Posted on 04/09/2005 6:13:03 AM PDT by TigerLikesRooster
If the government-sponsored mortgage giants known as Fannie Mae and Freddie Mac knew what was good for them, they'd accept proposals to create a more muscular regulator over them and reduce their supersized $1.5 trillion portfolios.
Those proposals were laid out in a bill introduced on Tuesday by Rep. Richard Baker (R), chairman of the House financial services subcommittee on capital markets. His measure rightly reflects a growing, post-Enron alarm in Congress over the risks a potential collapse of these two beasts poses to the nation's economy. Yet officials at Freddie Mac have already signaled opposition to these reforms - which are endorsed by lead Bush administration officials - saying they would "adversely affect our future profitability."
The Baker bill calls for a new regulator for Fan and Fred, one that would be able to adjust the size of their portfolios if they were deemed a risk to economic "safety and soundness." The regulator also could put Fannie and Freddie in receivership if they ran into serious trouble and would have the authority to approve major housing-related initiatives proposed by both mortgage giants.
Fannie and Freddie have expanded beyond their original government charter of providing affordable housing to low-income Americans - so much so, they now control half of the $7.6 trillion US mortgage market. Their portfolios grew some tenfold between 1990 and 2003. Critics contend they've used those portfolios simply to generate profits for their stockholders, not to further their charter.
If they failed, taxpayers could be forced to pay off the mortgage duo's debts because of their quasi-governmental status, which includes a nominal line of credit with the Treasury Department that allows them to undercut the banks by borrowing at below-market rates.
Fan and Fred's intense lobbying, together with a currently weak regulator, has let them balloon in size for years. But both were recently red-faced by nothing less than multibillion-dollar scandals that used accounting tricks to smooth earnings.
For Fannie, that meant being forced to restate an estimated $11 billion in earnings going back to 2001. In 2003, Freddie was forced to reduce its earnings by $5 billion - proof positive a new regulator with enhanced oversight powers is in order.
Although the bill falls short by not calling for an end to the line of credit with Treasury, the measure deserves broad support for being the most comprehensive effort to date to rein in these outsized companies.
OMG! I hope it is not too late.
Ping!
No that is not the worst that can happen by a long shot. Whether the worst that can happen will is another issue, but right now a lot of folks think that they are worth a lot of money based on liquidity in real estate pumped in by these mortgage institutions.
ping
What surprised me was the pace of portfolio growth. On the other hand, money supply is growing on a comparable pace. So maybe I shouldn't be so surprised.
By the way, I am glad to see that you know a lot about China. Your observation on S. Chinese attitude on the North is interesting. It is probably the extension of traditional Southern Chinese mentality which view themselves as more cultured and business-oriented.
Thanks for sharing your views.
This link is to Marc Faber, a very high grade bear. Asia hand. Out of respect I won't post it. Good stuff.
http://www.gloomboomdoom.com/marketcoms/mcdownloads/050404.pdf
Big ups yourself. Respect - Ali G
You have a Great screen name!
Thank you. My first choice was Jim Robinson but someone else had already taken that one.
>>My first choice was Jim Robinson but someone else had already taken that one.<<
LOL!!
SPEAKING FREELY
Oil for dollars, and dollars for US deficit
By Richard Benson
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.
The Asians remain shocked and in disbelief. Just when Japan, China, Taiwan and Hong Kong had accumulated enough dollars to buy oil to keep them warm for many winters, it's all over. In broad daylight, the Americans and the Organization of Petroleum Exporting Countries (OPEC) cheered as the price of oil popped up from US$30 a barrel to more than $50.
Indeed, this jump in the price of oil increases the world's daily oil consumption bill of 84 million barrels a day to $4.2 billion, from $2.5 billion (or $1.5 trillion a year from $900 billion). The world now has to shell out an additional $600 billion a year of "lucky bucks" to oil-producing countries just to stay in motion.
The bigger shock, however, is in the devaluation of dollar holdings of US Treasury debt. The rise in oil prices guarantees that the value of the US dollar will be pushed down even further, and stay down. Now that China is the No 2 oil importer and Japan is No 3 - with the rest of Asia very thirsty for oil as well - you can understand why the Asians must find a way to protect themselves.
The US strategy for using oil to finance its deficit is, of course, brilliant. America's elected officials knew that at some point those independent foreign central banks would start getting edgy about buying more dollars to pay for the United States' war and deficits. The $650 billion trade deficit is breathing down the dollar's neck. So which central banks can the US continue to use as the fall guys to buy the dollar? Why not the Persian Gulf oil states - but where would they get the dollars to buy US Treasuries? Well, with the Chinese piling up dollars and growing like crazy, at some point the oil market had to tighten. It was only a matter of time before the Chinese would start bidding up the price of oil. The Asians, therefore, are hung out to dry when the price of oil rises because they have to spend more of their dollars on oil.
As the price of oil goes up, extra money floods into the Gulf kingdoms. With the US secretary of defense putting troops all over the ground in the Middle East, and those nimble aircraft carriers nearby and ready to deliver the "shock and awe of sudden democracy" to the Gulf monarchs, it's a sure bet that America's OPEC buddies will stash their newly found Asian lucky bucks into good old American Treasury notes.
With such a simple policy to fund its deficit for another year, it's no wonder the United States can get by without any brain power at the Treasury Department. In effect, the US and its Gulf Arab allies just pulled off the biggest central-bank heist in the history of the world. The price of oil just went up 60% or more, which really cuts down to size that $3.4 trillion of net foreign holdings of US financial assets. As a loyal American, one would like to cheer one's government's deft move to pick the pockets of our trading and financing partners. Moreover, the US gets the Arabs to fund a large share of our deficit, subsidize our interest rates, and help keep our taxes low for another year. Surely I can afford to buy another gas-guzzling sport-ute, get a rifle, and wave a flag.
The United States is extracting tribute on oil from the world. If the world wants Middle Eastern oil, it can pay for it through the Saudi branch of the US Treasury. Why do the heads of Saudi Arabia, Kuwait, Abu Dhabi, Bahrain, Qatar, etc, hold dollars? Because they want to keep the money and the power. The ruling family of Saudi Arabia controls 25% of the world oil reserves and is completely dependent on oil revenues for its survival. Tens of thousands of Saudi princes live off lavish royal stipends. Think of Arabia as a family firm. If the dollar goes down in value, the Saudi royal family still gets to keep hundreds of billions of dollars. But, if they don't buy dollars, why would the US keep them in power? It would simply not be in our interests to do so. Remember when Saddam Hussein talked about pricing Iraq's oil in euros? "Shock and awe" quietly followed.
This program of oil for dollars and dollars for the US Treasury deficit is the simple tribute that we, as the superpower, can expect. The United States is well paid for keeping the world's supply of black gold safe and available to all. Unlike the Vietnam era - when the US was trying to finance guns and butter - getting others to pay now for our guns allows us to milk the oil out of the sand and turn it into butter.
The next question will be how the Asians respond to a 60% hike in the price of oil. Please stay tuned.
Notice in the chart below there are some big, smart, anonymous dollar holders (such as hedge funds) located in the Caribbean. No one knows who they really are.
Major foreign holders of US Treasury securities (in billions of dollars)
Japan 702
Mainland China 194
England 163
Caribbean 93
Korea 68
Taiwan 59
Hong Kong 59
Total (including other countries with fewer holdings) 1,960
Richard Benson is founder of Specialty Finance Group. He can be reached at AssetBond@aol.com. This article is republished with permission from Benson's Economic and Market Trends.
Too late! LOL
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.