Head in the Sand: 4 Big Mortgage Backers Swim in Ocean of Debt

 Editor’s Note: Nobody wants to hear it. The housing market is dragging the government and the economic future of this country down the drain. For decades the FDIC has followed a model of dismantling failed banks by letting healthy banks take over the assets. Despite the calls from Sheila Bair at FDIC, we are clearly avoiding the model that works. We have 7,000 banks and credit unions that could easily absorb the accounts of the banks that have failed but are “too big to fail.” We have at least 50 million recorded documents that are defective in the chain of title of American homes. By all normal indicators, housing prices may still have another 20% drop.

The profits and bonuses announced by Wall Street confirm my prediction over a year ago that the losses were fictional and that the real profits were stashed off shore and in other esoteric vehicles waiting to be released in continual bursts of apparent “recovery.” You might as well allow a bank robber open a new bank next door with the money stolen from the first bank. Now we have the nose-dive of the main mortgage backers who insured mortgages and who insured each other and who let the investment banks play in the insurance playground.

The truth is that all the players in the securitization chain made a lot of money that was unreported, untaxed and illegal. It amounts to many trillions of dollars representing all the alleged financial problems of the American government and the U.S. Economy. The money still exists (insofar as money ever exists).

The truth is that like any balance sheet you can boil it down to a single collective entry: debit American homeowners $13 trillion, credit Wall Street investment banks with $13 trillion. Change the accounting rules and allow the so-called “off balance sheet” trades and positions and poof! You have $13 trillion in “losses” on the books while the profits are still happy and healthy off-shore. Where does the $13 trillion come from? The U.S. Taxpayer. Who benefits? The Wall Street investment banks who get to keep the profits, go after the property, and keep most of the government assistance that was too complicated to report, but which amounts to far more than the TARP money.

Who lost? Virtually every American homeowner and every taxpayer. How does it get corrected? Simple: return all “assets” to their real value and disregard the distortion caused by Wall Street. They are calling that principal reduction. It isn’t. It is merely a return to normalcy. Give the homeowners back their equity, their stake in the American dream and the economy will recover, albeit slowly (we do have other problems).

Avoid that remedy and we will have decades of misery, social chaos, and even governmental changes. Without taking ruthless inventory of the truth and returning wealth from whence it was stolen, the government is without value, except to the perpetrators who continue to scare the regulators and buy the legislators with their myths of why they are more important than the millions of homeowners who are losing their homes, their lives, and their futures to the greed of a few lucky people who have the ear of government.

NY Times
December 17, 2009

4 Big Mortgage Backers Swim in Ocean of Debt

Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support.

These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state.

And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them.

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.

Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”

All the companies have recently drawn new government money or are in talks to do so:

¶Fannie Mae and Freddie Mac, which buy and resell mortgages, have used $112 billion — including $15 billion for Fannie in November — of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end, after which the Treasury would need Congressional approval to extend it. Company and government officials declined to comment.

¶GMAC, which finances auto sales, already has $13.4 billion from the Troubled Asset Relief Program, and has been in talks with the Treasury about getting up to $5.6 billion more, because a government “stress test” showed it was still too weak.

¶A.I.G., the insurance conglomerate, recently drew $2 billion from a special $30 billion government facility, which was created in the spring after a $40 billion infusion proved inadequate.

Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.

Timothy F. Geithner, the Treasury secretary, welcomed the repayment plans by Citigroup and Wells Fargo this week. Although Citi later ran into difficulty with the share sale to raise money for the repayment, Mr. Geithner said the actions meant that taxpayers were “now on track to reduce TARP bank investments by more than 75 percent.” That means that of the $245 billion awarded to banks, more than $185 billion is either recovered or about to be.

But that is just a fraction of the money that the four troubled debtors have received or may still get. Together, they have been offered nearly $600 billion, and that lifeline could climb to nearly $1 trillion if the commitment to Fannie and Freddie is doubled, as some predict. What’s more, the companies seem short on persuasive strategies for extricating themselves from the government’s embrace.

A spokeswoman for GMAC pointed out that the company had made all its scheduled dividend payments to the Treasury, as had Freddie Mac. While Fannie Mae has said it will have trouble paying its dividends, A.I.G. does not have to pay dividends.

A spokeswoman for A.I.G. said that the insurance company was committed to repaying taxpayers, but repayment would depend on market conditions. A Freddie Mac spokesman said that the company was dependent on continued support from the Treasury to stay solvent. A.I.G.’s latest request for money offers an example of why it needs more government aid to pay its debts. The company has a big aircraft leasing unit, International Lease Finance Corporation, which is considered a valuable asset but not a core part of its business.

Ever since the company announced in 2008 that it would dismantle itself and sell subsidiaries to pay back the government, analysts have expected International Lease to be sold.

But there is a big catch. A.I.G. does not own International Lease outright. A big block of the unit’s stock is actually held by an insurance subsidiary, which uses the shares to secure its promises to pay claims. If A.I.G. sold International Lease and gave the proceeds to the Fed to pay down debt, it would strip too much money out of the insurer, making it insolvent.

So A.I.G. used part of the $2 billion that it recently received from the Treasury to buy back the International Lease shares. That way, when a buyer finally appears, A.I.G. can sell the leasing business and pay the Fed.

“The irony is, for the government to recoup its value, it has to keep its support behind A.I.G.,” said a former company executive, who requested anonymity because of the delicacy of the matter. “The thing is a total Catch-22.”

A.I.G. said it also recently used some money from the Treasury to restructure its mortgage-guaranty business — something GMAC, Fannie and Freddie are struggling to do as well.

All four of the companies had businesses that provided mortgage guarantees. When defaults began soaring in 2007, they all suffered big losses. In some cases, they have insured each other; in other cases, banks or investors have to be paid.

Although GMAC’s main business is financing auto sales, its executives have said its biggest problem is containing the troubles in its mortgage business, known as Residential Capital. “What we want to do, to the best we’re able to, is draw a box around it and say that it is contained,” Michael Carpenter, the new chief executive, told a trade publication in November.

For its mortgage guarantee unit, A.I.G. used some Treasury money to reinsure $7 billion of obligations through a Vermont subsidiary. The terms call for the unit, United Guaranty of Greensboro, N.C., to pay the claims that it can afford and send the rest to the Vermont affiliate.

Little is known about the Vermont unit because the state does not require that type of company to file annual reports. If the Vermont company needs additional money, it presumably could turn to A.I.G., which can draw more from the Treasury.

Amy Schoenfeld contributed reporting and analysis.

16 Responses

  1. Dave,

    Nice post about strategic defaults. It appears that the comments here are moderated to some degree and if you put in a link, you trigger the automatic delay of moderation.

    But you’ve probably figured that out by now.

    You know, if –as Dave’s article suggests–we’re going to push to be on even footing with the banks, though, I’d rather have their power to create money out of nothing. What the hell are the banks even for anymore, anyway? That is to say, for example, that my bank charges me a “maintenance fee” every month and I have to wonder what they could possibly be “maintaining!”

    I mean, there’s not a little area of the bank’s vault with my name on it and cash in the exact amount of my balance at any given time–the “money” in a bank IS NOT THERE! The Federal Reserve admits as much:

    “Banks provide many services, but for most people, banking consists of depositing their salaries into checking accounts and writing checks on that account to buy things that cost more money than they want to carry in their wallets…VERY LITTLE OF THIS MONEY IS KEPT IN THE BANK’S VAULT, HOWEVER. While the Federal Reserve requires banks to keep a specified percentage of customer deposits on hand to meet routine withdrawals [MY COMMENT: as of 12-31-09, a bank with less than $10.7 million in net transaction accounts does not have to keep ANY reserves], they lend the excess. ”

    What the bank is “maintaining,” then, is binary data stored in a hard drive’s magnetic field–in other words, literally imaginary, ethereal, NOTHINGNESS. Does anyone really need a bank in which to deposit binary data (as opposed to anything with inherent value or even our all-but-worthless Federal Reserve notes) in the form of a paycheck? Most people I know now have direct deposit, which is all digital–you don’t even get to hold the check (which is only a representation of the digital data) in your hands.

    We have been told the biggest possible lies regarding our money, and look how fervently everyone believes them…

  2. Libra 99,

    Agreed. I’m going to work on a draft complaint letter.

    That’s just plain bogus.

    Any suggestions on where i should fax it would be cheerfully accepted!


  3. Dave,

    I think morals have pretty much gone out the window in this country. Just wait until this time next year and see where we’re at.


  4. Hi Sam

    Please email me .
    We have the same situation.
    I have a friend same Plaintiff (HSBC) but the same assignor like mine he work for attorney’s office.

  5. Can’t seem to post anything but keep trying – we need to collectively COMPLAIN LOUDLY about this! Seek opinions on HOW and WHO to complain to.

    This is quoted from Market Ticker by author Karl Denninger”

    “I’m tired of the repeated bull-crap from the media and various carny barkers about “moral obligations” to meet your payments on underwater property.

    Why is it that you have a moral or ethical obligation to BANKS to do this, when THOSE VERY SAME DAMN BANKS ARE WALKING AWAY IN THE SAME FASHION I ADVOCATE?

    Dec. 17 (Bloomberg) — Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

    The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

    “This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”


    Exactly as you do when you strategically default on your mortgage, giving the property back to the bank to get out of your loan obligation.

    Why is Morgan Stanley doing this?

    The Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.

    As a consequence of being “upside down” they are walking away.

    This isn’t the first one Morgan Stanley has walked off on either:

    Morgan Stanley last month agreed to hand over Crescent to Barclays, ending the firm’s obligation on a $2 billion loan after taking almost $1 billion in losses.

    When Morgan Stanley acquired it, Crescent owned 54 office buildings in cities including Dallas, Houston, Denver, Miami and Las Vegas. It also owned the Canyon Ranch spa and resort, residential developments in Scottsdale, Arizona; Vail Valley, Colorado; and Lake Tahoe, California.

    Got it?

    BANKS – the very same BANKS that people claim you have a MORAL AND ETHICAL OBLIGATION TO PAY EVEN IF YOU ARE UPSIDE DOWN – are walking away (by “negotiation” – as in “do it or we’ll default and you’ll get even less!”) from properties EVEN WHILE THE CARNIVAL BARKERS IN THE PRESS ARGUE IT IS IMMORAL FOR YOU TO DO SO.

    In a word: BULLxxxx.

    This is exactly the same thing – a “strategic default”, which people define as:

    “strategic default,” walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

    Morgan Stanley CAN pay, they are simply choosing not to, because the property has fallen in value.

    This is exactly identical to you choosing not to pay because YOUR HOUSE has fallen in value.

    George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay — and weren’t deceived by the lender about the nature of the loan — have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.


    I called Mr. Brenkert and spoke with him for a while this afternoon, and pointed out the above – that the asymmetry of position here is untenable and is in fact a big part of why we’re in this mess.

    Let’s be clear: Those arguing for this from the banking and regulatory industry know how you stop people from “Strategically Defaulting” – don’t give people loans that make such an option attractive!

    If we had only 20% down 30 year fully-amortizing fixed-rate loans in the mortgage business nobody in their right mind would strategically default, because they would lose their 20% and even if prices declined they would likely (with amortization) be either ahead or darn close to it – that is they’d lose actual money.

    But on the business side of things we allow companies to set up separate LLCs and then trade on the “parent” credit even though there is no recourse to the parent. This allows firms like Morgan (or the builder down here near me that has a bunch of these shell LLCs) to build and buy huge amounts of real estate – yet when something goes wrong they have tremendous leverage on a short sale, put-back or simple walk-off: if the lender doesn’t like it they’ll bankrupt the “container” LLC and the lender will get nothing.

    Consumers, of course, can’t do that. Try to set up a LLC and then use it as a vehicle to buy a house without a personal guarantee associated with the loan.

    Forget it.

    Try to get a small business loan with only the business as the collateral – no personal guarantee.

    Forget it.

    It is therefore my contention – and on this point Mr. Brenkert agreed – that the rules must be consistent for everyone, and if big business can strategically default on their obligations for profit (rather than for hardship) then consumers should be able to do so as well.

    Therefore, until the law is changed to prohibit the use of said “Strategic” legal containers and the resulting option of business interests – including the banks that are complaining now – to practice selective default when it suits them I stand by my original view:

    Strategic Default, in today’s economic, legal and ethical environment, is perfectly within the rights of consumers and they should exercise that right when it makes economic sense, after consultation with both legal and accounting professional.”

  6. Greetings,

    Just a test. Can’t seem to post anything (with links)

    Testing to see if I’ve gotten myself banned somehow!


  7. Wall Street, the banks and lenders, our government officials all = the “sons of darkness”.


  8. The only way to STOP the insanity is to STOP feeding the beast. STOP paying your mortgage. STOP paying your credit cards, car loans and student loans. Face it, they’re not worth the paper they’re written on. Starve the beast and STOP paying them !! It’s called anarchy, and it’s what it’s all come down to. And while we’re at it, STOP paying your taxes too. And no, I’m not kidding.


  9. Hey, you Mafia Mortgage Money Men (MMMM), listen to this:

    According to its latest report, the Federal Reserve now owns over $1 trillion of mortgage-backed securities, which is 45.6% of all assets on its balance sheet. One year ago mortgage-backed securities were only 0.6% of the Federal Reserve’s total assets!

    Wonder when these chickens will be coming home to roost. How do you feel about this? Is the Fed making a good investment (on our part)?

  10. If anyone is interested in a job making sure these spoiled brats are compliant… they can be found here; http://www.compliancex.com/

    Interesting that a few years ago anyone who could make a return for these chumps could easily fetch a six-figure gig, now they are looking to hire people who are going to help them remain “compliant”??

    *Charlie A – yeah, this is really weird!!!

  11. More on this story…

    I posted this earlier and it seems to have vanished.

    I think it has to do with the link – remove the X in the link and paste into your browser if you really want to get mad.


    I’m angry. Any ideas on how to most effectively vent our anger?

    All of us!

  12. More on this story…

    I posted this earlier and it seems to have vanished.


    I’m angry. Any ideas on how to most effectively vent our anger?

  13. to: DNY.
    what a great example of double standard that is dny, how convenient, “this isn’t a default or foreclosure situation” what it should read is: “this is not a default or foreclosure situation this is us the BIGGEST thieves in the history of human kind telling the rest of the American people once again:
    ESCREW YOU!!!!!!!!!!!!!!!!!!!!!!!! we do whatever in the hell we want! we own the “business”(can’t call it country anymore) and we’ll run it any way we want, live with it or eat *&^%$, ” Wow! what’s next guys in the crapiest ,craziest, and most ridiculous, out in the open belligerent provocation to the American people????? what can be next!!?? just when you think you’ve seen it all from the “evil machine”, just when you thought we have hit rock bottom!!! here comes another load of hot steaming crap!!!!!!! (seating on my chair, scratching my head staring at my comp screen in complete disbelieve) wow!! get me out of the twilight zone please)

  14. TO: DNY,

    Double Standard! HA!

    Do you suppose Morgan Stanley will be in receipt of a 1099-C?

    How about a deficiency judgment?

    Naaaa….probably a nice big BONUS!

    Here’s more on that story:




    Dec. 17 (Bloomberg) — Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

    The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

    —>“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

    ??? – How many borrowers out there can do this and characterize it as a mere “real estate transfer?” Let me guess – zero.


  16. In my mortgage, I noticed that the person that signed the assignment as the “MERS Certifying Officer” is also one of the top 6 managing attorneys at the law firm that is representing the Plaintiff (HSBC) in the foreclosure lawsuit against me.

    How can this be? Isn’t this illegal? What is this violation called? Does it have teeth? Can I get some money out of these perckerwoods?

Contribute to the discussion!

%d bloggers like this: