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"We want our secrets kept secret" - FHFA Director

Bruce Krasting's picture




 
The administrator of Fannie and Freddie, Edward Demarco, had this to say
yesterday regarding a bill to open the GSE’s to the FOIA:

H.R.
463, introduced by Representative Chaffetz, would subject the
Enterprises to the Freedom of Information Act (FOIA). FOIA’s “core
purpose” is to:

1) Enhance “public understanding of the operations or activities of the government;”

2) FOIA is “often explained as a means for citizens to know what their Government is up to."

This core purpose is not served by applying FOIA to Fannie Mae and Freddie Mac, which are still private companies operating in conservatorship. They did not cease to be private legal entities when they were placed into conservatorship, nor did they become part of FHFA.

Still private companies? That’s the reason they are shielded? After the taxpayers shelled out $200b (and counting)? Bullshit.

I’m going to give DeMarco a D- on this one. I can think of a half dozen
areas in Fan’s and Fred’s checkered past that should be exposed and made
public. There is no way the dirt over at F/F should remain hidden.
There is one area of inquiry that I think should be correctly viewed in
the history books. Allow me a ramble.

In
his memoir, former Treasury Secretary “Hank’ Paulson made the following
comments. (This covers a time period May – August 2008)

Treasury had been getting nervous calls from officials of foreign countries that were invested heavily with Fannie and Freddie.

Foreign investors held more than $1 Trillion of debt issued or
guaranteed by the GSEs, with big shares held in Japan, China and Russia.

Okay. We know this. The likes of China and Russia had Paulson by the balls. And they squeezed.
Hank does not give a source for the following information. It was
conveyed to him August 8th – 10th , 2008. Hank was in Beijing watching
Michael Phelps win medals at the time. Take a stab at where he might have learned this:

Russian
officials had made a top-level approach to the Chinese suggesting that
together they might sell big chunks of their GSE holdings to force the
U.S. to use it’s emergency authorities to prop up these two companies.

Here’s how I think this went down. Paulson was connected in China. He
was the CEO of Goldman. He was Treasury Secretary. He had his own access
to “top-level” Chinese officials. One of them called and invited him over for a tea.

China: 
The
Russians see that you are vulnerable. They want to take you out
financially. They want to force you to default as they did in 1998. They
want China to join them and push you to your knees. There are some
leaders here who are in favor of this plan. Others are not. Can you
offer me something that I can use to change the outcome of this?



Paulson:

I
understand your position. Try to understand mine. Not one penny of the
F/F bonds that you hold is guaranteed by the US government. It says so
right on the front of the Bond Indenture.

China: 
We
know the law. But now I tell you our law. If you stiff us with these
bonds we will be at economic war with America, and we will win.

Paulson: 
Okay,
okay, okay. I got you. I see the picture. Here is my response. I will
make a promise to you. I will make you money good on these bonds. I will
arrange a buyback. I will get the Fed to do this. I
will see to it that the amount of the buyback is a bit over the $1T
that is now in foreign hands. The US will eat what it does not deserve
to eat. You have my word that this will get done before I leave office.

China: 
How much time do you need to make these arrangements?

Paulson: 
Give
me four months. I will get this buyback agreed to as soon as I can. But
I, I mean the Fed, can’t go public with it until, say, two weeks after
the big election. Give me till the end of November.

This could swing an election. I need some room to get this done. This is very political. Understand?

China: 
We will hold off on the decision for a few months.


Paulson: 
Do me a favor. Tell the Russians to go shit in their hat.


China: 
You have until the first of December.

Four months later, two weeks after that big election; we get this:

Here is how the Fed describes the goal of QE1 (the F/F buyback):

Nothing about balls getting squeezed and side deals with China. If I’m right that this tale played a hand in the how and why of QE1 then it would add a great deal of ‘color’ to the story.

Let’s be clear on few facts. A) The US was never on the hook for F/F. B)
If the Fed thought it was necessary to provide a monetary jolt it could
have bought Treasuries versus Agencies (that is what they did with
QE2). QE1 was a debt buyback that was forced on us. That is a very
different kettle of fish than how it was sold to the public. If Paulson
had a hand in how this played out it would taint the Fed and the way
they conducted policy. There is nothing in the Fed’s duel mandate that says they are supposed to being doing buybacks to bail foreign central banks.

Like I said, this is all just my read of the history. I don't want to
see that our good pals at F/F get a free ride on this. If there were a 
FOI window for these bums I would be most anxious for them to open their
files on who said what to whom regarding these buybacks. My guess is
that it started back in August of 2008. Right after Hank got back from China.

Let me remind Mr. DeMarco of the purpose of the FOIA:

A means for citizens to know what their Government is up to.

The details of the GSE buyback need to be known and understood. I want
to know what my government, in particular the Fed, is up to. I want to
know what brought about QE1. I flat out don’t trust them. That’s why the FOIA in the first place.

 

 

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Thu, 05/26/2011 - 12:49 | 1313572 rlouis
rlouis's picture

Bruce:  Entirely plausible scenario - and it only validates the thesis that pols in D.C. are too ##* stupid to be in charge of anything resembling a "market". 

Barney Frank is probably hoping and praying this issue dies, so he can slink away into the shadows of history without the humiliation of the majority of the public knowing and understanding that his actions contributed to the capitulation of the once soverign US to China and Russia.  Whether he's a witting or unwitting tool of the intl. bankster class, he is a turd bumping POS.  I know, it's not fair to lay too much blame on any individual, industry owned politician,  but he deserves as much blame as anyone.  How he or Pelosi keep getting re-elected in their districts is simply amazing.

 

Thu, 05/26/2011 - 12:20 | 1313476 cdskiller
cdskiller's picture

Spot on, Bruce. Absolutely brilliant. That's what it smelled like to me from the start, and no one talked about it. We bailed out foreign central banks. Treasonous, in my book.

Thu, 05/26/2011 - 12:48 | 1313564 Greater Fool
Greater Fool's picture

Well, if you want to be jingoistic about it, then there was plenty of foreign hosing involved in the conservatorship--like billions in Fannie preferred equity that was issued, it seemed, mere moments before. ME sovereign wealth funds snapped the crap up, and the US Government immediately suspended payments on dividends. The holders experienced an almost total loss right away.

C was a similar story, with a similar collection of foreign dupes getting fleeced. On balance it's probably a good thing that somebody out there with nuclear weapons has a reason to care whether they get robbed blind, or else it would happen far more often than it does already.

Thu, 05/26/2011 - 12:22 | 1313470 Thisson
Thisson's picture

Bruce, the Fed is a private entity not subject to FOIA. 

And unfortunately DeMarco is right - Fannie and Freddie are also private and not subject to FOIA.  Government meddling in the housing market needs to end.  Fannie and Freddie should be put out of business.

 

 

Thu, 05/26/2011 - 14:19 | 1313866 RichardP
RichardP's picture

The Fed is an agent of Congress.  It does not exist to carry out it's own will; rather, it exists to carry out the will of Congress.  That fact stands on its own.  I still wouldn't hazard a guess about whether the courts would apply the FOIA laws to them, or any other agent of a government entity.  If there is a precedent for this somewhere, I don't know what it is.

Thu, 05/26/2011 - 12:46 | 1313567 DB Cooper
DB Cooper's picture

Come on - the Fed is the government! And the GSE's too (unless you can say the taxpayers don't have risk there which you can't).  I can see it now - the government will kill Fannie and Freddie to cover up the crime - and then start a NEW and Improved mortgage business called Herbie (it will also be private - to protect the guilty). 

Thu, 05/26/2011 - 12:13 | 1313449 DB Cooper
DB Cooper's picture

Bruce is right on.  The GSE's are at the heart of the crisis - they were/are the Ponzi on top of the Ponzi.  One Ponzi obviously wasn't enough for the Bankstas!  We definitely need this bill to pass but it's been in committee since January?  Don't count on it.

Thu, 05/26/2011 - 12:19 | 1313422 Cthonic
Cthonic's picture

Haven't read Paulson's "memoir", but it's been a patently obvious part of public record that the Chinese wanted out of the GSE debt they had accumulated selling us building materials and financing our subprime boom and home equity cash out orgy (their selling began in 2008 according to U.S. Treasury documents).  Not that the foreigners were alone: hello PIMCO, hello Buffet, I remember your pleading eyes broadcast across the land in 2008.

Thu, 05/26/2011 - 12:00 | 1313390 Rainman
Rainman's picture

These GSEs are/were/and will always be a bad idea. Please name one that has not lost monumental amounts of taxpayer-backstopped fiatscos. Even the Red Cross needed a bailout of 25mm.

Thu, 05/26/2011 - 11:55 | 1313368 RunningMan
RunningMan's picture

The US is no longer our government, and the overall system is highly unstable. It is composed of people for whom we vote in elections, but the candidates and the information we know about those candidates is controlled. That is counter to the democratic principles on which this country was founded. The situation is made worse by individual entities tossing money about - the Fed, Treasury, Fannie/Freddie (oops, our trillion dollar RE hedge fund portfolios went bust - save us or the US is toast!), etc. I really do wonder if they have anything left EXCEPT the control of information?

 

Fannie and Freddie were always implied to have government backing. It became explicit during the nationalization. But to say the people have  no right to know anything is absurd. These aren't military secrets, and the only thing I can think is someone doesn't want to be embarrassed.

Thu, 05/26/2011 - 11:58 | 1313366 SilverFocker
SilverFocker's picture

Uhhh "Here's how I think this went down", this same exact scenario was played out in the HBO TBTF flick.

Not trying to knock the author here but.......

I agree that F/F books need to be opened, as well as all others who caused this mess, but it will never happen, to many in power would be subject to treason.

Thu, 05/26/2011 - 11:58 | 1313364 Sunshine n Lollipops
Sunshine n Lollipops's picture

It's never good to stiff your bookie. They'll get what's owed to 'em, one way or another.

Thu, 05/26/2011 - 11:51 | 1313340 NotApplicable
NotApplicable's picture

"our government",  LOL

Bruce, until you get over this childish notion, you're never going to understand anything about what is going on and why. It's time to remove yourself from Plato's cave and stop confusing shadows for the shapes that make them.

An easy way to do this, is every time you use the word "government" stop for a second and replace it with the word "mafia." Next, ask yourself what the expected outcome would be if this were true. Finally, notice how much better these expectations fit the actual results as opposed to the fiction of representative government.

Do this enough times, and the logical conclusion becomes inescapable. If you don't do it though, then you keep empowering the beast that is destroying society.

Thu, 05/26/2011 - 11:28 | 1313246 Piranhanoia
Piranhanoia's picture

This would indicate the debt anyone had to a GSE was likely paid off as well, eliminating the grantor from responsibility on any loan.  1 Trillion is about what the liabilty is going to be for the lenders and GSE, before they turn over the rocks.  The idea that 5 or 17 billion is going to remotely compensate for the fraud is a bad joke.

Thu, 05/26/2011 - 11:23 | 1313233 Madcow
Madcow's picture

Does the US enforce the death penalty for Treason ??

Thu, 05/26/2011 - 11:52 | 1313342 NotApplicable
NotApplicable's picture

Whose version of it?

Thu, 05/26/2011 - 11:23 | 1313229 FMR Bankster
FMR Bankster's picture

To understand this bunch (Paulson,Corzine, ect) you need to remember how they became sucessful. They came of age in the late 1970's and early 1980's and made fortunes through leverage. And every time they screwed up they doubled down and the Fed cut rates and they were bailed out. Except now it's game over and they can't understand it. They keep thinking they can kick the can down the road. Corzine was my favorite example. A couple of months after he was booted out as Gov of jersey he took over MF Global. These clowns were effectively broke. His first public statement was (you can't make this stuff up) WE'VE GOT TO GET THE RISK UP AROUND HERE.

Thu, 05/26/2011 - 11:21 | 1313221 FMR Bankster
FMR Bankster's picture

To understand this bunch (Paulson,Corzine, ect) you need to remember how they became sucessful. They came of age in the late 1970's and early 1980's and made fortunes through leverage. And every time they screwed up they doubled down and the Fed cut rates and they were bailed out. Except now it's game over and they can't understand it. They keep thinking they can kick the can down the road. Corzine was my favorite example. A couple of months after he was booted out as Gov of jersey he took over MF Global. These clowns were effectively broke. His first public statement was (you can't make this stuff up) WE'VE GOT TO GET THE RISK UP AROUND HERE.

Thu, 05/26/2011 - 11:21 | 1313220 FMR Bankster
FMR Bankster's picture

To understand this bunch (Paulson,Corzine, ect) you need to remember how they became sucessful. They came of age in the late 1970's and early 1980's and made fortunes through leverage. And every time they screwed up they doubled down and the Fed cut rates and they were bailed out. Except now it's game over and they can't understand it. They keep thinking they can kick the can down the road. Corzine was my favorite example. A couple of months after he was booted out as Gov of jersey he took over MF Global. These clowns were effectively broke. His first public statement was (you can't make this stuff up) WE'VE GOT TO GET THE RISK UP AROUND HERE.

Thu, 05/26/2011 - 11:10 | 1313186 Troy Ounce
Troy Ounce's picture


QE3 is already in full swing, problem is you don't know it.

Thu, 05/26/2011 - 11:13 | 1313183 Troy Ounce
Troy Ounce's picture

 

QE3 is already in full swing, problem is you don't know it.

Thu, 05/26/2011 - 10:50 | 1313124 Herbert_guthrie
Herbert_guthrie's picture

Hank Paulson lives to the creed "Graft with Gusto!"

Thu, 05/26/2011 - 10:49 | 1313118 YHC-FTSE
YHC-FTSE's picture

"Foreign investors held $1T of debt issued or guaranteed by the GSEs", and how much debt was held by domestic investors? By Goldman, JPM, et al? Paulson is more likely to have initiated the buyback to save his mates at Squiddy & co., rather than because of pressure from the big bad foreign bogeymen. 

 

The reasoning that he did the buyback to save American firms from collapse and to save America from an economic war it couldn't win with foreign bogeymen kind of makes him a hero doesn't it? I don't buy that for a second from Paulson. 

Thu, 05/26/2011 - 12:11 | 1313425 hbjork1
hbjork1's picture

I agree that Paulson was and is not a deep strategic thinker.  He was focused on the immediate emergency with a fear that Americas large financial institutions could start falling like a string of dominos.

We all tend to become tools of our tools.  Under stress our solutions tend to be predicated on things we think we know, or see, using personal experience, fully relevant or not.  

The alternative is to reach for advice (where?) or to go to references (history?) and try to think again. 

Paulson needed a short term solution to the immediate problem that he was equipped to see. 

Thu, 05/26/2011 - 12:49 | 1313573 YHC-FTSE
YHC-FTSE's picture

"Paulson needed a short term solution to the immediate problem that he was equipped to see. "

Yep, that sounds just right to me. 

Thu, 05/26/2011 - 10:30 | 1313043 Greater Fool
Greater Fool's picture

I think the idea itself is probably correct, but I doubt the situation was quite as stark as all that. If I recall correctly, at the time Russia was having to go all-out to defend the Ruble, and dumping Agencies would have been a good way for them to raise dollars.

In the end, I think the more potent incentive was not any back-channel Russian threat, but the simple fact that the banks in the UK and continental Europe were up to their necks in RMBS of all varieties, and a panic in the Agency market could have been a death blow for a lot of them.

This fact is in its own way revelant to the Russia / China question, since in essence although the global power game is now being played out in the economic rather than military sphere, we are still fighting the Cold War. Seen this way, the primary strategic goal must be to protect our allies; the secondary strategic goal is to maintain the state of mutually-assured economic destruction that was engineered in the 90's.

Thu, 05/26/2011 - 10:28 | 1313036 Greenhead
Greenhead's picture

So Russia and China were going to take a big hit on their GSE bond holdings.  Are you saying they were going to dump their T's to get even?  What am I missing here?  So they got the Fed to create "Magic Money" to protect the Russians and the Chinese? 

Thu, 05/26/2011 - 10:28 | 1313035 Greenhead
Greenhead's picture

So Russia and China were going to take a big hit on their GSE bond holdings.  Are you saying they were going to dump their T's to get even?  What am I missing here?  So they got the Fed to create "Magic Money" to protect the Russians and the Chinese? 

Thu, 05/26/2011 - 10:29 | 1313024 b_thunder
b_thunder's picture

So, in Aug. '08 the Russians wanted to dump bonds and "break" America?  And jsut weeks later in Septemer/October  '08 our own Fed stuffed the Russian Central Bank (among many others) with hundreds of billions of dollar swaps to prevent Russia from their own collapse due to (rising) dollar-denominated borrowing they've done? 

And since then the Fed drove oil prices from low-30s to low-100s, making hundreds of billions flow into russian coffers again?  No, Russians by far are not the most evil ones here.

 

Thu, 05/26/2011 - 10:50 | 1313110 alexwest
alexwest's picture

###
stuffed the Russian Central Bank (among many others) with hundreds of billions of dollar swaps to prevent Russia from their own collapse due to (rising) dollar-denominated borrowing they've done?
###

dont be stupid...

before crisis n 2008 Russia (central bank) had almost 600 bln in reservers ( euro+$)..

it spent almost 200 bln to fight capital flight from country and defend ruble from big devaluation..
yet, ruble was debased by 50%..

alx

Thu, 05/26/2011 - 10:21 | 1313002 Ergo
Ergo's picture

Excellent logic Bruce.  This may not have been the only reason, but I strongly suspect it was a big piece of the puzzle.  Everyone knew at the time that foreign pressure was being applied re. Fannie.  I still think Paulson/Bernanke/etc. misplayed their hand rather badly.  But since they're more loyal to banks than the public, they had a much different motivation.

Thu, 05/26/2011 - 10:16 | 1312971 proLiberty
proLiberty's picture

When government sets up a corporation that then demands special favors from government, is that "crony capitalism" or something far worse?

Thu, 05/26/2011 - 10:11 | 1312957 gosseyn
gosseyn's picture

Bruce,

Good essay, especially Paulson's imaginative conversation.  A suggestion, please stop using the red ink.  Simple italics, bold face type and underlining are plenty to emphasize important points.  Thanks.

Thu, 05/26/2011 - 10:21 | 1313004 Bruce Krasting
Bruce Krasting's picture

Sorry. I like the red ink....

b

Thu, 05/26/2011 - 22:55 | 1315399 Ted K
Ted K's picture

Another vote for red ink stays.  

I enjoyed this post very much, because Geithner (although, yes, has also made some very bad decisions) has been left to clean up Henry Paulson's shit left on the toilet seat, Geithner has gotten 80% of the blame for what is 95% Hank Paulson's shitting on the seat.  This stuff was obvious to Paulson and Greenspan long before the 2008 Olympics or any off the record talks with Chinese players (although the scenario portrayed by Krasting above seems very realistic and probable to me).  They thought they would shove this one off on the next administration----that was a huge betrayal of the American people, and a betrayal which Paulson and Greenspan should never be forgiven for.  If I ever saw either of the two of them in a public setting, either one would be EXTREMELY lucky to get off with a pie in the face and an angry lecture on what assholes they are.

Thu, 05/26/2011 - 23:02 | 1315411 Ted K
Ted K's picture

By the way, I have pondered buying Paulson's book, as he is knowledgeable and I am sure many things to be learned from it, but I will not buy Paulson's book for moral reasons.  I will not reward a man financially for the trashing and betrayal of his native country.

Thu, 05/26/2011 - 12:35 | 1313516 hidingfromhelis
hidingfromhelis's picture

The red ink is appropriate...and unfortunate.

Thu, 05/26/2011 - 12:23 | 1313485 piceridu
piceridu's picture

Dig the red ink too. BK style

Thu, 05/26/2011 - 11:42 | 1313303 hbjork1
hbjork1's picture

Me too.  Best highlight.

Thu, 05/26/2011 - 10:07 | 1312941 SparkyvonBellagio
SparkyvonBellagio's picture

Tar and Feather and put them in new reality show

 

"the Horny Bunkie Diaries"

 

 

Thu, 05/26/2011 - 09:52 | 1312895 Fish Gone Bad
Fish Gone Bad's picture

So the purpose of QE1 was to protect the US from a financial attack from China and Russia.  The US did this by buying up apparently "worthless" paper.  So then QE2 was to buy up the nonperforming mortgage back securities ... to protect the US from a financial attack from China and Russia as well?  If that is the case, there must come a point where no country will buy our paper. 

Oh wait, we are already there.

Thu, 05/26/2011 - 09:49 | 1312873 DeadFred
DeadFred's picture

I've never understood why they allowed the FOIA in the first place or how come it hasn't been nuetered (totally) yet. It's one of the mysteries of life.

Thu, 05/26/2011 - 09:43 | 1312853 ATM
ATM's picture

How does the Fed buy GSE debt if they are private? I thought the rule was only AAA government debt?

Thu, 05/26/2011 - 10:26 | 1313010 ZackAttack
ZackAttack's picture

'Exigent circumstances' clause. Those two words cost us a cool trillion.

Thu, 05/26/2011 - 09:37 | 1312844 LawsofPhysics
LawsofPhysics's picture

Me too Bruce,  good luck with that.   Nothing short of a revolution will get that kind of information out.

Thu, 05/26/2011 - 09:35 | 1312835 butchee
butchee's picture

Bruce

Off topic....but a cool new weather site  http://weatherbell.com/  Has some very good Reports on ENSO and PDO.  Hope this doesn't seem like spam....I just know that you are a weather bug too!  Have a great holdiay weekend!

Thu, 05/26/2011 - 08:32 | 1312564 Duuude
Duuude's picture

 

Paulson has been proven to be above the law.

Period.

EOS

Thu, 05/26/2011 - 11:43 | 1313307 Popo
Popo's picture

"China:  We know the law. But now I tell you our law. If you stiff us with these bonds we will be at economic war with America, and we will win."

 

Lol.  It definitely didn't go down like that.   Nobody in China is feeling remotely confident about their economic footing.   The threat of a hard landing isn't just financial there, it's a matter of the bloodiest revolution in Chinese history which will spare none of the new wealth, and devastate the nation for decades.

Economic war with America is not a sure thing for China by any measure.

Thu, 05/26/2011 - 12:38 | 1313535 SilverDosed
SilverDosed's picture

China's ponzi is as closely tied to our ponzi as anyone's. They are not immune from the global house of cards and will help prop it up to save themselves.

Thu, 05/26/2011 - 09:56 | 1312894 Weisbrot
Weisbrot's picture

 

1> Paulson was granted conressional dispensation

 

2> as with any shell game, its important to keep ones mark (the public) distracted long enough for them not to know that the ball has been removed from the game.

 

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