Paulson's only choice was to use US taxpayer money to protect large institutional and government foreign investors (debt-holders) while sacrificing the holders of common and preferred stock (you). Paulson has had to sacrifice his own countrymen to keep potential enemies at bay. Who knows what we many lose? Where will good-hearted mom and dad investors go if they lose everything? If the nations wealth had not been drained so effectively by globalisation and war you would feel safe living under a bridge, but at the rate they are collapsing ...

Chestnuts Roasting As We Open Fire

Seven years ago this month the US Dollar index began its downward descent. 911 was the visible sign of the beginning of the end of the world as we have come to know it. The events of September 2008 are the first major phase of the death of our current economic framework. We have seen the beginning of the Subprime defaults. ALT-A and Pick A Pay loans are now starting to fail. They will be much bigger than Subprime. Auto loans, student loans and credit card defaults are coming as well. Credit card defaults will be about the same size as Subprime. The biggest range of defaults will come with Commercial loans.

We are soon to see difficulties with hedge funds. The failure of Collateralized Debt Obligations integrated with Credit Default Swaps and other Structured Investment Vehicles will take down entire nations. We now are seeing some of these investment tools begin to work in the destruction of banks. To help keep this in perspective there are 9000 or so hedge funds controlling about $250,000,000,000,000 dollars (250 Trillion - it looks better with the 0's). Most of these will fail in one way or another and not be bailed out. The Credit Derivatives Market is larger than the global economy. Have you hugged your savings today?

Investment Bank Bear Stearns is gone as a result of financial assassination, mortgage resellers Fannie May and Freddie Mac have been taken over by the US Government, Lehman Brothers is bankrupt, Merrill Lynch is going to be bought out by Bank of America at a huge loss and the world’s biggest insurance company AIG is ‘on the ropes’. Goldman Sachs and Morgan Stanley remain and both are under a cloud with thumping share collapses. As of Wednesday September 17 2008 three month US T-Bill yields are at .0304%. That means that an investment of $1,000,000 will pay $1,000,076. Washington Mutual is looking to merge with anyone. This is affecting the world and it is affecting us.

When the French economy failed during the French Revolution, France went to war with Austria. Soldiers were in good supply as the army was one place where a decent meal could be had. Cannon fodder stipend helped the families on the home front. This is a kind of back door draft that we are already beginning to hear about. A global war or a series of long planned smaller conflicts will mark the next phase of the disintegration of the Great Western Empire. Bernard Baruch taught us that 'All wars are economic in origin". This is certainly true of what we are about to witness.

We have begun to tangle with Pakistan, we have armed the Georgians to provoke the Russian Bear, we have sold 1000 Bunker Busters to Israel for an Iran attack, the North Koreans have resumed nuclear research and a huge flotilla waits in the Middle East. More could be said about Kosovo, Lebanon and Venezuela. We could well be in the thick of it by Christmas.