Fannie Mae Guarantees Almost a Third of the $12 Trillion Home Mortgage Market

New York, New York

The zombies are taking over!

Stocks went up 4 points on the Dow on Friday... Gold went up $10.

Noise. Distraction. Headlines. Opinions.

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The important trend is the big one – the shift of resources from the private sector to the public sector.

During the bubble years, the private sector made a big, big mistake – taking on far too much debt.

Now, it is correcting its mistake... reluctantly, painfully, and with plenty of foot-dragging and interference from the government. Instead of letting the dead die in peace… the feds are pumping financial adrenaline into their veins... turning them into zombies.

It’s expensive work... so the government is now making the same mistake the private sector made a few years ago. It’s pretending that debt-fuelled spending is the same as growth. Ain’t no such thing…

The feds’ “growth” is even more pernicious and counterfeit than the bubble era growth in the private sector. At least people actually wanted houses... they just couldn’t afford to pay for them.

The feds, on the other hand, produce things that people wouldn’t buy even if they had the money – zombie products. Who would buy a billion-dollar software program to spy on other people? Who would pay other people to do nothing? Who would take on the debts of a failing financial institution?

Feb. 27 (Bloomberg) – “Fannie Mae will seek $15.3 billion in U.S. aid, bringing the total owed under a government lifeline to $76.2 billion, after its 10th consecutive quarterly loss.

“The company posted a fourth-quarter net loss of $16.3 billion, or $2.87 a share, Washington-based Fannie Mae said in a filing yesterday with the Securities and Exchange Commission.

“Fannie Mae, which owns or guarantees about 28 percent of the $11.8 trillion U.S. home-loan market, has been hobbled by a three-year housing slump that wiped 28 percent from home values nationwide and led to record foreclosures. The company, which posted $120.5 billion in losses over the previous nine quarters, and rival Freddie Mac were seized by regulators in September 2008.”

Did you read that carefully? Fannie Mae guarantees almost a third of the $12 trillion home mortgage market – or about $4 trillion. And guess who guarantees Fannie Mae? The US taxpayer!

Fannie made bad loans. It ought to be put down, like a horse with a broken leg. But Fannie’s bondholders don’t take loss. The losses have been moved to the public sector and Fannie itself has been turned into a zombie company.

Assets, liabilities, spending – it’s all shuffling over to the government... and sucking the life out of the private sector. In the area of durable goods, only about 4.4% of them, on average, were purchased by the pentagon over the last 17 years. But since the beginning of the financial crisis, durable spending by private industry decreased... while pentagon spending went up. The most recent figures show that 8% of durable orders are now bought by the military.

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Recovery? Don’t bet on it. This government spending only makes it look like a recovery. The numbers may show an increase in durable goods sold, but tanks and armoured personnel carriers don’t lead to genuine growth. They lead to Soviet-style zombie growth... by the government, of the government, and for the government. The rest of the economy shrinks.

More thoughts after the news...

Stock markets may have lost the upside momentum they had at the start of the year. But there are still big opportunities for the speculator. And there’s plenty of speculation going on in the South Atlantic right now…

You’ve seen it on the news. But are those news readers showing you how to profit? One of our London analysts has been following this story for several years. Are his readers about to be rewarded for their patience?

This from an update last week…

“The crew of the Ocean Guardian drill are at the centre of the most explosive diplomatic row between Britain and Argentina since the Falklands War,” writes Tom Bulford.

“Drilling 60 miles off the coast of the Falklands, the mostly Scottish crew – veterans of drilling in the North Sea – are doing the best to keep their minds on the job.

“It’ll take 30 days to make it to their target depth. And having travelled half way around the world, their only focus now is drilling through 116m of rock hard sandstone between dawn and dusk.

“Meanwhile 200 miles away, the Argentinian government are doing everything they can to disrupt the crew of the Ocean Guardian. This week Buenos Aires has imposed restrictions on ships entering the territory. And President Cristina Kirchner is rallying Latin American allies to banish British oil groups out of the region.

“For all the attention the situation has gotten this week, this all looks like a political move from the Argentine government. There’s an election next year and President Kirchner de Fernandez badly needs to rally some support if she or her husband are to be re-elected. Defending the Falkland Islands is just the sort of populist move that fits the bill.

“Rather than obstructing efforts to find oil, Argentina should be encouraging others to fund the huge exploration budget.

“If no oil is found, you can bet that the Falklands will suddenly become a matter of indifference to Argentina.

“If it is found then its extraction and transport to refineries many miles away will become a major issue. Argentinean firms could possibly play a role, so a more constructive approach might be in its better interests.

The important thing, as Tom points out, is that things are starting to move in the Falklands oil story.

“There’s a rig drilling for oil for the first time since 1998. Investors around the world are catching on to an idea we tapped into a couple of years ago. And there are good reasons why our investment has good upside potential.

“And things are moving fast. Drilling of the first well in the area by Desire Petroleum(DES) is now under way and we should get results within 3-4 weeks. If this does find oil then this news story will reach a crescendo. But the share prices of all of the explorers should move ahead.”

Of course, the time to get into these oil stories is before they hit the mainstream. That’s why Tom is already looking at the next potential Falklands-style bonanza. It’s another tiny company that’s going after billions of barrels of oil. This one has not made it into the news yet. But if the company strikes oil, the share price could shoot up 2,044% higher within days, Tom believes. If you’ve not seen his new report, here it is.

Red Hot Penny Shares is a regulated product issued by Fleet Street Publications ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3600.

And more thoughts...

*** Everyone says the euro is falling apart... that Europe itself can’t survive as a political unit.

Europe seems to lack the things that make for a strong political system. It has no common language, for example (there are more than 200 different languages in Europe). And it has no common culture either... or even a common religion... or a common race.

The Greeks are rioting in the streets. They’re upset because their government is trying to cut back on ‘services.’ Actually, it’s not the services that anyone would miss. It’s the money. The rioters are mostly people who live, in one way or another, at the expense of others... thanks to the government. They work for the government... or get handouts from it.

The poor Greek government is stuck. As in almost all other democracies, politicians bought votes by giving out jobs and money. This leads to a bidding war... in which political parties vie for favour with the voters by offering more and more “services.” One gives away bread. The other prefers circuses. Whether it is food stamps or foreign wars... the price is high. And eventually, the bids go beyond the capacity of the economy to pay them.

Greece is at that point. So are half the US states. They’re out of money. It’s “doomsday” in Illinois, says one headline. It’s a ‘state of emergency,’ in New Jersey.

Lenders don’t want to give them any more money. Wisely, they worry they won’t get paid back. So, lenders demand higher interest rates to cover their increased risks... which puts the Greek budget even further in the red.

The Greeks think the Germans should come to their aid. Why? Because, in a way, it was the Germans who got them into this mess. Nobody would have lent so much money to the Greeks had it not been for the strong teuton-backed euro... and the implicit promise that if the Greeks got into trouble... which everyone knew they would... the rest of Europe would come to their aid.

Well, what do you know? The Greeks are in trouble. And the Germans don’t want to come to their aid. The Germans saved. They ran their own economy better. They are one of the few countries in Europe that is living, almost, within the terms of the treaty they all signed, in which they agreed to keep deficits below 3% of GDP. The German deficit is just a little more than 3%. The Greeks don’t even come close – with a deficit of 12.7%.

In America, the situation is a little different. The economy and the population are more homogenous. And much more of the money is in the hands of the central government. The Germans don’t see why their savings should be used to bail out the Greeks. They’ve got their economy. The Greeks have theirs. In the US, while there are regional differences, there is basically one economy... with one government that messes it up for everyone.

Is the US better off? Does central planning on a larger scale make the US dollar or the US economy stronger?

In fact, the looseness of the European experiment is a strength, not a weakness. What damages a paper currency is not an act of omission; it’s an act of commission. Neglecting to provide more cash and credit is not what kills paper money; on the contrary, it’s the willingness to provide unlimited amounts of it. So far, the Americans are. The Europeans – or at least the Germans – are not.

So, we’ll bet on the euro over the long term... both the euro and the dollar are “elastic” currencies. They both get stretched out of shape. But there are more people pulling at the dollar than the euro.

In the short run, anything could happen. There are probably more reasons for the dollar to go up than for it to go down. But in the long run, our money is on the euro.

*** “Dad, the strangest thing happened yesterday,” said daughter Sophia, now living in Baltimore. “My roommate couldn’t find her car. So she looked all around. She thought she just couldn’t remember where she parked it. But she finally gave up and called the police to report a stolen car. The police came up and they arrested her! It turned out that there was a warrant out for her arrest. She was on a bus and didn’t have any money to pay the fare... this was years ago. She got a ticket... and was supposed to go in and settle up. Well, naturally, she forgot. And so there was this warrant for her arrest. And then it was too late to post bail... so she spent the night in jail.

“Then, when she left the jail... she still didn’t have the money for bus fare, I guess... so she started walking. And she got mugged on the way home from the city jail and was taken to the hospital... though there’s nothing really wrong with her.

“Welcome to Baltimore...”

Until tomorrow,

Bill Bonner
The Daily Reckoning


The Daily Reckoning presents:
A Propensity to Screw Up

“There are accidents. There are mistakes. There are acts of God and acts of parliament. To give readers a preview, we suspect that the world’s savers and investors are about to follow Ms. Cosgrove – losing money due to bad luck, bad judgment, bad management and bad policy decisions…”

Read on for Bill Bonner’s Monday essay…

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P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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