As I Said Before

Sunday 1 August 2010 - Filed under Dumbassery + Economy + Government + Legislation + Regulation + Uncategorized

The day the new financial sector overhaul passed, I wrote

Though one should notice that they didn’t figure a way to deal with government excesses “that tipped the nation into the worst recession since the Great Depression.”

And it appears that I was right. Via Minyanville:

The financial services reforms of the Dodd-Frank Act were ostensibly aimed at many of the firms Congress sees as culprits in the financial crisis. The systemic risk oversight, trading limits, and compensation rules are largely directed at the big banks that dominate the financial industry. But with all of the focus on the banking sector, there are two gigantic subprime elephants (GSE) in the room that have gone unnoticed: Fannie Mae (FNM) and Freddie Mac (FRE). The omission of Fannie and Freddie reform from the regulatory overhaul bill must be quickly resolved.

The TARP bailout gave Citigroup (C) $45 billion, of which it has returned two-thirds. Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), and Goldman Sachs (GS) were bailed out for $105 billion in total, which they have fully returned with $10 billion in collective profit for the government. AIG got the most, a $182.3 billion series of loans and guarantees, and it’s restructuring its whole business to return the money. As it stands now, by the end of TARP the government may not have lost any money on these particular big banks — all of which were targeted by the Dodd-Frank Act.

Yet, government-sponsored enterprises (also, GSE) Fannie and Freddie have already booked $145 billion in losses for the government, with potentially a trillion more in the future. Meanwhile, a second housing bubble is forming as the GSEs, whose business model contributed to the buildup of the last bubble, are financing 98% of the market. Furthermore, the banks would never have had the financing to get themselves in such deep toxic housing debt without the GSEs in the first place. The banking sector certainly needs a regulatory update, but why weren’t Fannie and Freddie reformed first?

Why weren’t the organizations which single-handedly caused the real estate crash, which was the first domino to fall in the recent financial sector crash, addressed in the new bill? The answer is simple. Fannie and Freddie are near completely run by government, fulfilling government mandates, like underwriting mortgages for people who could not afford to pay for them in the name of “universal home ownership” at any cost, and there is no fucking way Congress will ever admit to its own mistakes and formulate rules which would bind their will. It’s much easier to simply blame those eeeeeeeeeeeeeeeevil capitalists at those extra eeeeeeeeeeeeeeeevil banks while absolving yourself of any responsibility whatsoever.

2010-08-01  »  madlibertarianguy