By Somebody lied, that’s for sure.
When Fannie Mae and Freddie Mac were nationalized in 2008, then-Director of the Federal Housing Finance Agency (FHFA) James Lockhart told Congress, under oath, that “the conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac.”
Pretty clear. That would mean, then, that taxpayers are guaranteeing that the Government Sponsored Enterprises’ (GSE) $1.6 trillion of corporate debt and $4.7 trillion of mortgage-backed securities will be paid. Right?
Wrong. According to Treasury Secretary Timothy Geithner, who in a letter to Congressman Scott Garrett wrote, “corporate debt of the GSEs is not the same as U.S. Treasuries, nor should it be considered sovereign debt.” The letter continued, “By statute, all obligations and securities issued by the 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.”
That’s interesting. Except, when Fannie Mae and Freddie Mac bundled together their securities and sold them all over the world, they used the implicit backing of taxpayers to sell them.
As reported by the New York Times’ Heather Simmons, “For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the American mortgage market run, have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s, and they usually pay better.”
The report continued, “The trillions in securities issued by Fannie and Freddie and backed by American mortgages were never explicitly guaranteed by the United States government, but foreign and domestic investors alike have always believed, because of the companies’ integral role in the housing market and their marketing pitch, that the guarantee would be backed up if it were tested.”
And they were right. As noted above, after the financial meltdown of 2008, not only were the companies nationalized, then-FHFA Director Lockhart told Congress as much when he said the bailout constituted “an explicit guarantee” that the securities and other obligations were still good.
But, if Geithner’s right, and “such obligations and securities” are actually “not guaranteed by the United States,” then they must be guaranteed by somebody else. Or else, they’re no good.
The companies certainly cannot afford to pay them. With over 3.9 million foreclosures last year, and an expected 4 million more this year, they are effectively bankrupt. According the White House Office of Budget and Management, the GSEs only have $1.755 trillion in assets. That would cover their $1.6 trillion of corporate debt, but not the $4.7 trillion in securities.
So, maybe the Federal Reserve is guaranteeing them. After all, they just completed their purchase of some $1.25 trillion in mortgage-backed securities from investors. But, if one were to think that constituted a guarantee, think again. According to the New York Federal Reserve website, “Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve’s exposure to the credit risk of the underlying mortgages is minimal.”
Except, Fannie and Freddie, as noted above, are bankrupt. They can’t pay.
To summarize this ill-fated chain of events:
1) Fannie and Freddie sold the securities with the implicit backing of taxpayers;
2) Congress nationalized the GSEs when they could not pay their bills;
3) and the FHFA said that this constituted “an explicit guarantee” by taxpayers; but then,
4) the Treasury said that the GSEs’ debts “are not guaranteed by the United States”; and
5) the New York Fed said that, actually, Fannie and Freddie are guaranteeing the debts, even though they can’t pay.
So, somebody lied.
And Americans for Limited Government President Bill Wilson wants to find out who. In a letter to Congressman Garrett, he wrote, “since the debt of Fannie Mae and Freddie Mac have not been included in the national debt, either then-Director Lockhart was misleading Congress in 2008, Secretary Geithner is misleading Congress today, or the Federal Reserve really is guaranteeing the GSEs’ debts and obligations.”
Wilson urged Garrett to demand that the House majority convene hearings immediately to get to the bottom of this mess, and to recommend that Barack Obama appoint a special prosecutor to ascertain who may be lying.
In a statement, Wilson said, “All these contradictory ‘guarantees’ do not add up, and the only way to get to bottom of it is for Congress to investigate the matter immediately. Are taxpayers guaranteeing Fannie and Freddie? Is the Federal Reserve? If neither, then who is backing up the GSEs’ $1.6 trillion in debt and $4.7 trillion in mortgage-backed securities?”
Either,Geithner and the OMB are correct, and the liabilities are not guaranteed, and should not be included in the debt. Or the FHFA and the New York Fed are correct, and Fannie and Freddie are responsible and taxpayers, by extension, are indeed guaranteeing the debts.
Based upon an objective view of the evidence, in particular the Fed’s statement that Fannie and Freddie are guaranteeing the debts and the FHFA’s testimony that Congress had provided “an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac,” it appears most likely that it is the Treasury Secretary who is lying when he stated that the debts “are not guaranteed”. And, of course, that the White House is lying when it kept the GSEs’ $6.3 trillion in liabilities off the books in the first place.
Robert Romano is the Senior Editor of ALG News Bureau.
