Monday, March 1, 2010

One Eye on the Fed: Fannie & Freddie Refinance Plan

John Hussman has written a conspiracy theory, a seven step process, that describes a sketchy process on how the Fed and Treasury, working in concert, will refinance the low quality loans held by Fannie and Freddie. As a result, the two end up getting cleared of their low quality debt and holders of US Treasury bonds will collect the interest from this refinancing. The rest of us will simply pay the interest (higher taxes). The good news in this scenario is there will not be a collapse of the two giants. The bad news is... it's just more of the same. Taxpayer's without representation.

His conspiracy theory of monetary manipulation without Congressional approval is similar to what has already occurred with TARP funds, and recently in HERA funds. His conspiracy story may soon be another reality story.

Here is one complete point made in his brief article:
Under the Housing and Economic Recovery Act of 2008 (HERA), Congress authorized the Treasury to provide sufficient funding to insure up to $300 billion dollars of original principal. Yet in a move that was clearly no part of Congressional intent, the Treasury has announced that it will allow this commitment to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years." Coincident with this, the Federal Reserve has accumulated nearly $1.5 trillion of Fannie Mae and Freddie Mac securities (MBS and agency debt), which is has no plan to liquidate other than lip service. Rather, it is allowing these securities to run off through maturity and pre-payment. Of course, the funds to pay off those maturing securities will largely come from the Treasury. Meanwhile, Bernanke has made it clear that the most important tool of the Fed during the interim will not be liquidation of these securities, but instead the payment of interest on bank reserves. (emphasis added)
If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.