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All Da King's Men

The GSE Shell Game

By David King Published: March 13, 2014

Last month, we were given wonderful news - the taxpayers made a profit on the 2008 housing bailouts !!! Hurrah !!! This happened due to Fannie Mae's alleged return to profitablity. As Reuters breathlessly reported, 'Fannie Mae Profits Push Taxpayers Into Black On Housing Bailout':

Before returning to the black last year, Fannie Mae had suffered five years of losses totaling $164 billion, and it had drawn $116.1 billion in taxpayer aid.

Freddie Mac, which lost $94 billion between 2007 and 2011, was supported by $71.3 billion in bailout funds. The company has yet to report fourth quarter results, but has already paid $9 million more in dividends than it received in aid.

Fannie Mae's dividend payment next month means the two companies, after a combined bailout of $187.5 billion, will have paid back about $192.5 billion in dividends.

And there you have it. The bailouts were a roaring success !!!...but only if you ignore what REALLY happened with Fannie, Freddy, and Ginny , as did Reuters, the New York Times, and almost the entire mainstream media. Our intrepid "journalists" nearly all missed one teensy weensy little detail, namely, the role played by the Federal Reserve Bank in the mortgage crisis.

Between 2008 and 2010, the Federal Reserve began purchasing Mortgage Backed Securities (MBS) from Fannie, Freddie, and Ginnie. Another way to describe these securities is "bad loans". Fannie Mae in particular was the Mount Everest of bad mortgage loans. The Fed began buying LOTS of bad loans from these Government Sponsored Entities (GSE's). The Fed bought $703.6 billion in Fannie Mae MBS, $432 billion in Freddie Mac MBS, and $114 billion in Ginnie Mae MBS. In total, the GSE's offloaded $1.25 trillion of their bad debt to the Federal Reserve. It was so much easier for the GSE's to return to so-called profitability after the government made their liabilities vanish into thin air !!! This trick of the Fed making liabilities vanish into thin air is commonly referred to as Quantitative Easing. I imagine every business enterprise in the country wishes they could pull off this liability vanishing trick, but alas, they cannot. I guess they aren't special enough to get GSE treatment.

Obviously, liabilities do not just vanish at no cost, and the MBS liabilities of the GSE's did not vanish. They were merely moved, and are now sitting on the balance sheet of the Federal Reserve. Fannie and friends become "profitable" again as the mortgage market recovered somewhat, and the taxpayers were allegedly paid back in this financial three-card monte game.

What ultimately happens with the Fed's Quantitative Easing measures will determine whether the taxpayers end up paying for the bailouts or not, not Fannie Mae's faux profitability. Currently, the Fed is STILL purchasing MBS to the tune of $35 billion per MONTH, in addition to $40 billion of Treasury bills per month. We are nowhere near to being out of the woods yet. The Fed's balance sheet has ballooned to over $4 trillion in cumulative QE purchases, with over $1.4 trillion of that amount consisting of mortgage bonds. Any media outlets that tell us the taxpayers have made a profit on the bailouts are either fools themselves, or playing us for fools.

The final chapter has yet to be written. I don't know what will happen, but there are several possible negative outcomes. If the Fed sold it's mortgage bonds now, it would incur unprecedented losses and erase the Fed's repayment to the government. That would be added to the debt and leave taxpayers on the hook. If interest rates rise, the value of the Fed's QE bond holdings would plunge, leaving taxpayers even more on the hook. The larger the Fed's QE portfolio grows, the more bonds it purchases, the larger becomes the risk to taxpayers.

But not to worry, the taxpayers made a profit on the bailouts !!! Suckers.

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