(Weekly Organ of the Communist Party of India (Marxist)
September 14 , 2008
CONTRARY to its ideology of capitalism and market economy, the US government has, by force of circumstances, taken control of two heavily loss-making American mortgage companies, Fannie Mae and Freddie Mac, on September 7, 2008. By invoking “conservatorship” under a 1992 Law, the Bush administration has effectively passed on the losses suffered by the private companies, to the burden of American taxpayers.
Fannie Mae and Freddie Mac were established by US Congress in 1930s to buy mortgages from banks, in turn, allowing banks to enter into more and more mortgages in the speculative (booming) housing market. Over the years, easy financing through Fannie and Freddie brought more and more people into the market for homes, generating a belief that American real estate prices could keep rising forever. And that contributed to the banks’ ultimately making extraordinarily risky loans that brought the market down, by their handing out loans to people without jobs, income or down payments. Those were the people who defaulted first, once home prices started falling in the wake of rising unemployment and declining incomes of American people. As the defaulters left the market, the whole speculative bubble burst. Today, Fannie and Freddie own or guarantee more than $ 5 trillion in mortgage debt in US.
As Fannie and Freddie were considered to be backed by US government, even foreign institutions and governments purchased their securities. Some $ 1.5 trillion worth securities, are held by foreign investors at the end of March 2008. These include: China $ 376 billion, Japan $ 228 billion, Russia $ 75 billion, Luxembourg $ 39 billion, Belgium $ 33 billion, Britain $ 28 billion, Hungary $ 20 billion and so on. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.
Over the last one year, the shares of the most important US mortgage companies, plummeted continuously. The Citigroup has recorded more than $ 45 billion in credit losses and write-downs since mid-2007 and lost nearly $ 15 billion in the last two quarters. Citigroup’s stock has lost nearly 70 per cent of its value in the past year. Many small and midsize US banks are heavily exposed to weakening local property markets and loans to defaulting builders. Fannie and Freddie lost more than 74 per cent each of their market value this year. The net worth of Fannie and Freddie together has been reduced to about $ 55 billion only as of March 2008 against the liability of more than $ 5 trillion of securities/bonds, issued by them.
In similar cases earlier, the Bush government intervened to avert a bankruptcy of the Bear Stearns investment house and guided the sale of the company to J P Morgan Chase at a very cheap rate ($ 2 per share) by granting a loan of $ 29 billion. Similarly, IndyMac Bancorp, a bank based in California (US), stopped making new loans and announced layoffs of more than half of its 7,200 workers. The US regulators were forced to seize the bank and close it. During the last 7-8 years, hundreds of private corporates in US have cooked up their accounts, defrauded the investors, resorted to insider trading and/or became bankrupt.
Worldwide, banks and brokerage firms have already written down the value of the assets they hold, notably those linked to mortgages, by more than $ 400 billion since the beginning of last year as a result of subprime crisis in the US. In April, the IMF said that total losses for banks, insurance companies and investment funds may reach $ 945 billion, and some forecasters say they could be even higher.
As much of the private equity that once surged into the speculative mortgage industry has fled the market, there remained absolutely no possibility of raising billions of dollars in investment to save the loss making companies. Therefore, the responsibility of facing the losses has now been left at the doors of the government-sponsored Fannie and Freddie, which are already facing huge losses.
Now that the two American companies are sick, the foreign holders are desperately watching the future of hundreds of billions of dollars of their investments. How Fannie and Freddie’s rescue is handled would ultimately test the world’s faith in the American markets and could influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say. Also at stake is America’s ability to access credit in future. If foreign companies and governments fail to get back these investments, all home, auto and credit card loans in America will be much more difficult to come by and the future of banking industry in US would be at stake.
A situation has arisen where, if Fannie and Freddie were not bailed out to fulfil their commitments to bond holders including foreign investors, it would not only affect the US economy but also the image and credit worthiness of America Inc.
BURDEN ON THE TAXPAYERS
The Bush government has, therefore, decided to take control of Fannie and Freddie under a ‘Conservatorship’ as per a 1992 law. This legislation would offer an explicit government guarantee on the $ 5 trillion in mortgage debt owned or guaranteed by the Fannie and Freddie. However, according to the International Herald Tribune newspaper this legislation would effectively double the size of the US public debt and would give the Treasury the authority to rescue the mortgage companies, either by extending credit or by purchasing equity with unspecified amount of tax dollars in the rescue act. Some Congressmen are calling this scheme as a ‘blank cheque’ to the Treasury. If one looks at the net market value of $ 55 billion and liabilities of over $ 5000 billion in the accounts of Fannie and Freddie put together, the burden on the American taxpayers will be in trillions of dollars.
Actually, the take over of Fannie and Freddie by the US government means that losses incurred by the private corporates running into trillions of dollars are being added to the national debt of America, which has now reached $ 10.6 trillion (Rs. 4,66,40,000 crores). The war expenses in Iraq and Afghanistan are already being added to the national debt directly, without being shown in the budget. Together, the American national debt would increase by trillions of dollars in the next few years and place unbearable burden on the present and future generations of American taxpayers.
While the bill to rescue Fannie and Freddie was being discussed in the US Senate,
Senator Jim Bunning asked Treasury Secretary Henry Paulson Jr., “Where is the money going to come from?”
Paulson replied, “From the government.”
Bunning queried, “Who is the government?”
Paulson replied, “The taxpayers.”
This definition of “US government” as “US taxpayers” raises several questions on the nature of American democracy. One immediate question: Is it the American taxpayers, who are waging war on Iraq, under American democracy? In any case, American capitalism’s market economy has turned into: profits to the private corporates and losses to the account of American taxpayers.