Off the Books Mortgage Bailout

Includes: BAC, C, FMCC, GS, MS
by: John Lounsbury

Ten days ago I reported on the process, described by John R. Talbott at, that the Fed has been using to transfer bad mortgage debt from its member banks to the taxpayer, using Fannie Mae (NYSE:FMN) and Freddie Mac (FRE). Talbott called this the "trillion dollar fraud".

More on how Fannie and Freddie are used to continue bailing out banks has come to light since. Peter Gorenstein at Ticker Tech has an article covering recent interviews with Dean Baker, co-director of the Center for Economic and Policy Research and with Barry Ritholtz of Fusion IQ (author of The Big Picture blog and acclaimed book "Bailout Nation"). There is also a video of the interview program.

Now that Fannie and Freddie are in conservatorship under government control (since September, 2008), Baker and Ritholtz both suggest that continued mounting losses at the two GOEs (government owned enterprises) are being accumulated as a matter of policy. Ritholtz said Fannie and Freddie are being used as conduits to take bad assets off the banks' books. He said it looks like we are running an unofficial TARP through Fannie and Freddie. The term "backdoor bailout" was used in the discussion.

This bailout is completely off the books and open ended. The sum of $1 trillion (used by Talbott) is not mentioned in the interview but it is possible. Ritholtz says the total starts with losses at FNM and FRE which he estimated at about $400 billion. When you add the off the books bailout process, Ritholtz says $400 billion may be "way too low". Reenter Talbott's $1 trillion.

Baker said that if the wool is being pulled over congressional eyes here, it is being done willingly. He said congress just doesn't want to deal with this now.

So here is the picture as I see it:

  1. Oligarchic banks are funneling their bad debt assets through the Fed onto the books of Fannie and Freddie. Who owns FNM and FRE? The taxpayer. These are now your bad assets.
  2. With their books relieved of toxicity, the trading functions at the banks can use Fed funds at zero interest to play at the marketplace casino. Since the cost of capital is nil and the oligarchs control the markets through computers and volume of trade, they need never lose a bet. Is it any wonder that Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) had no losing trading days in the first quarter? No, it is not. What is a wonder is that Morgan Stanley (NYSE:MS) lost money on four trading days. What are they? Incompetent?
  3. The idea appears to be that this process will aid the banks in recapitalizing as they amass trading profits. That might be okay if the new capital could also be applied against toxic asset losses. But wait a minute. What toxic assets? The banks don't have them anymore, you do.

Talbott's trillion dollar fraud has a clearly identified victim. It's you.

Disclosure: No positions.