February 23, 2013
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The Wilderness of Derivatives (by the numbers)
1. In 1968-70, Congress in its infinite wisdom and with a lot of help from Wall Street lobbyists created
Fannie Mae and Freddie Mac as GSE’s (Government Sponsored Enterprises) EXEMPT FROM TAXES*
Fannie had been part of the government since 1938 - But it was privatized along with Freddie to create a
secondary market for mortgages - The “Implicit Full Faith and Credit” of the US Treasury backed their
operations… The bonds they issued made up of millions of mortgages were lumped into huge pools and
traded like commodities - sugar, wheat, pork bellies, etc.
2. Banks and Non-Banks no longer had to hold mortgages in-house. They were sold to Freddie and sister
Fannie and this freed up their deposits to make many more mortgages… Their trading symbols FNM and
FRE were listed and traded on the New York Stock Exchange and their prices skyrocketed - In year 2002
FNM was selling at $120 a share and her brother hit a high of $75 in year 2004.
3. I was for many years a member of the board of a little Waldoboro Maine Savings & Loan suddenly and
magically transformed into an FSB (Federal Savings Bank) and I started to worry - So did the Chairman,
the CEO and the rest of the board… Holy smoke!... Uncle Sam was now our biggest competitor!
4. For the next 20 years Fannie and Freddie made enormous TAX-FREE profits!…Their “No Risk” bonds
yielded 35 points more than US Treasuries and 70 points above triple-A corporate debt…The whole
investment world, foreign and domestic, clamored for them --
6. Enter the Wall Street Banksters again, who created these two voracious entities… They started getting
jealous…they wanted in on this profit bonanza… so around year 2000 they started making a market tied
to short-term ARM’s (1-Year Adjustable Rate Mortgages) and thanks to Allan Greenspan -“Sub-Prime
Mortgage Derivatives” were born - They came up with fancy names for these “Paper Promises” like
CMT’s, CDO’s, MTA’s, COFI’s etc - They chopped each one up into 20 or 30 pieces and sold them
to hedge funds and pension funds, foreign governments, insurance companies, etc.
7. Not one of the many government regulators responsible bothered to check all this questionable
leveraging activity – a lot of it illegal because some of these guys were selling their OWN stocks short.
Not to worry - After all, everyone knew that American home owners don’t walk away from their mortgages.
But when the bubble burst lots of them did - and taxpayers now are forced to bail out those ‘too big to fail” crooks.
8. A few years ago, that little S&L in Waldoboro Maine was gobbled up by a big bank that got themselves
in trouble - and that big bank was gobbled up by an even bigger bank - And Fannie and Freddie closed
yesterday (Dec 2008) at 42 cents and 35 cents a share respectively.
9. And so it goes…
*The Emergency Home Finance Act of 1970
Note: I have re-posted this because it’s been almost 5 years since the illegal abuse of EHFA mentioned in numbers 6 and 7,
and not a single individual responsible for the near-destruction of the world's financial system has been prosecuted!
Comments (4)
Thanks for the post, sir, very informative.
wow! What a lesson for all of us. Until all this stuff hit the fan, I wasn't aware of Fannie Mae and Freddie Mac being what they were. How horrible that we build our trust on such shaky foundations of illegal enterprises.
@ZSA_MD - Thanks for your reponse Dr. Z... A hypothetical but numbers-wise, very real example of the financial concequenses inherent in the 2008 melt-down is the following: - In 2002, an investor buys 100 shares of Fannie Mae at $120 a share, an outlay of $12,000... Six years later his 100 shares have been marked down by the market to 42 cents a share or $42... a loss of $11,958 or -99.65%... The market has NEVER been wrong in its assessment of financial health or impending disaster... The Federal Reserve avoided a complete meltdown by having the Treasury deposit hundreds of billions into the big Wall Street banks and their proxies and collapsing interest rates to zero... These hundreds of billions were created electronically by the Fed with the one big card Uncle Sam still has the ability to play... The US Dollar is the only reserve currency left in the world and almost everything of value is priced in dollars... Presently stock markets are doing well because it is the only game in town... But the inherent danger remains as 80% of the trading is done by computers programmed algorythmically to take advantage of short-to-medium term trends... The longer term is in doubt and the "Lemming" factor is still programmed into those machines... Incidentally, a fellow "Patrioti" Boston Greek and a forensic accountant, Harry Markopoulos testified a number of times before the Securities and Exchange Commission in Washington about the wrong-doing going on in the mortgage derivatives market well before the shit hit the fan and was rebuffed each time...
Elucidating.
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