Warning: If you’d rather not get pissed off on Christmas Day, then skip this post.
On Christmas Eve, while visions of sugarplums danced in our heads, the U.S. Treasury was busy completing a back-door bailout of the government-sponsored entities Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, better known as Fannie Mae and Freddie Mac. According to the Wall Street Journal, the new policy is as follows:
“The new terms announced Thursday would allow the cap on Treasury’s support to increase by the amount of the total net loss the firms experience over the next three years, beginning on Jan. 1. The cap in place at the end of 2012 would apply thereafter.”
What that means, basically, is that Fannie and Freddie are being given blank checks, the ability to realize a theoretically infinite value of losses over the next three years.
The original government-sponsored enterprise (GSE) bailout was one of the first government interventions of the financial crisis, occurring even before Lehman Brothers blew up in September 2008, and was executed according to legislation signed into law by George Bush in July of that year, legislation that granted sweeping new powers to the U.S. Treasury to insure GSE debt and to shore up their finances. The New York Times characterized the law thusly:
“The law authorizes the Federal Housing Administration to insure up to the $300 billion in such loans but the Congressional Budget Office has estimated that only $68 billion of that authority is likely to be used. The original lenders will have to pay upfront fees into an insurance fund, and borrowers will pay continuing insurance premiums of 1.5 percent a year to insulate taxpayers against losses from defaults.”
In calculating the effect of the legislation on the public purse, the Congressional Budget Office’s director posted in July 2008 on his blog the following:
“Using historical and industry estimates of the expected losses on the different types of credit risk that the GSEs face in their current portfolios, CBO estimated the firms’ possible credit losses under thousands of possible future market conditions for housing prices. That analysis suggested that there was more than a 50 percent chance that the GSEs’ future losses would not exceed those already recognized, but there was almost a 5 percent chance that the added losses will total more than $100 billion. Given that distribution of possible future losses, CBO then evaluated how much assistance might need to be provided to the GSEs to allow them to continue operating in the capital markets.”
These CBO calculations look positively quaint today (bear in mind, these are the same folks who did the math on our recent health care insurance reform legislation). Bloomberg reported yesterday that, in the last nine quarters, combined losses at the GSEs total nearly $190 billion. I cannot say how much of these losses occurred before the above CBO estimates were drafted, but clearly, we’ve seen significant losses since then, an amount that figures to grow substantially in the next two quarters amid continuing economic woes in the U.S.
It is interesting to pick at the CBO director’s use of language, quoted above, as an exercise to show how bureaucrats use statistics to mask reality. To demonstrate the spread of risk, the CBO director bounded his presentation with two probabilities. First, there was a 50/50 chance that “future losses would not exceed those already recognized.” Second, on the opposite end of the pole, he gave us a trifling 5% risk of “added losses [totaling] more than $100 billion.” Presenting the data this way would lead a reasonable person to assume that the risks are manageable, assuming that the probabilities are right (and they likely won’t be). But why 5% and $100 billion? Plug in $75 billion losses, and I bet that risk percentage spikes a great deal. If he had said we have a 33% chance of realizing $75 billion in losses, I wonder if that would have changed the conversation? Probably not, because the policy-makers had already decided what they were going to do, numbers be damned, and President Bush was too clueless to know the difference, but the point is worth making because bureaucrats and journalists tend to treat these CBO estimates as pieces of Gospel. They get recycled and regurgitated to the point that they take on an element of immutable fact. To remind people in public discourse that these estimates are just estimates is to court the fieriest sort of reprimand and all manner of ad hominem attacks.
In a final irony, the New York Times reported in July 2008 that the original GSE bailout contained a plan to help as many as 400,000 homeowners pay off their troubled mortgages and replace them with affordable government loans. If you assume that those loans averaged around $200,000 each, that represents a total of $80 billion. Hell, we could have just eaten those loans with public money, made the lenders whole, and would still be $30 billion ahead of where we are now!
Instead, the money pit is getting deeper, and we are paying the GSE executives millions of dollars in compensation for helping us dig. Oy.
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