SeriousBull

Government rule changes may buy time, but can it bail US out?

Tags: Economy + Fannie Mae + Fed + Freddie Mac + Ginnnie Mae + investing + Markets

The feel good rally following the latest Fed rate cut would be believable if anything had changed. Ah, but it has, or will. Today Fannie Mae and Freddie Mac had their capital reserve requirements lowered from 30% to 20% permitting them to hold a greater amount of mortgages with less collateral on hand. We have to assume that the Fed figured out the clock was ticking and soon 28 days would pass so that the ugly

problem of nobody wanting the underwater mortgages would resurrect itself. If the government sponsored agencies could just step up, that would get the illiquid securities off the Fed’s Balance Sheet. OK. We’re for that.

But the remaining stench that will likely make the rally vaporize is the new proposals to change the accounting rules–instead of marking mortgages to market, how about holding some part of them for investment purposes? Since these would be classified as long term investments to be held to maturity they could be valued at full principle value manufacturing new capital.  Incredible what a rule change can do! And besides, banks are permitted to do it so why not let everybody?

The problem here that the Fed has been addressin only the liquidity issues not the solvency issues. They are not yet recognizing that there has been an enormouns amount of value lost. Papering over it is not going to make the problem go away. There’s a disturbing pattern here. First the government is operating on a double-standard.  They let those who completely failed in their regulatory oversight attempt to fix the problem for themselves and what we get is hoarding of rate cuts, usury, and gouging of the public. Secondly, there permit special rules for banks to carry off balance sheet risk elsewhere, and yet banks are offered public money at lower and lower rates to boost their profits because letting them fail would disgrace those those in charge. Third, the government fails to disclose what the losses at Ginnie Mae are ballooning to hoping they’ll get bailed out some how by time.  It’s obvious that the regulators are violating the first rule of prudent trading–cut your losses, don’t think time will heal a bad problem.  It’s also obvious that Regulation SB requiring full and timely disclosure of material events doesn’t apply to the Government sector–most notably Ginnie Mae. We have a crisis and we have irresponsible actions by irresponsible people. The government writes the rules but enjoys immunity from their breach of the rules–and then cleverly changes them if it suits their purpose and can be explained as a public good.

We have serious financial crisis and we need to resolve this it by going back to sound lending standards, not desperate actions to hide, disguise, and ignore the problem caused by the gross inflation of housing values and excess leverage. The bottom line is that the government got its pocket picked by a factor that will likely prove to be considerably more than one or two trillion dollars (China has reportedly $1.6 trillion in mortgage-back US securities). It’s time for a strategy that recognizes this inevitable loss and seeks to protect the public so that they will not have to pay the tab.  The time for this action is NOW. Not after the losses are fully realized and others have profited from it.

Continuing reactionary, piecemeal policy actions will only prolong the inevitable. By election time the Fed will be out of bullets having used up all their monetary tools at a time when they need them most.  It’s foolish policy to think that time and interest rate cuts will heal a lower or inflated value problem, particularly in a recessionary economy.  Changing the rules to perpetuate the charade that an extraordinary amount of US homes are not worth their principle value and will not be for years to come is fraud. The US Government should own up to the facts and not not rely on luck and unsound accounting rule changes to bail US out.

March 19, 2008 - Economy, Markets, Politics