Missing here: Giving Fannie Mae and Freddie Mac an unlimited, uncapped credit line into the US Treasury on Christmas eve.

http://emac.blogs.foxbusiness.com/2010/01/21/a-21st-century-glass-steagall/

January 21, 2010 11:15 AM EST by Elizabeth MacDonald
What's Missing in the President's Wall Street Fix

President Barack Obama will announce today moves to limit the size and risk-taking ability of the largest banks because of the perceived risk they pose to US taxpayers. Adviser and former Federal Chairman Paul Volcker, no longer marginalized in the administration, backs the changes.

Banks will no longer be allowed to own or operate hedge funds or private equity funds.

Missing here: Giving Fannie Mae and Freddie Mac an unlimited, uncapped credit line into the US Treasury on Christmas eve.

This, at a time when both disclosed in securities filings that the housing policies of the Administration and Congress will lead to additional taxpayer losses. Both have combined balance sheets equal to about 40% of US GDP.

Which company really needs to be shrunk to protect taxpayers?

You should worry that the bank fixes are misplaced and that they don’t target the real causes of the crisis, as the administration attempts to re-affix a regulatory antenna to the roof of the government that was knocked off long ago.

Government housing and mortgage policies are really the cause of the banking collapse.

That includes the collapse of banks such as Washington Mutual, Wachovia, and the meltdown at the two invalids permanently stuck in Congress’s intensive care unit, Fannie Mae and Freddie Mac, the recipients of the largest taxpayer bailouts.

A government-distorted housing market continues to get a government bailout, showing Washington has no more sense than a flock of pheasants.

And those policies have cost TARP dearly. Taxpayers have lost $27.1 billion on the government’s new Home Affordable Modification Program to date; they've lost $30.4 billion on AIG, and $30.4 billion on the automakers.

You should worry about the lack of imagination and vision, where the US Treasury, Federal Reserve officials and Wall Street executives all admit they never fully factored in a nationwide housing crash in their risk models during the bubble years.

And borrowers, too, figured they could live fat and happy in their golden years by selling each other houses at inflated prices, which is like trying to sell annuities on the Titanic, as one Wall Street analyst says.

The policymakers now are raising concerns about the wrong risks. Wall Street trading did not solely create the crisis. Sure, talk about reinstating Glass-Steagall might be overly optimistic, as one government official says it'd be difficult to do.

Glass-Steagall was repealed in 1999, and let banks combine their commercial and investment banking operations. Just don't expect that its reinstatement would solve our current problems--although it would naturally curtail large bonus payouts and get rid of the pay czar, as there would be less money to bet.

Another big focus in the Administration's new financial fixes is stopping the risks involved in trading in the firms' own money, called proprietary trading, versus customers' money sunk in securities, commodities, derivatives, hedge funds and other financial products.

But prop trading accounted for less than 10% of revenue at Goldman Sachs. Since 2003, proprietary trading amounts to just 12% of net revenue. Goldman generated $203 billion net revenue from 2003 through September, meaning that about $24 billion was proprietary trading.

The subprime securities market, paper trades built on the backs of subprime loans, did not create the crisis.

At the heart of the crisis are the mortgages given out willy-nilly by banks, the mortgages like the pick-a-payment loans sold by Golden West Financial (acquired by Wachovia, hastening its collapse), all part of the government’s push to have a 100% homeownership rate in this country.

Yes, Wall Street was corrupt. Yes, Wall Street did successfully pressure the Securities and Exchange Commission in 2004 to ease up on capital reserve requirements, letting them blow out their wallets which inevitably caused American taxpayers to back them up.

Those were all government decisions — even JPMorgan Chase’s Jamie Dimon candidly admitted the banks needed more regulation to stop their own recklessness. A laissez faire market led to laissez faire bookkeeping, to be sure.

But fake paper trades have been with us since the turn of the 20thcentury, with the bucket shops full of them, and throughout the ‘30s, with the Congressional Pecora Commission previewing the recklessness on Wall Street today.

Market cops know you can’t legislate out of existence greed. But you can put the guardrails back up.

Forget the hand-wringing commissions. Get a market cop swinging a night stick that’s not made out of macaroni noodles. Regulators in the little Office of Thrift Supervision apparently didn’t realize they could have sued AIG, or merely threatened to, and stopped its lethal financial products division in its tracks.

But the ‘30s saw something else. It saw the dawn of the U.S.’s present housing policy, culminating in President Franklin D. Roosevelt’s 1944 address outlining a new economic bill of rights, where he said Americans have a right to a decent home, a right to health care.

Rational thinkers can debate this issue as to what the Constitution really says, that you have a right to the pursuit of happiness, which involves the pursuit of the acquisition of such items. What you should be worried about is this: Fannie and Freddie were placed into conservatorship in the early fall of 2008 and are now hostage to the government's every crisis move.

And the government just lifted the caps on their Treasury borrowings to an unlimited amount. Unlimited. Meaning they can take on all sorts of rotting mortgage paper, a mountain of which taxpayers will be staring at morosely for some time to come.

Fannie and Freddie have a combined balance sheets of more than $5 trillion, with hundreds of billions more off the balance sheet. The administration and Congress now explicitly continue to give support to the worst, most irresponsible crop of borrowers taxpayers have ever endured.

The Obama administration is putting off any effort at reforming Fannie and Freddie; pay czar Ken Feinberg has no jurisdiction over the two companies, both of which just agreed to pay their top executives up to $6 million in compensation for 2009. In cash. Not stock, as the pay czar is forcing other companies. In cash, because the executives see these companies stock at about a buck apiece.

Already, Fannie and Freddie hold or insure about 10 million subprime and Alt-A loans, as well as mortgage-backed securities, worth in total about $1.6 trillion. This stew of loans and debt is seeing record delinquencies.

The government-dependent enterprises have already cost taxpayers $110 billion in losses, they’ve already drawn down $111 billion from the Treasury, and both admit in SEC filings that they will continue to bleed money for some time to come in order to prop up the administration's effort to revivify the U.S. economy by supporting home buying.

It’s more than just rising home delinquencies. Fannie Mae just reported that the rate of serious delinquencies - those at least three months behind - on conventional loans in its single-family guarantee business rose to 4.98% in October, up from 4.72% in September - and about triple the 1.89% rate in October 2008.

Again, the Federal is now the mortgage securitization market, and now has $910.3 billion in mortgage-backed securities on its balance sheet, out of a planned $1.25 trillion in such purchases. But it can only tread water for so long. And that Fed program is set to expire next March, which means Fannie and Freddie will need an assist once that happens.

So the new Glass-Steagall rules are a step towards what former Federal Reserve chairman Volcker says what really should be done: break up the banks.

Former Fed chairman Alan Greenspan agrees. The U.K. and the European Commission are breaking up Royal Bank of Scotland and Lloyds Banking Group in deals to prop up both banks. Essentially, European banking regulators there are telling their banks if you want more taxpayer money, you've got to sell off units and Kryptonite assets.

Stop the too big to fail psychosis. The U.S. government and the banking sector have moved in the opposite direction. The banks are getting taxpayer money first, and then are breaking themselves up after the fact.

U.S. banks are essentially giant black boxes, holding notional exposures to derivatives amounting to $203 trillion, or more than three times the size of the planet’s GDP, estimated at $65.6 trillion in 2007.

Citigroup and Bank of America each have balance sheets roughly 10 times the size of ExxonMobil’s, analysts note, and their disarray proves that a $2 trillion balance sheet is beyond the realm of mere mortals. That $2 trillion equals the size of the economy of France.

Officials are so submerged in problems there that they need scuba gear to get out. Bringing back some semblance of Glass-Steagall is a step in the right direction.

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