Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

08 April 2010

Fannie Mae and Freddie Mac and the Full Faith and Credit of the USA

Robert Romano posted an interesting article on the debt of Fannie Mae and Freddie Mac and the U.S. debt on 7 April 2010.  Romano is the Senior Editor of the ALG News Bureau.  ALG is Americans for Limited Government, which is an organization doing good work for the cause of American liberty.  I will summarize the most interesting points in his article below.

Congress placed the government secured entities (GSEs) Fannie Mae and Freddie Mac under federal government conservatorship in 2008 because they were effectively bankrupt.  Congress formed the Federal Housing Finance Agency to manage their sorry financial mess, which Congress had long worked hard to foster.  In June 2008, their combined debt was $6.6 trillion, of which $4.7 trillion was mortgage-backed securities.  Congressman Scott Garrett asked Treasury Secretary Timothy Geithner why this debt taken on by the federal government had not been added to the national debt.  The U.S. debt of $12.6 trillion should really be $19.2 trillion and this would result in the downgrading of U.S. debt due to excessive risk.  There is quite a song and dance going on here while trying to avoid this.

Geithner says this corporate debt is not the same as U.S. Treasuries and should not be considered sovereign debt.  He says, "By statute, all obligations and securities issued by GSEs must include a statement that makes clear that such obligations and securities are not guaranteed by the United States and do not constitute a debt or obligation of the United States."  But, he also says the "Treasury is committed to supporting the GSEs while in conservatorship and to ensuring that the GSEs have sufficient capital to meet their debt obligations and honor their guarantees."  When Fannie Mae and Freddy Mac were nationalized, the FHFA director James Lockhart told Congress that "the conservatorship and the access to credit from the U. S. Treasury provide an explicit guarantee to existing and future debt holders of Fanny Mae and Freddy Mac."  It seems clear that when Congress nationalized the GSEs, the earlier statute that their obligations were not guaranteed by the federal government, had to be superseded or inherently contradicted.

Foreign investors held $1.5 trillion of the $4.7 trillion in mortgage-backed securities.  In June 2007, the last an accounting by nation was performed, China held $376 billion, Japan $228 billion, Russia $75 billion, Luxembourg held $39 billion, Belgium $33 billion, Britain $28 billion, and Middle Eastern national funds are also big holders.  Many of these nations apparently said they would not buy Treasury bonds to support the U.S. national debt if the government did not rescue them from the bankrupt mortgage-backed securities they held.  The federal government has since bought up $1.25 trillion of mortgage-backed toxic security debt.  The Treasury will not say whose toxic securities they bought, but they only dealt with primary dealers who could directly deal with the Federal Reserve Bank of New York.  When the TARP program was put together, the Treasury was forbidden to purchase the mortgage-backed securities of foreign central banks.  But, it appears likely that Geithner has done just that with paper which is indeed backed by the explicit backing of the United States.  What else could he have paid the primary dealers for the toxic securities with?

This is just me again:  Our real national debt is clearly much greater than the $12.6 trillion figure we are told in a huge lie that it is.  There is still much more hidden debt than just that of Fanny Mae and Freddy Mac also.

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