A Short Lesson in Chemistry

Marla Singer's picture

The Obama administration is on the case, don't you worry.  Given that expanding the balance sheets of Government Sponsored Entities, increasing their regulatory caps on assets, and then, when caps could rise no further, permitting them to resort to securitization to move underpriced real estate loans off their balance sheets didn't work, let's relax caps even more, and, while we are at it, give them a blank check drawn on the Treasury.  Bloomberg reports:

The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

Translation: This clear, oily smelling liquid I've been using doesn't seem to be quenching the flames.  Hand me that larger jug over there, will you?

It used to be that some alternate reality was the only place we would ever expect to hear this:

Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury Department officials said they didn’t expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.

...and then hear this thirty seconds later:

Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

The changes mean that rather than needing to trim their portfolios, Fannie (with around $770 billion in holdings) and Freddie (with about $760 billion) can collectively expand them by almost 18% or another $270 billion in 2010.  The Treasury explained:

Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios.

So.  Let us summarize:

We do not expect the GSE's to grow their portfolios at all, so we are fixing the bloated portfolio problem by easing the portfolio caps to permit a quarter trillion dollar expansion thereof.

We do not expect either of the GSEs to need more help from the Treasury, so we are responding to the underutilized $400 billion "lifeline" the GSE's have with the Treasury ($111 of which is currently used) by expanding it to... infinity.

Oh, and though they have collectively lost nearly $200 billion, we are paying the CEOs around $6 million each.

Great work team!  It's already almost 11:00.  Let's go to lunch.