Thursday, April 07, 2005

Will We See Meaningful Reform Of GSEs?

More details of the fraud at Fannie Mae are coming out of the congressional hearings. MSNBC, "Falcon said his office obtained testimony from an employee in Fannie Mae's controller's division indicating the employee would change the books when asked, even though he often did not understand the purpose of the changes."

And it is dawning on participants that crimes have been committed. "The result of the changes was an increase in..earnings..and the release of a $27.1 million bonus pool for senior executives. 'We're looking into who did it and how far up it went,' Falcon said."

Unfortunately, the biggest issue of the portfolios is being politicized. And the thinly-veiled issue of deflating the credit markets is bouncing around. "Greenspan's testimony focused largely on the most controversial aspect of the debate: the size of Fannie's and Freddie's portfolios of mortgage assets."

7 Comments:

At 1:28 PM, Blogger PunKtilious said...

FNM stock up again today. I cannot for the life of me understand how anyone can justify buying into this "soon-to-be, if not already" insolvent GSE.
The poopoo is gonna hit the fan very shortly.

 
At 1:53 PM, Blogger Ben Jones said...

punktilious,
I have been watching FNM for a while. This appears to be a relief rally; relief that congress is going easy on them. It doesn't change the firms situation.

I was hoping for "meaningful reform" but I will have to settle for drawn-out collapse.

Isn't the stock down over 20%, even with the advance of the last two days?

 
At 4:59 PM, Blogger PunKtilious said...

(Isn't the stock down over 20%, even with the advance of the last two days?)

Yes, I have watched its stock plummet over the previous 4 months. I am growing frustrated that the media whores have not yet latched on to this one (like Enron) and demand more accountability.
Fannie Mae is no different than Enron or MCI, in fact we already know that $$ wise we are looking at more malfeasance and fraud than MCI and Enron without official results even calculated. This is absolutely mind boggling.
By the way, thanks for the great message board, I visit here daily and look foward to opinions expressed by "sane" people.

 
At 10:44 AM, Anonymous Billy The Kid said...

I hope that FNM will finally expose the US house of whores, er I mean house of congress for what it truly is. As I recall FNM gave out more bribe money than any other corporation in the USA (not a small task).

People are blind to how corrupt the federal government really is. It's unbelievable to me what they get away with. FNM will be much bigger than Enron because it will be the US tax payer who ultimately pays for it instead of an isolated group of ostriches, er I mean stock holders. But then again I guess that most tax payers have their heads in the sand too!

 
At 5:22 PM, Blogger desi dude said...

People in this country are unbelievable ingorant of their politicians, government. Too trusting!

Just ask SS. President went and opened some shelfs in SS office and said that all he saw was some 'worthless IOUs'

Man , that needs some Gall to say that!

These were the IOUs provided by the fed govt so that they can use SS money for their current expenses. An IOU from the govt is an IOU. Fully backed by the faith of the govt.

If I buy series EE bonds from the govt and president tells me that my IOUS are worthless. will I keep quiet? No way. SS is our money. I dont see any of this knowledge being present in the general public, going by what I see on the TV or newspapers.

 
At 2:34 PM, Blogger Thomas said...

Desi,

The SS Trust Fund IOUs are "worthless" in the sense that the Trust Fund can't sell them. There is therefore no market for them, so in a sense, they have no intrinsic, liquidable value. The relationship between the Trust Fund and the federal government's general fund is analogous to a situation when one division within a corporation owes money to another division. The asset is cancelled out by a corresponding debt, so there is technically no value on the books.

Since the ultimate payer of Social Security benefits is the federal government, the IOUs held by the Trust Fund have no intrinsic value. The government can't sell them to raise money, as might be the case with negotiable securities or gold bars. All the IOUs represent is a legal obligation to pay the amount represented by the IOUs as Social Security benefits. However, both the Trust Fund and the general fund ARE the federal government, so there's no ironclad rule that would prevent a law to be passed causing the Trust Fund to forgive the general fund some of the debt represented by the IOUs. Since the government can't sell the IOUs, it will have to find the money to redeem them elsewhere, either by raising taxes or borrowing. The burden of either option will be so extreme by the 2030s that there may be overwhelming pressure for the government to elect precisely that scenario I mentioned above, where the government essentially forgives part of its debt to itself.

Under the present benefits formula, even if every dollar represented by the IOUs is dedicated to SS benefits, the IOUs are expected to be exhausted in 2041 -- two years after I'm eligible for retirement. After that time, mandatory across-the-board benefits kick in to the extent needed to make payroll tax receipts equal benefits paid.

So I have every incentive to support some form of personally-controlled account being carved out of my payroll taxes. Even if I craft my personal-account portfolio extremely conservatively, using T-bonds and so forth, and get no greater return than the Trust Fund does itself, the account will be mine, and can't be taken away in the way SS benefits can and will be reduced.

 
At 2:35 PM, Blogger Thomas said...

More succinctly, Desi, YOUR EE bonds aren't worthless, because you can sell them. The bonds the government owes to itself are worthless, because it can't sell them.

 

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