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Who Launched the USS Fannie Mac?

Bruce Krasting's picture





 

Marla Singer at Zero Hedge wrote an important piece
regarding the Agencies this weekend. I am sure that she will get a lot
of .GOV reads from this. I believe that she might be the first to not
only blame the government for the problems at Fannie and Freddie but to
make a case that the government might be responsible for some of the
consequences. Ms. Singer may be onto something.

There was an interesting court case down in New Orleans last fall.
There are numerous appeals out on this case, so no precedent has been
set as yet. But we are getting close. There may be some connection to
the facts in NOLA and what happened with Fannie and Freddie.

I am not a lawyer, so allow me to spell this out in layman’s language. I will let the lawyers out there pick this apart.

Following the Katrina disaster in New Orleans there were many lawsuits
from property owners who had been flooded and lost all that they had.
Most of these suits were directed at the Army Corps of Engineers
(“ACE”). The argument put forward was that the ACE failed in its
responsibilities to protect the property owners in NO, and as a result
they were liable for damages. Legally this argument has little merit.

There are statutes and precedents that establish that the Government
has substantial immunity from lawsuits. Even if the ACE did screw up,
the government is shielded from liability. (The seminal case of Central
Green Co. v. United States, 531 U.S. 425 (2001))

But that is not what US District Judge Stanwood Duvall said in his
opinion. He found in favor of the plaintiffs. Judge Duvall awarded five
victims of hurricane Katrina almost $750,000, ruling that the Army
Corps of Engineers helped cause the flooding of their homes and
businesses by carelessly maintaining a shipping channel to the Gulf of
Mexico.

The following comments were made:

-The Corps had not acted with due care when it botched operation and maintenance of MRGO, (a shipping canal). {MRGO=FNM/FRE??}

-Army Corps of Engineers failed to tell Congress about the channel's environmental and safety problems. {OFHEO??}

On the more difficult issue of whether one can sue the Government, even
when they screw up, the Judge made a most interesting (to me) legal
argument:

“Would the United States be immune for
all damages if a Navy vessel lost control and broke through a levee
where the sole cause of the failure of that levee was the Navy vessel’s
negligence?”

The Judge relied on this logic when he ruled against the ACE/US
Government. I can’t help but make the comparison to the Government’s
role with respect to Fannie and Freddie. Both the Executive and
Legislative arms of Government misused the Agencies for decades. As a
result, the F/F equity holders took a quarter of a trillion dollar
shellacking, and damn near everyone in the globe felt some of the pain.
The US will pay for it over the next twenty years.

It’s a stretch to compare Judge Duvall’s ruling in NOLA to the
circumstances behind F/F. But not that much of a stretch. I have a book
of examples. A major turning point in this history took place in 2002.
The numbers exploded after that and the die was cast. This from a
George Bush speech in 2002.

"Economic security at home is just an important part of -- as
homeland security. And owning a home is part of that economic security."



"I called upon the private sector to help us and help the home
buyers. I'm proud to report that Fannie Mae has heard the call and, as
I understand, it's about $440 billion over a period of time. Freddie
Mac is interested in helping. I appreciate both of those agencies
providing the underpinnings of good capital
."

In 2002 Bush was consumed with Homeland Security. He used Fannie and
Freddie to support his goals. Notice he refers to F/F as the “private sector”. He knew better. His T-Secretaries were warning Congress that the Agencies posed a systemic risk.

Fannie Mae heard the call”. What bunk. Fannie was told what to do by the Administration. For Mr. Bush to have suggested that this was somehow the “underpinnings of good capital”
speaks for itself. That statement makes no sense. But, none of this
made sense. The audience of mortgage bankers cheered loudly however.

This was the battleship USS Fannie Mac headed for the levee. It just took six years for the crash to happen.

Back in NOLO the lawyers are lining up clients who got flooded. The
talk is of a $100b class action lawsuit as a result of Judge Duvall’s
ruling. Some experts see as inevitable the creation by Congress of a
fund to compensate Katrina victims ala the 911 victims. The results of
the lawsuit and the proposal for a settlement has gotten support from
Academia:

Professor Oliver Houck of Tulane Law School, "This was our 9/11. There's even more of a rationale here, because the government was largely responsible."

Those that chase Fannie and Freddie stock might do well to follow the
appeals of Judge Duvall’s ruling. Those that chase ambulances might do
well to follow it too. There is a case here somewhere.

 


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Sun, 01/03/2010 - 12:50 | Link to Comment Carl Marks
Carl Marks's picture

The United States Government has usurped the Constitution with the acquiescence of the people whose insatiable demand for largess has destroyed the foundation of this country. American corruption, greed and sloth has brought about her destruction from within. You wanted democratic socialism but you got corporate fascism. Right wing populism is simmering. It took the Civil War to eviscerate the Tenth Amendment. The Great Depression heralded the end to constitutional government. Reform will come from the barrel of a gun. Military dictatorship under the guise of public safety will follow. You won your freedom only to lose it to your base need for comfort.

Sun, 01/03/2010 - 12:38 | Link to Comment Anonymous
Sun, 01/03/2010 - 12:55 | Link to Comment spekulatn
spekulatn's picture

+1000.  

 

Sun, 01/03/2010 - 12:17 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

I agree Fannie and Freddie are disasters, billions in losses. This seems to be an argument to the effect that the proximate cause of these monumental losses is garden-variety negligence, e.g., the immense battleship whose helmsman is momentarily distracted, with unfortunate consequences.

However, it is hard to argue that actions endlessly repeated, and endlessly ratified by all of the various participants, constitutes "negligence."   I see it as a grand series of business transactions, with a profit motive.  Then it follows, that for every loss, there is a counterparty who profits, in this case handsomely, who therefore has motive to enter into the transaction, especially one in which the outcome can be greatly influenced to one's benefit by political contributions and lobbying. So, who profited? Follow the money to the real perps. 

Sun, 01/03/2010 - 13:40 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Is conflict of interest negligence? Is willful misuse of power negligence?

That's for the lawyers to work on. For me I have made up my mind. The WH used F/F to further their agenda. While their intent way back then was benign, the consequences were catastrophic.There were many in the Bush administration (include all of the Treasury Secretaries and his life long friend James Lockhart) who were all saying they constituted a systemic risk. No one listened and now we pay........The battleship hit the dike and we all got flooded.

We can't rewrite history. But I will ask the question anyway. Where would we be today if F/F did not load up on Sub Prime and Alt A loans in the 02-06 years?

Answer: Much better than were are today.

 

Sun, 01/03/2010 - 17:43 | Link to Comment Miles Kendig
Miles Kendig's picture

While their intent way back then was benign,...

What makes you so sure Bruce?

Sun, 01/03/2010 - 11:49 | Link to Comment heatbarrier
heatbarrier's picture

Oh boy. Bruce, don't feed the fire, the piece on the agencies is deeply flawed. There are people out there trying to sink the ZH Bismarck, why give them an easy shot?  

Sun, 01/03/2010 - 11:54 | Link to Comment Cursive
Cursive's picture

@heatbarrier

I would rather this have died earlier this weekend, too.  Howard and you wrote some excellent rebuttals that referenced actual experience in the field.  To say that the fraud was ring-fenced inside F/F and that there is a wide moat between F/F and the ratings agencies and investment banks is, well, unbelievable (and that was the least inflammatory word I could think of).

Sun, 01/03/2010 - 12:32 | Link to Comment heatbarrier
heatbarrier's picture

Cursive, Howard and I are dissenters the spirit of communitas, it is because we care about ZH. There are two important stories IMO around MBS-ABS and they are not about the agencies:

1. The rise of non-agencies MBS and the massive fraud that accompanied it,

http://www.fdic.gov/bank/analytical/regional/ro20063q/na/2006_fall01_cha...

http://hammer.ucla.edu/watchlisten/watchlisten/show_id/129363

2. The discrediting of the MBS-ABS technology, the only challenge to the banking model, and the rise of banks so large that they are de facto GSEs.

Sun, 01/03/2010 - 12:38 | Link to Comment Cursive
Cursive's picture

@ heatbarrier

I care about ZH, too.  Reading Denniger this morning, he posits a theory that the Christmas Eve open credit line extended the F/F could be a window for the banksters to unload the principal reductions on their underwater loans/HELOC's.  If that were to happen, who would be the ultimate beneficiary?  The banks.  Who among the ZH community doesn't think the banks are pushing for these bailouts?  And there are so-called economists such as Mark Zandi saying this is exactly what we need.  F/F are problems, but it is wrong to focus on F/F as the origin of the problem.

Sun, 01/03/2010 - 12:43 | Link to Comment RobotTrader
RobotTrader's picture

No wonder the banks are now showing relative strength.

All the garbage will be offloaded from the balance sheets onto FNM and FRE, and the taxpayers will end up paying the bill.

Sun, 01/03/2010 - 13:17 | Link to Comment Rainman
Rainman's picture

Agreed. The BAD BANK (S) have already been created with this intent.

The horror.

Sun, 01/03/2010 - 11:31 | Link to Comment Anonymous
Sun, 01/03/2010 - 11:13 | Link to Comment Yes We Can. But...
Yes We Can. But Lets Not.'s picture

I worked at Fannie Mae for 5 years.  Grew to loath it, it's 'mission' to push the "American Dream" on everyone, and creeps like Barney Frank, Jamie Gorelick, Frank Raines, etc., the pathetic, racist 'diversity' training classes they made employees suffer through, and the promotion of employees on bases other than merit.

My own view is that the present economic mess in this country germinated not from a failure of free markets but from the Gubmint's having stuck its finger in the sector underlying the US economy - the housing sector - via Fannie and Freddie.

The WSJ repeated warned/editorialized over the years that the Gubmint's implicit backing of Fannie/Freddie would one day become explicit.  They were right, and today, the preliminary, soon-to-grow price tag has emerged at $400 billion.

Nice work, Barney & Co.  I nominate Barney Frank for Time Magazine Person of the Decade.

Sun, 01/03/2010 - 11:35 | Link to Comment Bruce Krasting
Bruce Krasting's picture

I sure do love to hear from F/F employees. Any others want to contribute?

Sun, 01/03/2010 - 10:19 | Link to Comment Lndmvr
Lndmvr's picture

Little of track , but I just saw some government bastard on This Week say somthing about " we have to decide what we are going to do about american terrorists who contact Aquida. (?)" Get the hell out of Missouri if you can!

Sun, 01/03/2010 - 10:00 | Link to Comment Anonymous
Sun, 01/03/2010 - 18:10 | Link to Comment ATG
ATG's picture

True understanding...

Sun, 01/03/2010 - 09:49 | Link to Comment Anonymous
Sun, 01/03/2010 - 14:11 | Link to Comment moneymutt
moneymutt's picture

if you had hired an engineering firm to deal with obvious problem the shipping channel presented, you would have sued them for doing what the ACE did, they screwed up major league, like a doctor not diagnosing an obvious classic case of a well known disease, even after the patient raises concern they have such disease. It like the doctor, says no, I refuse to test you for said disease as I know you don't have, and then patient dies of said disease.

If you look at the technical issues, the shipping channel did just what everyone technical knew it would do, allowing massive flooding if not re-engineered. Dutch et al all deal with this and have much expereince how these channels will behave. ACE was tasked and given enough money to fix this and they did not. The flooding from Katrina that went into shipping channel was not even close to a rare event, it was well within anticipated design life flooding, Kat was not even that big of hurricane, the flooding was not that bad except that the stupid channel made it bad.

Sun, 01/03/2010 - 15:54 | Link to Comment Anonymous
Sun, 01/03/2010 - 09:17 | Link to Comment Anonymous
Sun, 01/03/2010 - 13:54 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Good point Anon. All those folks in NOLO could have just moved..... That's silly. Judges decide these matters, and they have.

Sounds like you live in America. You can choose which block to live on or the Town you call home. You can move from State to State. But you can't get the Feds out of your picture.

You could not have moved anwhere and been protected from the trouble these two brought on us. You did not ask for that, but they came into our homes whether we wanted them or not.

Are you telling me you are not a little poorer as a result of the crash of the USS Fannie Mac? We all are.

 

As for the 'skin in the game', you are spot on.

b

 

Sun, 01/03/2010 - 08:24 | Link to Comment skippy
skippy's picture

Bruce can we dispense with Government agency's / financial's nomenclature and use say...fascist oligarchs .001 oner's and their minions...Just saying.

BTW Brontecapital blog is gone...Biden bite[?] so soon after the wet ink?

 

 

 

 

Sun, 01/03/2010 - 18:06 | Link to Comment ATG
ATG's picture

Still very much alive:

http://brontecapital.blogspot.com/

Sun, 01/03/2010 - 06:26 | Link to Comment Turnstile
Turnstile's picture

Mr. Krasting, it's a bit hard to take you serious when you're drooling on yourself while typing out:

I believe that she might be the first to not only blame the government for the problems at Fannie and Freddie but to make a case that the government might be responsible for some of the consequences. Ms. Singer may be onto something.

I don't want to take anything away from Ms. Singer, but really, the first to warn of Freddie and Fannie, and the consequences of the governments current actions?  There have been warnings since the GSE's first inception and when they were first made into "private" exchange traded companies--and I guarentee that major institutions buying Fredde and Fannie's MBS knew damn well that the US government was going to back them, even though it says right on the prospectus that the US government is not obligated to back them.  That's the hazard of powerful enetities, especially foreign powers, buying securities from any GSE: the inevitable political pressure will be put on to cover these losses.

Again, not to take anything away from Ms. Singer, but in the future, Mr. Krasting, you might do yourself a favor without such overly egregious promotions--or simply ask her on that night on the town in person

Sun, 01/03/2010 - 13:53 | Link to Comment moneymutt
moneymutt's picture

the funny thing is we used to complain about the quasi-govt guarantee these "private" GSE had...knowing the moral hazard that created all along...little did we know AIG and GS and BofA and Citigroup also had govt guarantees...they did not even in need the "GSE" for such backing...pathetic.

Sun, 01/03/2010 - 09:04 | Link to Comment Bruce Krasting
Bruce Krasting's picture

You guys are tough! I said that she A) Blamed the Government AND 2) SHE LAID OUT A CASE THEY WERE LIABLE.

So it was the lialbility side that I thought was unique. I would not have been able to write about battleships if it were not for her. I owe her for that.

As for that on the town stuff, I'm too shy......

Sun, 01/03/2010 - 11:45 | Link to Comment Anonymous
Sun, 01/03/2010 - 21:43 | Link to Comment Turnstile
Turnstile's picture

Sorry, Mr. Krasting, the above post should have been issued in my username; a mistakingly replyied without logging in.

Sun, 01/03/2010 - 05:54 | Link to Comment Atoyota
Atoyota's picture

OK, most of those people foreclosed upon either knew they couldn't pay or were buying as an investment to flip in a short period of time, left holding the bag or 'hot potato'.

Are these the plaintiffs?

Next the Federal government is essentially "we the people", so if a lawsuit were to succeed it would be we the people paying the claim. Unless you can lay blame on the individual decision makers here I see this as an act of screwing oneself. (haven't we been through enough?)

I think the only people to benefit on this would be the lawyers, and I'd hate to recite all the bad lawyer jokes I know.

 

Sun, 01/03/2010 - 13:50 | Link to Comment moneymutt
moneymutt's picture

 atoyota you say "...most of those people foreclosed upon either knew they couldn't pay or were buying as an investment to flip in a short period of time, left holding the bag or 'hot potato'."

Have you read the stats on these things, most people were buying a house they could afford according to the bank, or refi-ing a house that they said they should because the money was so cheap, many people that lost their houses, lost their houses due to slimy mortgage fraud that took the trusting homeowners for all they could through outrageous fees, exploding interest rates that were not declared. Many are simply losing their houses due to bad economy, and even while getting an affordable house and paying down principle with fixed rate mortgage, the 30-50 drop in prices had wiped out equity, so when jobless for a year, they can't sell house, can't make payments...lose house. Many people lose houses after getting sick hurt.

There are lots of reasons for foreclosures, not just individuals that over reached.

If house prices were run-up by policies by others that knew better, they should hold as much responsibility as individual, schmucks working for a living and just doing what all the smart guys are telling them to do.

I go with Andrew Jackson on this:

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society-the farmers, mechanics, and laborers-who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing.

Sun, 01/03/2010 - 14:47 | Link to Comment Atoyota
Atoyota's picture

This is the bottom line, no need to go any further with this.

Next the Federal government is essentially "we the people", so if a lawsuit were to succeed it would be we the people paying the claim. Unless you can lay blame on the individual decision makers here I see this as an act of screwing oneself. (haven't we been through enough?)

This is a lose lose proposition, the only winners would be the lawyers.

Sun, 01/03/2010 - 10:12 | Link to Comment Anonymouse
Anonymouse's picture

+100.  It's one thing for a small group of people to recover from the government (even if a bogus claim).  It's completely another for a large group to do so.  At best, as Atoyota says, it would enrich the lawyers.

More likely, it would end up in a wholescale redistribution of wealth.  After all, the poor were hardest hit, right?

Sun, 01/03/2010 - 05:38 | Link to Comment Gwaihir
Gwaihir's picture

So the Bismarck is the visualization of the USS Fannie Mac? Interesting...

 

Sun, 01/03/2010 - 09:07 | Link to Comment Bruce Krasting
Bruce Krasting's picture

A once mighty warship that was sunk at a huge cost of life?  Seems fitting to me. I loved the photo, and came up with a way to use it........

Sun, 01/03/2010 - 09:26 | Link to Comment mikla
mikla's picture

Very good article, and really great perspective.  Love the photo too.

A parallel metaphor with the warship is that you need to power off the engines while you are miles off shore, because its mass will drive it into the harbor without power.  So it is with F&F -- what mass, what mess.

It's a little sad, really ... the US culture has evolved into, "Something bad happened to me, so now I'm gonna get rich!"  While I understand the tragedies, and the fact that the lawyers will skim the greatest wealth (and the "victims" may not themselves be "made whole"), the reality exists that the government CANNOT be a backstop to everything.

Does anyone really believe that the government should be repsonsible for everything (e.g., infrastructure, healthcare, economy, etc.), and we can merely sue when we don't get what we want?

The money doesn't exist for all this stuff, although yes, a few hundred billion here and there might slosh to some Katrina "victims".

Sun, 01/03/2010 - 17:56 | Link to Comment ATG
ATG's picture

the kultur of moral hazard will not survive...

Sun, 01/03/2010 - 11:46 | Link to Comment Pinkfleud
Pinkfleud's picture

While I agree with what you said, you have to remember that we're such a nanny state that if the Govt didn't have their fingers in every aspect of our lives they wouldn't be liable cause they wouldn't be involved. If we want to be left alone we as americans have to start doing for our selfs and get the Govt out of our lives.

 

I know, there is no easter bunny .......

Sun, 01/03/2010 - 15:54 | Link to Comment Brindle702
Brindle702's picture

+1

Sun, 01/03/2010 - 12:40 | Link to Comment mikla
mikla's picture

Agreed, and I'd prefer that ... We can mis-direct our capital better than the government can, and aside from national defense, government really doesn't do anything very well.

Sun, 01/03/2010 - 17:37 | Link to Comment delacroix
delacroix's picture

what makes you think they do national defense well? $600+ billion a year

Mon, 01/04/2010 - 14:14 | Link to Comment mikla
mikla's picture

what makes you think they do national defense well? $600+ billion a year

A fair point, with my only response, "National defense is expensive and there is no viable alternative."

People can ONLY look to government for something so important that they are willing to waste money and hurt people.  All social programs waste money and hurt people, and I'd prefer they'd be handled by non-government because non-government would waste less money and hurt fewer people.

Pretty much the only exception is national defense because of its nature and scale -- you're wasting money and hurting people to build a $1B airplane, but there's no other way you'd get a $1B airplane.

That analogy doesn't hold for other large economies-of-scale, like national highways or NASA -- it's already shown big stuff like that can be done better and cheaper without the (Federal) government.

 

Sun, 01/03/2010 - 01:03 | Link to Comment Anonymous
Sun, 01/03/2010 - 00:59 | Link to Comment Anonymous
Sun, 01/03/2010 - 00:52 | Link to Comment suteibu
suteibu's picture

Professor Oliver Houck of Tulane Law School, "This was our 9/11. There's even more of a rationale here, because the government was largely responsible."

 

Good Lord.  We can all blame the politicians and the agencies and the banks and anyone else.  The real cause for all of this crap is a piss-poor culture where "class-action" has replaced "acting with class" in the minds of the populace.

Sun, 01/03/2010 - 15:58 | Link to Comment Anonymous
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