Are Fannie and Freddie Screwed? Bush Hopes So

President Bush made it his sub rosa mission to end the hegemony of these two Democrats-in-waiting companies. I don't even think he understood what the guarantee was or what they were supposed to do. -- Jim Cramer, "An Elegy for Fannie and Freddie"

In January, I wrote a cultural analysis of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, more casually known as Fannie Mae and Freddie Mac, and how the Bush administration might be trying to take them down. Ex-CEO Franklin Delano Raines was in court and accusing Bush of what the Washington Post described as "a coordinated plan within the Bush administration to depress Fannie Mae's stock price," which would have gotten more play in the press were it not for the fact that Raines was accused by Fannie Mae's overseer, the Office of Federal Housing Enterprise Oversight (OFHEO), of skimming millions off the top for himself. The soap opera thickened under the weight of the fact that OFHEO director James B. Lockhart was not only a Bush contributor but a loyalist who went to school with him at Yale. And while the two parties, and their political parties, waged war with each other over control of two government-sponsored entities, the housing meltdown caught serious fire.

It has since cratered.

But my piece fell on deaf ears, except for those belonging to motivated professional and armchair economists who love to explore the nether regions of history, finance and hyperreality. Because hyperreality is exactly what the rampant securitization of the debt and housing markets has wrought since George W. Bush took office and, paraphrasing popular stock blowhard Jim Cramer, set about destroying the decades-old lender for good, plunging yet another knife into the back of not Franklin Delano Raines, but Franklin Delano Roosevelt, and his New Deal.

So here we are, months later, and the shit has hit the fan. The world, it seems, has awoken to the fact that Fannie and Freddie own trillions in worthless debt, which will need to be owned, which is to say bought, by the government rather than the shareholders who ditched them. And although CNN fool Glenn Beck may still want to attack FDR for nationalizing finance, it is neither his nor the American people's fault that the banks pimped corrupt schemes like CDOs and SIVs. It is those banks, and their accessories in the real estate and finance markets, that logged trillions in inflated debt without checking to see if the money was going to ever really come in.

After all, as I argued in the earlier piece, FDR defeated Hitler, Mussolini and the Great Depression by pulling the nation together, rather than tearing it apart. That latter fuck-up has been left to the Bush administration's economic and geopolitical gamesmanship.

If you're going to know anything about Fannie and Freddie, know this: They used to be government agencies and were created to help responsible Americans get loans for houses. In 1968, they were privatized and therefore deregulated, which is to say, profitable for the few and corrupt for the many. As Paul Krugman puts it in the otherwise weak analysis "Fannie, Freddie and the Threat of Economic Meltdown," "Profits are privatized but losses are socialized."

The problem is that Fannie and Freddie still carry the imprimatur of the government, offering options that no other lending institutions can offer. In other words, they talk private but walk public. Because of the implicit guarantee that the government would bail them out, which it is now going to have to do, they never had to raise enough cash to cover their asse(t)s. They didn't have to insure their solvency with actual liquidity, just crunch numbers in hyperreal stratagems and come out ahead. This is primarily why they are an epicenter of politicized appointments and economic corruption.

They are the ultimate rich asshole's playground. Do whatever you want, they invite, and the maid will clean it up. Go ahead and trash the place. Daddy's got cash.

Except he doesn't. The maid, in this instance, is you and I, who have been subsidizing the shenanigans of the Bush administration and its colluders in government, realty and finance. They admittedly hatched a daring plan: Even if you were smart enough not to drink the housing Kool-Aid, you're still going to pay, a lot. At last report, Fannie and Freddie held nearly $5 trillion in mortgage debt; add that to the taxpayers' books, and America's public debt skyrockets by 50 percent. Meanwhile, the executives, hedge funders, bankers and further suits feeding at the trough make off with billions in subsidies, earnings and bonuses, leaving the public and its once-proud lending institutions for dead.

"[Bush] probably just said, "We have banks, good banks, like Washington Mutual and Countrywide; why do we need Fannie Mae, which just makes money for the Democrats?'" posits Cramer in "An Elegy for Fannie and Freddie." "So, over a multiyear scheme, he hamstrung the agencies and let the private banks take over lending and securitizing pretty much anything."

Once the dust settles, those banks, and their customers and shareholders, might be as screwed as Americans who have to now watch their public debt jump by half because of scams they couldn't sort out, even if they had the right calculators. Only days ago, the Federal Deposit Insurance Corporation assumed control of the bridge bank IndyMac, which was founded by hated housing fire starters Countrywide Financial, as panicked depositors fought cops and each other trying to withdraw their money. Earlier this year, the Federal Reserve abandoned decades of practice and started directly lending to the dirty investment banks, brokering a deal that gave the corrupt Bear Stearns to Lehman for a song. It was a disastrous move that matched nicely with the Fed's cushy interest-rate policy. Today, the Securities and Exchange Commission blocked the short-selling, naked and otherwise, of Fannie and Freddie shares, and is considering extending the practice to the market at large.

Meanwhile, a bottom to the madness and loss is nowhere in sight, just in time for the election. Mission accomplished? You bet. The White House always wins.