Debt Rattle, July 13 2008: Puppeteers and puppets

Dorothea Lange Louisiana July 1937
"Louisiana Negress."

Ilargi: There is a remarkable consensus emerging, at least among the part of the population that has active neurons, when it comes to the state of US and global finance. "The greatest taxpayer rip-off in American history", "The Biggest Transfer Of Wealth In History", "One of the greatest periods of systematic looting in American history".

All of you who have followed my writings, know how much and how often I have emphasized these exact points. I’ve used a term like "transfer of wealth" (from public to private coffers) more times than I care to keep count of. And I’ve even given the scheme a name: The Bulgaria Model. Well, today, look around you.

This weekend, in my view, Willem Buiter at Financial Times is the king of the crop in analyzing what goes on in US finance politics these days: "USA: A dishonest, spineless socialist state".

If you would suggest to any American that today Russia is the most capitalist country in the world, and the US nothing but a socialist banana republic, nobody would listen to a word you say. Media and politics have painted the image of a free and strong society for so long that hardly anyone in the US has any clue of what is really happening.

But it’s still very much true, and it’s not a recent event either, or one endorsed by only one political party. It’s the blueprint of US society, and has been for many decades. What happens today is merely the logical and inevitable culmination of what has been sown through the past decades.

Please don’t expect the present "main" media to pay anything but lip service to reality. It’ll all continue, the lying and cheating and blindness, till it’s all done and way too late.

The picture painted and believed in will continue to be that of a US government and Federal Reserve attempting to save the US economy, in the name of the glory and betterment of all Americans, as well as all the poor lost souls on the planet who need clusterbombs, depleted uranium, renditions and waterboarding, in order to reach the nirvana of free democracy, which Americans themselves haven’t known for many generations.

I hold out no hopes that it will stop, or that people will start to see it for what it is. Americans will focus on yet another empty spinmeister doctored illusion of change that yet another presidential candidate promises, completely oblivious to the fact that ALL candidates in US politics are financed by the same small group of sponsors. who want to see a hefty profit from their investments, or else. Puppeteers and puppets.

Here’s Wikipedia’a entry for "Puppeteer", eerily accurate in describing US politics:

A puppeteer is a person who manipulates an inanimate object — a puppet— in real time to create the illusion of life. The puppeteer may be visible to or hidden from the audience. A puppeteer can operate a puppet indirectly by the use of strings, rods, wires, electronics or directly by his or her own hands placed inside the puppet or holding it externally. Some puppet styles require puppeteers to work together as a team to create a single puppet character.

There are a wide range of styles of puppetry but whatever the style, the puppeteer's role is to manipulate the physical object in such a manner that the audience believes the object is imbued with life. In some instances the persona of the puppeteer is also an important feature.

The relationship between the puppeteer and the puppet-maker is often assumed to be similar to that between an actor and a playwright. This may be so, but one of the characteristics of puppetry is that very often the puppeteer assumes the joint roles of puppet-maker, director, designer, writer and performer. In this case a puppeteer is a more complete theatre practitioner than is the case within other theatre forms.

"Puppetry is a highly effective and dynamically creative means of exploring the richness of interpersonal communication. By its very nature, puppetry concentrates on the puppet rather than the puppeteer. This provides a safety zone for the puppeteer and allows for exploration of unlimited themes through a safe and non-threatening environment for communication.

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Update 7.00 pm EDT Ilargi: Well, it's not the $15 billion the Times of London claimed it would be. Instead we get what is at first glance an intentionally terribly opaque bunch of dirty smelly sticky fingers grabbing at will and without limit in the black hole that is the bottomless pit known as the public purse.

Tomorrow is Bastille Day, señors. History rhymes, whether you can remember your lines or not.

U.S. acts to support Fannie Mae, Freddie Mac

The U.S. Treasury Department and the Federal Reserve took wide ranging and unprecedented steps on Sunday to boost confidence in embattled mortgage finance giants Fannie Mae and Freddie Mac.

Treasury Secretary Henry Paulson said he was acting after consulting with the Fed, the companies' regulator, the Securities and Exchange Commission, and congressional leaders of both political parties.Key moves included:

• The Treasury increased a government line of credit available to either company, by an amount to be determined by the Treasury. Each company can currently draw up to $2.25 billion from the Treasury.
  
• The Fed authorized the government-sponsored enterprises to borrow from its discount window as necessary. Any lending would be collateralized by U.S. government and agency securities.
  
• The Treasury said it would buy equity in either company if needed.
  
• The Fed would, as a part of legislation aimed at boosting oversight of the companies that is making its way through Congress, take on a "consultative role" in setting capital requirements and financial safety and soundness standards for the two companies.

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Ilargi: The Wall Street Journal has an in-depth, obviously prepared (?!) analysis of the measures Paulson announced a short while ago.

U.S. Announces Rescue Plan For Fannie Mae, Freddie Mac

The U.S. Treasury and Federal Reserve, capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants.

In a statement timed to precede the opening of markets Monday, as well as a closely watched auction of debt by Freddie, the Treasury said it plans to seek approval from Congress for a temporary increase in a long-standing Treasury line of credit for the two companies.

The Treasury also said it would seek temporary authority so that it could buy equity in either company "if needed" to ensure they have "sufficient capital to continue to serve their mission" of providing a steady flow of money into home mortgages. The plan, which requires congressional approval, also calls for a provision to give the Federal Reserve a "consultative role" in the process of setting capital requirements and other "prudential standards" for Fannie and Freddie.

The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.

All told, the moves represent an attempt by the federal government to do as much as it can to prevent any active intervention in the companies' finances. Officials hope that by making such a public display of support, they will persuade investors that they have faith in Fannie and Freddie's long-term prospects and that they will stand behind both companies if necessary.

Even so, the weekend's result is likely to reinforce the notion that investors can always count on the government to bail out Fannie or Freddie in a crisis -- a belief the Bush administration until recently tried hard to quash. The unprecedented moves highlight Treasury's concern about market conditions and a senior official said the steps are intended to help "stabilize" the current situation.

While Treasury does not think the financial situation of either firm has deteriorated since Friday, "as we've watched market developments we decided it was time for policymakers to act," said one administration official said. Both companies are vital to the proper functioning of the U.S. mortgage market. If either company stumbled into serious financial trouble -- a prospect that seemed more real last week as their stock prices crashed nearly 50% -- that would deliver a brutal blow to the already weak housing market and economy.

Federal regulators, politicians and investment banks spent two hectic days swapping information and seeking to come up with the best ways of calming markets. From Washington, Treasury Secretary Henry Paulson personally called the heads of some investment banks, trying to gauge the level of nervousness about Fannie Mae and Freddie Mac and determine whether they would participate in Monday's $3 billion debt auction, according to people familiar with the matter.

Timothy Geithner, president of the Federal Reserve Bank of New York, also has been reaching out to Wall Street firms over the weekend to discuss the latest events. Fed, Treasury and company officials stayed in touch with top Capitol Hill lawmakers and their staffs throughout the weekend. Lawmakers continued their efforts to reassure financial markets about the government's support of both companies.

If either of the companies asks for it they could have access to a line of credit or an equity investment by the U.S. government. Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months. Treasury would not say how high the line of credit might go or how much of an equity stake Treasury might purchase.

They would not discuss whether the equity stake would carry any preferred terms for the government. Those decisions would be up to the discretion of Mr. Paulson, the official said, and "will be governed by protecting the taxpayers and the government." The two companies' line of credit is currently capped at $2.25 billion. The Treasury didn't say to what level they would be increased. It's also not clear what role the Fed might play. And while the Treasury said any moves would "carry terms and conditions necessary to protect the taxpayer," it didn't elaborate.

One complication is winning congressional approval. To do so, Congress will have to modify language contained in a big housing-rescue bill already nearing completion after several fraught weeks. The Senate late Friday passed a package that would create a new, stronger regulator for Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks.

The House passed a similar bill in May. House and Senate leaders are going to try to resolve differences between both bills this week, possibly bringing a bill to the White House before the August recess. The Senate could try to open up the bill it passed Friday and make changes before sending it to over to lawmakers in the House. This could meet resistance, though, because changes of such magnitude would likely need debate.

Also, lawmakers are trying to finish the housing package soon so that a big mortgage insurance program can be expanded before the end of the summer. Instead, lawmakers could try to advance the existing housing bill and then quickly introduce a separate bill with Treasury's requests.

The administration official said Mr. Paulson has reached out to bipartisan members of Congress and has had "good productive conversations … There's nothing to suggest that we will not be able to accomplish this." The Sunday move was in part designed to head off fears about Monday's auction of Freddie Mac notes, which while small, had assumed an outsized importance as a test of investor confidence.

Freddie should be able to find buyers for its three- and six-month notes, market analysts said, but there is a chance that some financial institutions and investors may demand to be paid higher-then-usual yields on the notes. Similar Freddie and Fannie notes outstanding yield around 2.5%. Some analysts feel that if weak demand for Freddie's auction leads to sharply higher yields on the new notes, it could trigger a selloff across a wide range of debt issued by the companies. Still, most think that scenario is unlikely.

The Treasury and Fed "are responding belatedly," said Henry Kaufman, an economic consultant who headed economic research chief at Salomon Brothers Inc. in the 1980s. Mr. Kaufman said last week that the Treasury should encourage the two companies to draw on lines of credit with the government and state that, if needed, it would be willing to supply new equity capital to them by purchasing preferred stock.

There remains some tension within the administration as to the best way to address the two companies, which are a hybrid mix of public company with an implicit government backing. Some Republicans in particular have long loathed the pair, in part because they worried that taxpayers would eventually be on the hook for risks taken on behalf of shareholders.

Some administration officials are believed to prefer a tough-love approach. Under one option, according to people familiar with the broad outlines of policy discussions within the administration, they could try to install a new slate of presidentially appointed board members at the companies. The idea would be to impose more market discipline on the companies, in an effort to curb their appetites for borrowing and investing, and gradually shrink their enormous balance sheets.

That's proved hard to do until now, because of the companies' relatively weak regulator and their perceived financial backing from the federal government, which allow them to borrow virtually at will, at low cost. As the housing market has worsened in recent months, Congress and the administration have even leaned more heavily on Fannie and Freddie. Reducing their demand for mortgages now could harm the already devastated housing market, and delay recovery.

Appointment of new presidential directors also would be an abandonment – at least for now -- of the Bush administration's often-stated ambition to distance the federal government from the companies. The new board members would be drawn from the ranks of financial-market heavyweights. Fannie and Freddie shares both dropped about 45% last week and are down more than 80% from a year ago.

Investors are worried that the companies eventually will have to raise large amounts of capital to cope with growing losses stemming from mortgage defaults. Freddie has announced plans to raise $5.5 billion by selling common and preferred shares but is likely to put off those plans in hopes of a calmer market. Fannie raised $7.4 billion in share offerings in April and May.

Fannie and Freddie were chartered by Congress to ensure a steady flow of money into home mortgages, but they are owned by private-sector shareholders and have their shares listed on the New York Stock Exchange. The two companies own or guarantee about $5.2 trillion of U.S. home mortgages, or nearly half of those outstanding.

There have long been legal provisions that authorize the Treasury to buy as much as $2.25 billion of Fannie or Freddie debt, but this generally has been viewed as a symbol of the companies' ties to the government rather than as something they were likely to use.

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Update 5.45 pm EDT Ilargi: The London Times claims to know what will come out of today's Fannie and Freddie discussions. $15 billion is a lot of money ($50 for every American), but in the GSE pit it will vanish in seconds. It won't solve anything, and all parties involved know it. But it's a nice fee for a Sunday afternoon for the lucky recipients. Thank you, America!

What amuses me to no end is that there is also a proposal to let the Treasury buy Fan and Fred's mortgages securities. Not only is that Bulgaria in all its shining beauty, it certainly begs the question why the government wouldn't just buy the mortgages outright. It would undoubtedly be a lot cheaper. Or better still, once we're in Bulgaria, why not just buy the homes, and rent them out.... Cheaper still, for sure.

US ready to stage $15 billion mortgage rescue

The US Government was last night [Sunday] close to taking the dramatic step of pumping $15 billion into the country's mortgage system in a desperate measure to prevent the economy going into a tailspin.

The possibility of an emergency infusion of taxpayers' money - which sources cautioned had yet to be finalised - emerged ahead of a critical attempt by Freddie Mac, the mortgage group, to borrow $3 billion from Wall Street today. Under the injection plan, the US Treasury would buy a total of about $15 billion of newly issued shares in Freddie Mac and Fannie Mae, the two giant mortgage groups that between them account for more than half of America's $12,000 billion of outstanding home loans.

Expectation of government intervention in the companies last Friday sent their shares plunging. Fannie's shares were down as much as 50 per cent and Freddie's 48 per cent at one stage. Fears of wider fallout from the mortgage market problems hit other financial groups, with Lehman's shares falling 20 per cent. The Dow Jones industrial average fell below the psychologically important 11,000 level for the first time since 2006.

Last night the US Securities and Exchange Commission (SEC) stepped in to issue a warning against rumour-mongering. The SEC said that it would check that no false information was being spread. It did not name companies it felt might be victimised.

Although the Treasury's injection plan has not been signed off, it was seen as the likeliest of the potential measures under consideration by the Treasury, which simply cannot allow Fannie and Freddie to fail because they underpin the entire US housing market and, in turn, the US economy. “They can't be allowed to fail, because if they did, the whole US financial system would collapse,” said Christopher Whalen, of Institutional Risk Analytics, which assesses risk in the banking industry.

The Government worked furiously behind the scenes over the weekend to ensure that Freddie Mac is able to sell $3 billion of short-term debt in the group in a “Dutch auction” today - and at an acceptable interest rate. As well as preparing to shore up confidence in Freddie Mac through a multi-billion-dollar capital injection, Treasury officials took the highly unusual step of calling leading banks and urging them to buy Freddie's debt. The routine offering of debt would be used to finance Freddie's day-to-day operation.

Fannie and Freddie are fundamental to the smooth running of the US housing market. They buy mortgages from banks and other lenders and package them into bonds, which they sell on to pension funds and other investment firms.The banks use the money they receive from selling their mortgages to Fannie and Freddie to make further loans to new homeowners.

They guarantee the payments on the mortgage bonds they create, in the event of a default on the underlying home loans, and they also retain on their balance sheets hundreds of billions of dollars of the mortgages they buy. A failure of Freddie and Fannie would not only drive up US mortgage payments significantly - as a crucial source of financing dried up - but the value of all the bonds they guaranteed would also plummet as the safety net was removed.

This would have a domino effect across the debt market, affecting everything from car loans to student loans, as lenders who suffered huge losses from the housing crash demanded higher interest rates on future loans to help them to get back into the black.

Other options the Treasury was considering at the weekend were thought to include buying the securities itself, letting the Federal Reserve Bank of New York buy them or asking private firms to buy them with a government guarantee to make good losses.

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Update 5.00 pm EDT

Treasury to Issue Statement Supportive of Mortgage Giants

The Treasury is expected later today to make a statement supportive of beleaguered mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter.

The exact language couldn't be learned but is expected to be a statement of facts designed to reassure markets, people familiar with the matter said. The two stockholder-owned, government-sponsored companies, whose operations are vital to the functioning of the U.S. housing market, face a severe crisis of confidence after a week in which their stocks each lost nearly half their value.

Monday's markets will bring a big test of the two companies' financial health when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence.

Treasury officials and other regulators have been calling potential buyers of the debt over the weekend to gauge their interest and urge them to participate, according to people familiar with the matter.

Wall Street investors are worried that both entities won't have enough capital to cover their expected losses caused by declining home values and foreclosures. The two companies own or guarantee about $5.2 trillion of mortgages or nearly half of all U.S. home-mortgage debt outstanding.

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The Biggest Transfer Of Wealth In History

This week began with alarm bells. First Bridgewater Associates broke the glass and pulled the handle; it said the conflagration in the credit markets might lead to losses four times higher than previous estimates – at $1.6 trillion. A lot of money – even for someone who lives in London.

Bridgewater helpfully pointed out that this was just the beginning; the world would lose an additional $12 trillion in foregone credit. When the going is good, each ounce of a bank’s share capital grows into as much as a pound of credit available to borrowers. But when the cycle turns, the shrinkage takes your breath away. Remove a dollar from a bank’s balance sheet and you wipe out a ten-spot of credit.

Bad news for people in Britain and America who are accustomed to living off of credit. Bad news for their economies, too. Without access to the fire hose of easy credit, the consumer economy goes up in smoke. To give you an idea of the scale of a $12 trillion problem, the entire U.K. economy generates only $2.8 trillion of output annually. The U.S. economy – at $13.8 trillion – is only slightly bigger than the anticipated damage.

When the alarums quieted and the flames died down, hopeful analysts sifted the ruins and wondered where the City and Wall Street might find the resources to restock their shelves. Suddenly, all heads rocked towards the East. Visions of myrrh and incense danced before their greedy eyes. Sultans as rich as Croesus...oil sheiks with sand dunes for brains...maharajas of motor industries and mandarins of manufacturing.

Enriched by the black gold flowing from deep holes in Arabia...or from commerce on the trade routes between Hong Kong and Long Beach, these princes of modern finance have trillions. Surely they will come to the aid of those who had made them rich? The gist of the following reflection is this: no, they won’t. Just because people are rich doesn’t mean they are stupid.

Outside the Bank of England and the U.S. Fed lies some $5.3 trillion in central bank reserves. In foreign government pension reserves and other accounts is another $6.1 trillion. Add $3 trillion more now in the hands of Sovereign Wealth Funds. The IMF says these SWFs will grow to $12 trillion within four years. Morgan Stanley estimates a $17.5 trillion pot by 2017. Altogether, this is enough moolah to buy control of every public company in Britain and America combined.

Few people bother to ask where they got all that money. Never mind, we will answer the question anyway: it is the fruit of a monumental hornswoggle. “It is the biggest transfer of wealth in history,” says T. Boone Pickens, speaking of the oil trade. Americans alone import 3.6 billion barrels of oil a year. In 2003, the tab for all that goo was only about $70 billion. At today’s oil price, it is pushing half a trillion.

A quarter of oil’s price increase since 2003 was because the dollar skidded against foreign currencies. What about the other 75%? That too, is probably largely a feature of a slippery dollar. For the last 100 years, the oil price has greased along – more or less – with U.S. money supply growth. As M3 increased, so did the price of oil. Currently, the money supply – as measured by M3 – is increasing at an annual rate of about 18%. Oil is going up – on a 10-year moving average basis – about 23% per year. Looked at another way, from 1974 to the present, the price of oil has gone up a bit more than 14 times. The U.S. money supply, meanwhile, has gone up a bit more than 11 times.

What does this mean? Oil is probably overpriced. But don’t worry, Mr. Market will sort that out. Just don’t get distracted. This is one of the funniest and most perverse scenes in modern finance; it would be a shame to miss it. In effect, the world’s most sophisticated capitalists are also the dumbest when it comes to money. America and Britain spent too much money. Now, they owe more money to more people than any nations ever did before.

Once, they owned the world; now the world owns them. And now, the U.S. central bank inflates in order to try to rescue its errant banks, reckless spenders and condo speculators. But in the global economy, the easy money won’t stay put. Instead, it seeps over to oil sheiks in the Near East to pay for petrol...or over to the sweatshop operators in Far East to pay for electronic gadgets and designer T-shirts.

It doesn’t stimulate the U.S. economy, in other words; it stimulates the foreigners’ economies and raises prices for everyone, including themselves. Unfortunately, while the foreigners earn more money and can keep up with rising prices – incomes in India are up 148% since 2001 – the Anglo-saxons’ wages are stagnant. Americans haven’t had a real wage increase in 40 years.

And now the lynchpins of leveraged finance are praying that the cash they spent on imports will come back to them. And it will. But it comes back like a young man who got rich in the colonies...with better clothes and a sniffy air. It left a servant; it comes back a master, buying up valuable assets and expecting the indigenes of Wall Street to shine its shoes. Foreign purchases of U.S. assets rose 90% last year.

Foreigners are bidding for America’s leading brewery, Britain’s stock exchange, hedge funds, infrastructure projects and technology companies. A Chinese company bought MG. An SWF from the Gulf bought the emblematic Chrysler in New York. A Russian who got rich in fertilizer bought Donald Trump’s Palm Beach mansion for $100 million. And the balance sheet of the U.S. Fed shows $2.3 trillion of US treasury debt held in custody for foreign central banks.

The harder the Fed fights the correction...the more money and credit it puts out. This monetary inflation causes prices for oil and imports to rise...and more money goes into foreign reserves and Sovereign Wealth Funds in the East, to be used to buy more assets in the West. Thanks to America’s mad monetary policy, these private assets are being taken into public ownership. Some of America’s most important properties are being nationalized...but by other nations.

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One of the greatest periods of systematic looting in American history

The FDIC take down of IndyMac has occurred. This bank had $19.06 billion in deposits, and from the FDIC site it looks like the insurance pool will eat $4-8 billion on this one. With about $52 billion in FDIC reserves on hand, we can get some idea of the possible burn rate as this process unfolds with other banks.

From Aaron Krowne’s Bank Implode-Meter comes a comment about IndyMac defaulted homebuilder loans, and the problems and costs associated with half constructed housing projects. Aaron also offers some comments on Wachovia who appears to have brought in a Paulsen crony from Goldman Sachs. This is probably significant to my general theory that the last six months of the Bush administration will mark one of the greatest periods of systematic looting in American history.

Never again will so many assets be handed off to regulators and corrupt apparatcheks for “distribution” to the privileged. This may make the “privatization” of the Soviet Union to Russian oligarchs look like a cake walk. Aaron also mentions that fact that JP Morgan will likely make a move in the Southeast. Wachovia? Maybe, but there are also a slew of smaller regional banks in that region too.

In asking the question of who gets looted and who gets the distressed pickings, I think it is important to consider who is most exposed. The answer is the investment banks who have thin capital bases relative to their fictitious capital holdings and obligations. The biggest plum of all are the assets of GSE’s Fannie Mae and Freddie Mac. Therefore I think we are going to see them dropping one by one like flies.

And it really does look like the next crisis is Lehman Brothers. It is not that LEH is terribly more exposed than the others, it’s just that they apparently drew the wrong straw. I will also mention that with enormous amounts of wealth already transferred to oil sheiks and Asians that you can look for them to be the new owners of many marked down American assets. They have the purse, and the only nationality or race that is important is the green. You can count on that as much as you can count on the sun going down at night. Follow that ball.


I believe the pile on and stealing of American banks will happen at a very rapid pace, maybe even within just a few weeks. It really has to be a done deal by the end of this year. The events that tipped me off were wholesale downgrades of virtually all regional banks by Goldman Sachs, Citicorp and a chorus of lacky lapdogs in June. In addition the old Risklove rabble is running stock prices of banks into the ground with extremely aggressive short selling.

And now as if problems didn’t exist before, there is suddenly a panic recognition phase about Fannie Mae and Freddie Mac. What a coincidence! And what a coincidence that the overdue closure if IndyMac occurred this week. And next week we get a slew of 2nd quarter bank reports.

Allow me to give you a quick simplified primer (we can get more anal in the comments if you wish) on banks. Banking is a great business in almost all times. That is why I am convinced the great monied interests are lathered up for a crisis about now and before Paulsen and his lapdog Bush leaves office.

A generic bank takes cheap deposits, lends to credit worthy businesses and Gente, and collects a spread of say 3-3.5%, minus operating expenses, netting out around 2.8%. Just using rounded numbers, for each dollar of capital skin in the game, they can take in deposits of $10, and make loans, and net out 28 cents against the Skin. Losses are then subtracted off, and the remaining profit is added to the Skin. If losses are running higher than previously anticipated (universal now) than it is reserved for and taken off of Skin.

In a banking crisis it is important to look at potential losses. One way to ball park whether the Skin shareholders are going down or to what degree they will be diluted is called the Texas ratio. This takes non-performing loans divided into tangible equity capital plus loan loss reserves. It is important to recognize that a non-performing loan is not a complete loss. Recoveries are a complete topic in and of itself, that I will attempt to shed light on as this phase unfolds.

There are recoveries especially on mortgages. Figure that a ratio of 50% jeopardizes not only all the profit of banking, but also damages the leverage capital that is needed to exist as a bank. That bank will need to raise capital (preferred or common equity) to make that up, and right now the ability to do so is severe constrained even for more solid lower Texas ratio banks. The other method is as ominous, reduce or liquidate loans to bring in line with depleted capital.

We are about to get quite a snap shot of American banking conditions at mid-year, buckle your seat belts.

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The greatest taxpayer rip-off in American history

Chinese government is top foreign holder of Fannie Mae, Freddie Mac bonds. $376 billion in Chinese agency bond holdings subject to taxpayer bailout proposals according to Freedomworks analysts.

As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."

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USA: A dishonest, spineless socialist state

Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator  Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? 

The answer is:  obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms.  Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.

The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) are government-sponsored enterprises  of the US federal government. They are shareholder-owned corporations authorized to make loans and loan guarantees. Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal.  For the next 30 years, it held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to remove Fannie Mae from the federal budget and balance sheet - the financial demands of the Vietnam War made such financial window dressing politically necessary - Fannie Mae was converted into a private corporation and listed on the stock exchange. It also ceased to be the guarantor of government-issued mortgages.  That responsibility was transferred to another GSE, the newly created Government National Mortgage Association (Ginnie Mae).

Freddie Mac was created in 1970 to do effectively the same thing as Fannie May, that is to expand the secondary market for mortgages.  The GSEs buy mortgages on the secondary market, pool them and sell them as mortgage-backed securities to investors on the open market.  They institutionalised and popularlised securitisation, a development whose excesses ultimately brought us the subprime residential mortgage backed securities disaster (although the GSEs themselves did not issue or guarantee subprime mortgages).

The US has, starting with FDR, socialised much of its residential housing finance arrangements since the 1930s.  Since the recent financial crisis began in August 2007, most of what remained private has also been socialised. Together, Fannie May and Freddie Mac own or back about half of all outstanding home loans.

Evidently impressed by the argument that farmers in the US don’t have their snouts deep enough in the public trough, the federal government in 1988 created the Federal Agricultural Mortgage Corporation (Farmer Mac), following the Fannie & Freddie model, as a a stockholder-owned, publicly-traded company to promote a secondary market in agricultural loans.

In addition, the Federal Home Association, a branch of the federal Department of Housing and Urban Development, provides subsidised mortgage insurance.  Currently the FHA has  4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. In addition, the 12 Federal Home Loan Banks (created in 1932) provide low-cost funding to private American financial institutions for home mortgage loans, small business , rural, agricultural and economic development lending. 

While they are owned by their (private institutional) members, they are exempt from state and local income taxes. They also don’t seem to go broke a lot.  An agricultural version of the FHLB, the Farm Credit System, consisting of four Farm Credit Banks, one Agricultural Credit Bank and a number of other institutions rounds off the universe of federally subsidised public housing finance provision in the US. 

Formally, neither Fannie nor Freddie are backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection.

However, the companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default. Irrespective of these legal niceties, de facto, everybody knows that, although the shareholders of these GSEs are (probably) not underwritten by the Federal Government, the Federal Government would bail out the rest of the creditors to both institutions before you could say the words “serious threat to residential mortgage finance”.  

The creditors to Fannie and Freddie are therefore not unduly worried, even as the shares of the two companies have tanked. Between May 1 and July 9, credit-default swaps tied to the senior debt of Fannie Mae and Freddie Mac climbed 35 basis points to 70 basis. That’s ludicrously low, if there is no implicit guarantee of federal financial support for these entities.

During good times, Freddie Mac and Fannie May have been able to collect massive rents by being able to borrow at spreads over Federal borrowing rates that were much lower than was warranted by the quality of their portfolios.  The implicit guarantee of the Federal Government, an implicit contingent liability of the tax payers, made this possible.  These rents were partly appropriated by the orginal investors in Fannie and Freddie stock, and partly by the management and employees of the two GSEs.

Now that the seven fat years have come and gone and the seven lean years have arrived, the Federal Government is likely to be called upon to bail out Fannie and Freddie.  The deterioration in the quality of their balance sheet and the increase in the scale of their balance sheets - both the result of political pressure to ‘do something’ about the US housing crisis and the implosion and disappearance of the private home loan market - probably would have pushed both GSEs into insolvency by now had they been honest private corporations.  These parrots are no more.

On July 11, 2008, the New York Times reported that US government officials were considering a plan for the US government to take over Fannie Mae and/or Freddie Mac if their financial situations were to worsen due to the US housing crisis. These government officials were also reported by the New York Times as stating that the government had also considered calling for an explicit federal government guarantee of $5 trillion on debt owned or guaranteed by the two companies through legislation.  You can see why the creditors to these GSEs don’t seem to be too worried.

There are many forms of socialism.  The version practiced in the US is the most deceitful one I know.  An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions.  Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification.  The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion  committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country.

The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral)  is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

The chair of the Senate Banking Committee, Chris Dodd, has said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie.  I am afraid he may be right.  After all, an injection of the liquidity by the Fed is so much more politically expedient than an explicit fiscal subsidy, even though their economic effect is identical. This would not be a liquidity enhancement operation by the Fed, which would be a legitimate operation for the central bank to engage in.  It would be a quasi-fiscal recapitalisation of two insolvent institutions, which is not part of the mandate of the Fed.

The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich.  It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. 

They should never have been privatised in the first place.  Cost the exercise.  Increase taxes or cut other public spending to finance the exercise.  But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies.  These GSEs were designed to make losses.  They are expected to make losses.  If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it.  Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA.  Granted, the US version of socialism is imperfect thus far.  The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. 

But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies.  Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

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Ilargi: And wouldn’t you know, right on cue the doofus of change comes up with entire new dimensions in empty rhetoric. Is this specimen truly as stupid as he tries to look? In any case, a valiant attempt to outdo W’s best efforts in the highly rated craft of oinking and bleating. Obama makes it sound even more convincing.

Obama Says U.S. May Not Take Any Action to Aid Fannie, Freddie

Democrat Barack Obama left open the possibility that the federal government won't need to take any steps to aid mortgage giants Fannie Mae and Freddie Mac, saying it needs to watch the evolving situation before making a decision.

"I think we need to watch carefully to see how it plays out before we make a decision about which steps need to be taken, if any," Obama, 46, said aboard his campaign plane from Chicago to San Diego late Saturday. It was the first time Obama addressed concerns over the stability of the two firms that own or guarantee almost half the $12 trillion in U.S. mortgages.

Obama, his party's presumptive presidential nominee, said he's committed to making sure there's liquidity in the housing markets and that Fannie Mae and Freddie Mac "play critical roles in that process." Obama said he's been monitoring the situation "closely" and that it's "of extraordinary concern."

If the government were to step in and provide the firms with more liquidity, "there are a lot of different definitions of what a bailout would look like," Obama, an Illinois senator, said without providing specifics. "There are issues related to the short term liquidity --can they borrow money -- versus issues related to whether the underlying assets of the two corporations are really unsound," he said.

U.S. Treasury Secretary Henry Paulson on Friday signaled that a government takeover of the two firms, the biggest buyers of U.S. mortgages, won't be necessary, saying they should continue as shareholder-owned companies with federal charters.

Senator John McCain of Arizona, the presumptive Republican presidential nominee, told reporters July 11 that Fannie Mae and Freddie Mac would "very likely require some kind of government assistance," and while he didn't know what the best immediate action would be, McCain said he'd "support effective action to keep them from going under."

Obama said the "bigger problem" is the broader mortgage crisis and that with "some prudent steps by the government that we'll be able to stabilize the situation." He praised the $300 billion housing rescue package that the Senate passed this week and called on President George W. Bush to sign it, saying the U.S. has moved into a recession and it's necessary to move "swiftly" on a final housing bill.

Obama also reiterated his call for an additional $50 billion stimulus package. Still, he said, the Senate housing bill "is not the end-all, be-all; there's going to still be some working out to do."

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US officials check on Freddie Mac securities sale

U.S. Treasury Department officials are trying to make sure that Freddie Mac, one of two troubled U.S. giant mortgage firms, will be able sell $3 billion in securities this week at a previously scheduled sale, the Washington Post reported on Sunday.

On Monday, Freddie Mac is due to sell the $3 billion of short-term debt in what will be a barometer of market appetite for the firm's securities. The Post said Treasury Department officials on Saturday spoke by telephone with major banks that normally purchase such securities to ensure that these firms still plan to place bids, and they were optimistic the sale would be a success.

Shares of Freddie Mac and Fannie Mae, companies that play a central role in U.S. housing markets, fell sharply this past week as fears mounted the two would not have enough capital to make it through the worst U.S. housing crisis since the Great Depression. The shares are trading at a fraction of their value of a year ago.

The newspaper said that anything less than a successful sale of the securities would pose new questions about how far the federal government is willing to go to prop up Freddie Mac, Fannie Mae and other faltering financial enterprises. The companies on Friday said their finances were sound enough to withstand the housing crisis, and government officials scrambled to make public statements to restore confidence in them.

The Post said Treasury officials were considering several options if interest in the sale of Freddie Mac securities is lagging. In one possibility option, the Treasury Department or the Federal Reserve would purchase the securities directly.

The newspaper said other possibilities are allowing the Federal Reserve Bank in New York to buy the debt indirectly through private brokers or asking private firms to purchase the debt while extending to them a public or private assurance that the government would back the securities if Freddie were ultimately unable to cover its obligations.

The $5.2 trillion in mortgages owned or guaranteed by Fannie Mac and Freddie Mac dwarfs the size of the savings and loan institutions taken over by the federal government in the late 1980s or the big Japanese banks that required government assistance there in the 1990s. Until now, these are two of the biggest post-Depression financial rescue efforts, the paper said

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UK braced for US banking backlash

The British economy is braced for further turbulence this week as the fallout from the second largest bank failure in US history spreads across the Atlantic. Last week's extraordinary decision by the US Federal Reserve to take over the Californian bank, Indymac, comes as the Bush administration attempts to quash speculation that America's two largest mortgage lenders, Fannie May and Freddie Mac, also face nationalisation.

Rumours swirled last night that they may have to be bailed out this week after their shares fell sharply on Wall Street. And City experts are now warning that the problems facing the US are a harbinger of things to come in Britain. Terry Smith, an influential City commentator and chairman of stockbrokers Collins Stewart, said: 'It is every bit as true today as it was in the Thirties that, if America sneezes, the rest of the world will catch a cold.'

Asked if he thought the crisis had reached its zenith, Smith said: 'We are nearer the beginning than the end. I'm afraid there is going to be more pain - quite a lot, actually.' Liberal Democrat Treasury spokesman Vince Cable said: 'Things always tend to be more dramatic in the States, but what happened at Northern Rock showed us that there is an extraordinary amount of complacency by the authorities on this side of the pond.'

Both British and US banks are seeing their share prices fall as house prices continue to slide. 'Prices are already down eight per cent in the UK and quite conservative forecasters reckon that the extent of the collapse from peak to trough could be 30 per cent,' said Cable.

Further house price falls could have serious repercussions for the wider economy, he warned. 'The economy is on the way down,' he said. 'We have already seen the credit crunch affect banks, house builders and retailers - a recession is quite possible.'

A move by the Federal Reserve to nationalise Fannie May and Freddie Mac, which together account for 40 per cent of all US mortgages, would send dire signals around the world. The two lenders urgently need to raise billions of dollars to offset expected losses stemming from mortgage defaults, but cannot seek additional cash from their shareholders. Between them, the two guarantee or own mortgages worth more than $5 trillion.

Fears over the impending collapse of Indymac last week saw a massive run on deposits as frightened customers looked to withdraw cash. Amid chaotic scenes, customers pleaded with staff to be allowed to enter the bank after it shut its doors. One woman leant on the locked doors, pleading with a teller: 'Please, please, I want to take out a portion.'

The bank's branches were closed this weekend, but will reopen tomorrow as Indymac Federal Bank. Deposits of less than $100,000 are guaranteed. Indymac's failure had been widely expected, as the bank shut offices and laid off employees to cope with huge losses from defaulted mortgages taken out at the height of the housing boom. Meanwhile nervous depositors were pulling out $100 million a day, according to observers.

Indymac's problems are likely to impact on the ability of the UK's banks to shore up their finances. Some of Britain's biggest lenders, such as HBOS and RBS, have already been forced to ask their shareholders for billions of extra cash as they seek to repair their battered balance sheets. Bradford & Bingley, a specialist buy-to-let lender, had to be rescued by its largest institutional investors.

The bank, which has two million depositors and one million mortgage borrowers, made an £8m loss in the first four months of this year. But Angela Knight, head of the British Bankers' Association sought to allay fears that Britain's problems were as bad as those of the US. 'In America, they have lent money to people with no proof of income to buy five-bedroom houses,' she said. 'That has not happened in Britain.'

Gordon Brown's government is braced for further knocks this week, when fresh data will be published on unemployment, inflation and the state of public finances. Analysts expect the figures to make grim reading. The numbers out of work are expected to rise as hard-pressed businesses shed labour.

Housebuilders such as Taylor Wimpey and Barratt are laying off thousands, although these job losses are not expected to show up in the figures until later this year. A spokesman for the Federation of Small Businesses said: 'A majority of our members expect no growth this year, and a sizeable minority expect to reduce staff.'

Last Friday, the FTSE 100 index closed in 'bear market' territory for the first time since the dotcom crash, after it plunged nearly three per cent at the end of another dire week. A bear market is when share prices are down 20 per cent from their peak. City bank Lehman Brothers said its economists had cut their UK GDP forecasts to the extent that the UK was now heading for recession.

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Freddie Mac's Next Hurdle: Raise Cash

Treasury Department officials were working the telephones yesterday to make sure that Freddie Mac, one of the nation's two troubled mortgage giants, will be able to sell $3 billion of its securities tomorrow in a previously scheduled sale that has now become a crucial test of investor confidence.

Though officials said they were optimistic the sale would be a success, anything less would pose new questions about how far the federal government is willing to go to prop up Freddie Mac, its sister Fannie Mae and other faltering financial enterprises.

Officials spoke yesterday with major banks that normally purchase securities, like the short-term debt offered by Freddie, to ensure these firms still plan to place bids tomorrow. This was part of an effort by officials at Treasury, the Federal Reserve and other agencies this weekend to gauge market sentiment and check that investors still have faith in Freddie Mac and Fannie Mae after the steep decline in their stock prices last week.

At the same time, Treasury officials were considering several options to backstop the sale in case they discover that interest in the securities is flagging, according to sources familiar with the discussions. Under one alternative, the Treasury or Fed would purchase the securities directly.

Other possibilities are allowing the Federal Reserve Bank of New York to buy the debt indirectly through private brokers or asking private firms to purchase the debt while extending to them either a public or private assurance that the government would back the securities if Freddie were ultimately unable to cover its obligations.

As the credit crisis has battered one financial giant after another, federal officials have taken steps that have put the government, and potentially taxpayers, on the line behind private institutions.

Last week's gut-wrenching ride for shareholders of Fannie Mae and Freddie Mac raised speculation about whether the Bush administration might be forced to step up again, either by taking direct control of the firms or by pumping fresh capital into them, perhaps in return for stock and a promise to restructure the companies.

It would be only the latest in a series of unusual interventions. In March, the Fed extended a $30 billion credit line to orchestrate JP Morgan Chase's purchase of troubled investment bank Bear Stearns. The Fed then let other investment banks borrow directly from the Fed at favorable rates.

And Friday the Federal Deposit Insurance Corp. seized control of California-based IndyMac Bank with plans to liquidate its assets at a cost that could wipe out more than 10 percent of the FDIC's funds.

"Someday this capitalistic economy, or what we used to call the capitalistic system, needs to get back on track and that means failure," said Lee Hoskins, former president of the Federal Reserve Bank of Cleveland. "You can't have risk-taking without failure." But if there is a limit to the government's willingness to back financial giants, now might not be the best time to find out.

Even long-time critics of Fannie Mae and Freddie Mac -- unusual hybrids with private shareholders, a public mission, a congressional charter and implied government backing -- say that the federal government has no option but to assure their viability because they are so central to already troubled mortgage and housing markets and hence to the overall economy.

The $5.2 trillion in mortgages owned or guaranteed by Fannie Mae and Freddie Mac dwarfs the size of the savings and loan institutions taken over by the federal government in the late 1980s or even the big Japanese banks that required government assistance there in the 1990s. These have been two of the biggest post-Depression financial rescue efforts.

Moreover, at a time when commercial banks have become cautious about new loans, Fannie Mae and Freddie Mac continue to provide liquidity for more than 70 percent of new home mortgages.

In addition, banks, pension funds and other institutions as well as foreign governments hold large amounts of the two firms' bonds. Any suggestion that the U.S. government wasn't standing behind the firms might cause widespread losses and further caution in credit markets.

"We have no options like we did with S&Ls. These two are so large and so vital to the continued operation of the mortgage markets that the government must back them," said Peter Wallison, a longtime critic of implicit government backing for the firms and general counsel of the Treasury under President Reagan. "We should be grateful that they still have sufficient capital to be considered by their regulator to be viable and that capital markets see Fannie and Freddie as backed by the government."

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Stocks face financial fears and a wall of earnings

Stocks will likely start the coming week full of growing uncertainty after news late Friday that retail bank IndyMac was shut down by regulators, becoming the latest victim of the subprime mortgage crisis. The Federal Deposit Insurance Corp., which regulates U.S. banks, said it will take over IndyMac's operations after questions arose about its capitalization levels.

When the news came late Friday, traders had already left the New York Stock Exchange worried about the fate of government-backed mortgage buyers Fannie Mae and Freddie Mac, tensions between Iran and Israel, and surging crude oil prices.
"The market is telling us that something is not fine there," said Paul Mendelsohn, director of investments at Hinsdale Associates, referring to market fear about additional problems that might be facing the two giant mortgage firms.

Reports that the Treasury Department and the Federal Reserve may be planning to rescue Fannie Mae and Freddie Mac were flying around in the media and in the markets late in the week, although most were officially denied or never completely clarified. By the close on Friday, the Dow Jones Industrial Average had lost 128 points, or 1.1%, at 11,100, tallying a loss of 1.6% for the week. The S&P 500 dropped 13 points to 1,239.50 on Friday, giving it a weekly loss of 1.8%.

The Nasdaq Composite fell 18 points, or 0.8%, to 2,239.08, giving the technology-laden index a 0.3% weekly loss. "I think that the market is going to be rocked by more rumors and reports next week, unless something happens before, just like the weekend before Bear Stearns," said Paul Mendelsohn, director of investments at Hinsdale Associates.

Recurring jolts related to the credit crisis are also likely to cast a shadow on the first heavy week of second-quarter earnings, which brings reports from the likes of investment firms Merrill Lynch & Co. and JP Morgan Chase & Co. on Thursday, as well as banking giant Citigroup Inc. on Friday.

The fears palpable in markets at the end of the week was reminiscent to many of the near-collapse and subsequent rescue of Bear Stearns, one of Wall Street's oldest investment firms, which fell apart in March because of its investments in bad home loans. Investors have become hopeful that a bail-out plan for Fannie Mae and Freddie Mac could lift the market out of its current funk as worries about ailing financial firms have come back in full-force in recent weeks.

"The government can't let these two fail before they are too central to the mortgage lending process," said Ken Tower, chief market strategist at Covered Bridge Tactical. Federal Reserve Chairman Ben Bernanke, who delivers his semi-annual testimony to Congress on Tuesday, will likely "get grilled" on the current financial mess, according to Hinsdale's Mendelsohn. "Now the main question is going to be, what's going to be the end game," he said. "Where is this going to end?"

From March to late May, stocks had rallied back as the Federal Reserve helped bail out Bear Stearns, continued to aggressively cut interest rates and staged massive interventions in markets to soothe the effects of the housing-led credit crisis. But the market fell sharply through June to close the chapter on a dismal first half for stocks, with mounting worries about a weak dollar and surging commodities prices piling on to other economic woes from the depressed housing market and the credit crisis.

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Key facts on Fannie Mae and Freddie Mac

Shares in U.S. mortgage finance firms Fannie Mae and Freddie Mac plunged this week as market speculation mounted that the government was set to take them over to resolve their funding problems. Here are some key facts about the two companies:

FANNIE MAE:
-- Formal name: Federal National Mortgage Association
-- Created in 1938 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing.
-- Annual revenue: $43.71 billion (Dec. 31, 2007)
-- Chairman: Stephen B. Ashley.
-- Shares touched a 52-week high of $70.57 on Aug. 22, 2007 and fell as low as $6.87 on Friday, but closed at $10.25.

FREDDIE MAC:
-- Formal name: Federal Home Loan Mortgage Corp.
-- Created in 1970 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing
-- Annual revenue: $42.91 billion (Dec. 31, 2007)
-- Common stock outstanding: 646.27 million (Jan. 31, 2008)
-- Chairman: Richard F. Syron.
-- Shares touched a 52-week high of $67.20 on Aug. 17, 2007 and fell as low as $3.89 on Friday, but closed at $7.75.

WHAT DO THE COMPANIES DO?
Fannie Mae and smaller Freddie Mac are shareholder-owned companies charged by Congress with supporting housing by keeping money flowing in the mortgage market. Due to the congressional charter, the two are often referred to as government-sponsored enterprises, or GSEs.

Due largely to an implied government guarantee, they are able to raise funds relatively cheaply by selling debt to investors. The funds they raise are then used to purchase home loans from mortgage originators such as banks, allowing the lenders to make fresh home loans.

While the collapse of the subprime mortgage market, which caters to borrowers with poor credit histories, has contributed significantly to the U.S. housing slump, the vast majority of mortgages purchased by Fannie Mae and Freddie Mac are prime, fixed-rate loans on which borrowers are current.

Fannie Mae and Freddie Mac bundle the loans they purchase into securities which are sold, with a guarantee of payment, to investors worldwide. In addition, the two companies also guarantee mortgages and pay owners of the loans when there is a default.

SIZE OF INVESTMENTS
The two companies hold some of the loans they purchase and securities they bundle in their investment portfolios. Fannie Mae said its portfolio was $736.9 billion in May, the highest since August 2005, while Freddie Mac said its portfolio was a record $770.4 billion in May.

Including investments and guarantees, Fannie Mae's total book of business topped $3 trillion for the first time in May, twice its size at the beginning of 2002. With Freddie Mac's $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market.

WHY ARE THEY IN TROUBLE?
As the housing market continues to deteriorate, foreclosures have spread beyond subprime loans to higher-quality mortgages. The two companies have been required to write down their loans held for investment and pay out on guaranteed mortgages that default, depleting their capital. Fannie Mae and Freddie Mac have reported more than $11 billion in losses since the housing market bubble burst.

Contrary to many other financial institutions, Fannie Mae and Freddie Mac have never been required to hold much capital relative to their assets. That leaves them with a smaller cushion for absorbing losses. A lack of capital also indicates they are unable to buy mortgages from lenders.

THE SOLUTION?
Analysts and investors expect the two companies to raise capital. Fannie Mae raised $7.4 billion of capital in April and May by selling common and preferred shares. Freddie Mac has announced plans to raise $5.5 billion but its ability to do that by selling shares will be difficult given the sharp drop in its stock price.

WHY DOES IT MATTER IF THEY REMAIN SOLVENT?
The two companies' presence in the struggling housing market is widely considered to be critical. They help keep mortgage rates low for many consumers, but the companies are struggling to balance growth through buying loans against rising delinquencies.

IS THERE A PRECEDENT?
In 1979, Fannie Mae became insolvent as the market value of its liabilities exceeded the market value of its assets. This turned around as market factors eventually worked in the company's favor. The U.S. government did not get involved.

WHO OVERSEES THE TWO COMPANIES?
The Office of Federal Housing Enterprise Oversight

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Branson predicts "spectacular" airline casualties

There will be "spectacular casualties" in the airline industry over the next 12 months, billionaire Richard Branson, the owner of Britain's No. 2 long-haul airline Virgin Atlantic [VA.UL], was quoted as saying on Saturday.

The U.S. airline industry -- including Virgin America -- has been battered by soaring fuel costs that are pinching even the healthiest airlines. "The financial state of the world is just about the worst I've ever known it," Branson told The Times newspaper in an interview. "It's getting perilously close to being worse than the 1990s.

"You have the perfect storm -- you've not only got the banking crisis and the housing crisis, you've got the soaring fuel prices as well. One of the big American carriers will almost definitely go." Branson confirmed Virgin was interested in buying British airline bmi, 50 percent plus one share owned by entrepreneur Sir Michael Bishop.

The carrier has long been expected to change ownership in 2009 due to a private agreement between Bishop and 30 percent minus one share co-owner Lufthansa. Despite barely making a profit in 2007 -- and with the outlook far worse for 2008 -- bmi's value is in its control of 11 percent of the highly prized airline slots at Heathrow.

The billionaire also called for an end to BAA's monopoly of Britain's major airports. Part of Spain's Ferrovial since 2006, BAA has owned the three main airports serving London -- Heathrow, Gatwick and Stansted -- as well as Scotland's Edinburgh and Glasgow airports since it floated over 20 years ago.

"It's been embarrassing to be British looking at foreigners queuing up to come into the country," said Branson. "I certainly think that BAA should be broken up. Each individual terminal at Heathrow should be privatised so they can compete against each other. BAA just creams off more and more every year."

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Death of globalisation consensus

The world economy has seen globalisation collapse once already. The gold standard era – with its free capital mobility and open trade – came to an abrupt end in 1914 and could not be resuscitated after the First World War. Are we about to witness a similar global economic breakdown?

The question is not fanciful. Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded".

There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.

Recent events have heightened the urgency with which these issues are discussed. The presidential electoral campaign in the United States has highlighted the frailty of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes.

Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.

So if globalisation is in danger, who are its real enemies? There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth. Meanwhile, they regarded themselves as the true progressives, because they understood that safeguarding and advancing globalization was the best remedy against poverty and insecurity.

But that self-assured attitude has all but disappeared, replaced by doubts, questions, and scepticism. Gone also are the violent street protests and mass movements against globalisation. What makes news nowadays is the growing list of mainstream economists who are questioning globalisation's supposedly unmitigated virtues.

So we have Paul Samuelson, the author of the post-war era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation", musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.

While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate. Moreover, even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalisation go.

For example, Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits. But their debates on the merits of regional trade agreements – Bergsten for, Bhagwati against – are as heated as each one's disagreements with the authors mentioned above.

None of these intellectuals is against globalisation, of course. What they want is not to turn back globalisation, but to create new institutions and compensation mechanisms – at home or internationally – that will render globalisation more effective, fairer, and more sustainable.

Their policy proposals are often vague (when specified at all), and command little consensus. But confrontation over globalisation has clearly moved well beyond the streets to the columns of the financial press and the rostrums of mainstream think tanks.

That is an important point for globalisation's cheerleaders to understand, as they often behave as if the "other side" still consists of protectionists and anarchists. Today, the question is no longer: "Are you for or against globalisation?" The question is: "What should the rules of globalisation be?" The cheerleaders' true sparring partners today are not rock-throwing youths but their fellow intellectuals.

The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multi-lateralism that permitted policy-makers to focus on domestic social and employment needs, while enabling global trade to recover and flourish. This regime was superseded in the 1980's and 1990's by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.

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U.S. soy supplies razor-thin, price soars

Heavy rains and floods in the Midwest will cut the U.S. soybean harvest by 3 percent and push the farm-gate price to a record $12.75 a bushel, $2.60 more than the 2007 crop, the government projected on Friday. The Agriculture Department estimate is up by $1 a bushel from its estimate before the floods. Soybean supplies will be tight into fall 2009 at a minimum.

USDA projected a soybean crop of 3 billion bushels, the fourth-largest on record, but 105 million bushels, or 3 percent, less than expected before June rains swamped the Midwest. Growers will harvest 2 percent less soybean land because of the bad weather and yields are down too, said USDA. "On the soybeans, stocks just remain razor-tight there," said analyst Don Roose of U.S. Commodities.

U.S. warehouses will hold 125 million bushels -- a scant two-week supply -- when this year's crop is ready for harvest, said USDA. The stockpile is projected for 140 million bushels when the 2009 harvest begin, a slight improvement. Citigroup analyst David Driscoll said tight U.S. supplies would encourage South American farmers to expand their soybean plantings this fall. Brazil could top the United States as a soybean exporter in 2008/09, said USDA.

This year's corn crop was estimated to fetch a farm-gate average of $6 a bushel, also a record and up 20 cents from USDA's June estimate. Farmers are projected to reap 11.715 billion bushels, down 20 million bushels from June but the third-largest crop ever. "The tighter balance sheet for soybeans and higher soybean prices are expected to drive competition for 2009 acreage, keeping cash and futures corn prices relatively strong but below recent record levels," said USDA.

Slightly less corn -- 50 million bushels a year -- will be used in making ethanol due to a slowdown in the industry, said USDA. USDA forecast a wheat crop of 2.461 billion bushels, up 23 percent from 2007 and the largest in a decade. Cotton was pegged at 14 million bales, the smallest since 1998.

Although U.S. farmers planted more corn than expected, "heavy June rains and flooding reduced the share of harvested area in the higher-yielding Corn Belt states," said USDA. The crop would average 148.4 bushels an acre, down 0.5 bushel from estimates before the floods.

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