Fannie Mae

This is Tony Hayward, a man who combines the ruthlessness of Mao Zedong with the sheer genocidal glee of Hitler. Add the economic scorched-earth policy of General Ne Win, and a dash of Saddam Hussein’s disdain for the environment, and in the BP chairman we have a thoroughly contemporary supervillain. In some circles, he’s almost as hated as George W. Bush.

BP has lost $102.7 billion in 10 weeks. That’s the GDP of Poland, the country with the 18^th-largest economy in the world. All because Hayward wouldn’t ensure that the series of valves used to prevent a blowout on the Deepwater Horizon rig included a trigger with a “deadman’s switch” that only stays inactive when the rig is manned. It would have cost an extra $500,000. The law didn’t require a deadman’s switch on Deepwater Horizon, and still doesn’t, but surely someone as diabolical as Tony Hayward should be able to predict the future. The populist wisdom is that Hayward ought to be keelhauled for the unspeakable atrocities he’s committed in the lubeless anal rape of Mother Gaia.

This is Franklin Delano Raines, former chairman of Fannie Mae.

(This always needs to come with an explanation, because so few people understand what this famed but mysterious entity does. Same with Freddie Mac. This particular explanation involves only Fannie Mae, but the two are close to interchangeable.)

You get a mortgage through a standard lender. But that lender can only lend out so much, relative to its assets. So the lender sells the rights to your loan to Fannie Mae, then takes that money and can loan it out. Multiply that by all the lenders in the nation, and Fannie Mae is essentially a bank with limitless funds. The argument for Fannie Mae’s existence is that it gives more people a chance to own homes, leaving open the question of why this is so important that it needs to be achieved artificially.

Now Fannie Mae has all these loans on hand – yours, and millions of others. Fannie Mae then packages the loans and sells them to investors. It promises the investors a decent return, and…

WAIT. How can Fannie Mae promise any kind of return? That’s not how investments work.

Private investments, no. But Fannie Mae is a government entity.

No it isn’t. Its own website says it’s a private corporation.
Yes, and the Hell’s Angels are a motorcycle club that gives toys to kids every Christmas.

You’d have to agree that if, say, a bunch of people default on the underlying mortgages, Fannie Mae would have to lower its returns. Except Fannie Mae has access to something that Microsoft, Geico and Cargill don’t: your tax dollars.

If Fannie Mae isn’t a government organization, then why doesn’t it pay state or local taxes? Why is it exempt from Securities & Exchange Commission regulations? Why did it enjoy a AAA credit rating when its debt-to-equity ratio would suggest a D rating?

For the first 30 years (1938-68), Fannie Mae was blatantly and officially a government operation. The only reason it switched to a “private” corporation was to keep its dismal numbers off the federal balance sheet. From that point on, you know the story: Fannie Mae leaned on lenders to hand out mortgages to people who didn’t earn enough money to justify the payments. (Thanks to 1977’s Community Reinvestment Act, an attempt to circumvent classical economics.) Thus Fannie Mae’s returns to investors should have decreased, but didn’t. And why not? After all, ultimately it was someone else who had to pick up the check.

There’s a reason why Fannie Mae goes through chairmen like the Oakland Raiders go through head coaches.

The worse the economy gets, the more harm Fannie Mae and Freddie Mac’s unassailability does to the economy. People can’t pay their mortgages, Fannie Mae and Freddie Mac continue to sell investments, and the implicit government backing becomes explicit, with no end in sight.

BP produces something tangible: without what they offer, our cars would be nothing more than stationary status symbols. Trucks move freight, and need gas to do so. The importance of BP’s role in the economy is obvious. Fannie Mae and Freddie Mac? Not even close. Their very purpose is to thwart economic movement, under the guise of democratizing the way people buy homes. But selling homes, like anything else, has nothing to do with how many people would enjoy the product and everything to do with whether they can afford it.

The cleanup estimates for Deepwater Horizon have ranged from $3 billion (BP’s own, presumably conservative estimate) to $20 billion (the amount the White House “suggested” BP fork over) to $63 billion (a recent estimate by a Raymond James analyst.) Let’s go with $20 billion, which is not just the median but close enough to the geometric mean. This will be paid exclusively by BP’s owners: its shareholders. Which primarily means the pension fund holders throughout the United Kingdom who watch every drop in BP’s stock price (it’s down 57% since the accident) with trepidation. American taxpayers won’t be out a nickel. (Check that. Obviously the oil leak impacts a lot of people economically, just like other unrelated events impact those same people both positively and negatively – just not in their capacity as taxpayers.)

Now, let’s contrast the havoc BP hath wrought with the similar numbers for Fannie Mae and Freddie Mac.

On October 4, 2007, Fannie Mae traded at 67.39. Within 11 months it had fallen to 33¢, a penny or two from where it remains. That’s a loss of $79 billion.

On June 9, 2008, Freddie Mac stock traded at 41. Within 9 months, it sank to where Fannie Mae is today. A mere $26.5 billion loss.

That’s $105 billion evaporated. The companies’ corpses are now the property of…well, you and me, whether you like it or not. We’ve already given Fannie Mae and Freddie Mac $145 billion from a line of “unlimited” government credit, although presumably it’s limited by how much you and I can earn.

The Congressional Budget Office, which has an interest in keeping government numbers as conservative as BP keeps its, estimates that ultimately Fannie Mae and Freddie Mac will cost us $389 billion. Barclays Capital says $500 billion ($1500 per capita.) Other estimates are twice that.

Janet Jackson exposes a nipple, Mark McGwire injects dianabol, an idiot woman conjures up a story about the accelerator and the brake in her Lexus switching places, and Congress can’t wait to publicize the hearings. Yet an entity created by Congress does what government entities do – destroy wealth, but profoundly in this case – and the quiet is deafening.

That quiet is also tampered by the obfuscation of institutionalization. The people who ran, and run, Fannie Mae and Freddie Mac took our money and torched it. They have names.