There's Nothing "Fair" about it

Bruce Krasting's picture

When the federal government guarantees a student loan, that loan is subject to accounting treatment that was established by the 1990 Fair Credit and Reporting Act (FCRA). It should come as no surprise that the FCRA methodology is not “fair” at all.

The Congressional Budget Office (CBO) succinctly described the problem in a new report.  (Link):

FCRA Treatment Does Not Give a Comprehensive Accounting of Federal Costs.

In CBO’s view, FCRA-based cost estimates do not provide a full accounting of what federal credit programs actually cost the government because they do not incorporate the full cost of the risk associated with the loans.

A few questions come to mind:

How extensive is this problem?

Is there an alternative to FCRA?

How large is the understatement of risk at the federal level from the loan guaranty programs?

The answer to A is that the problem is enormous. CBO has provided some details:



CBO’s list of outstanding federally guaranteed debt comes to $2.665 Trillion. But that is just a part of the story. Note that the report includes $1.18T of FHA guarantees and $258B of Veteran's Home loans. These guarantees all relate to mortgages. If the credit risks associated with FHA’s/VA's mortgage activity is included in the numbers, then why are the guarantees and loans provided by Fannie and Freddie excluded? The answer is that a more appropriate method of accounting would trigger a a huge increase in total debt. No one wants that, right?

The CBO waves away over $6 Trillion of additional debt with this very simple footnote:

Excludes the activities of Fannie Mae and Freddie Mac, purchases by the Treasury of securities issued by Fannie Mae and Freddie Mac, the financial assets acquired through the Troubled Asset Relief Program, and certain other transactions that involve credit assistance.

Adding all the pieces that should be included brings the total to $9 Trillion!

CBO has recommended that a different methodology be adopted to evaluate the cost of federal loan guarantee programs:

Fair-Value Accounting Provides a More Comprehensive Measure of Federal Costs

Fair-value accounting recognizes market risk as a cost to the government. To incorporate the cost of such risk, fair-value accounting calculates present values using market-based discount rates.

CBO described how significant the understatement of risk is. It provided an example of the government’s accounting treatment using a $100 million three-year loan. The results:



CBO estimated that there is a 2.9% difference between the current method of accounting (FCRA) and Fair Value. Unfortunately the federal government does not make three-year loans. It’s a long-term lender. The guarantees extend for 30 years on mortgages, 20 years for student loans. Some loans made to finance solar projects extend to 40 years. The longer the maturity of a guarantee, the greater the upfront cost using the market based approach. A realistic assessment of the imbedded risk of the long-term guarantees would be closer to 4%. That would put the understatement of risk at around $400B.

The obvious reason why fair-value accounting is not used to evaluate the federal credit programs is that it would add to the current year’s budget. No one wants that, right? CBO says it all:

Fair-value estimates often imply larger costs to the government for issuing or guaranteeing a loan than do FCRA-based estimates.

If fair-value had been the methodology used to evaluate the risk the government took with its loan book the world look quite different today.

I) If fair value had been the standard there would have been a reserve for a portion of the losses. If there had been a previously expensed safety net of $100 - 150B the 2008-09 losses would have been more manageable. As a result, a range of different options would have been available to address the collapse of housing.

II) If the true (truer) cost of the guarantees had been applied starting in 2000, we would have avoided the ensuing massive bubble in real estate; we could have avoided the horrific collapse in housing eight years later.

Not only does FCRA treatment hide the true cost of credit extension, it actually turns debt into a budgetary benefit . When the government makes a loan guarantee it realizes a net gain. Referring to the $100 million loan described above, the CBO shows that booking a new guarantee reduces the current year budget deficit:

According to the rules for budgetary accounting established in the Federal Credit Reform Act of 1990, the net cash flow in each future year is discounted at a compounded annual rate equal to the yield on Treasury securities with the same term to maturity. The FCRA subsidy of -$1.6 million (that is, a net reduction in the budget deficit) is the sum across all years of the net cash outflow from the government in each year discounted on a FCRA basis.

Rather than create a reserve against future losses, the government realizes a reduction in the current year deficit. So the “solution” to a big budget deficit is to make more loan guarantees! This is, of course, what has happened.



If a financial institution ran its books like this, the SEC, FDIC and the Federal Reserve would put it out of business. But when the politicians do it, they get re-elected.



If the $2.65T of debt identified by the CBO is added to the Fannie/Freddie debt ($6T), the Trust Fund IOU’s ($4.6T) and Debt Held by the Public ($10.4T, it comes to $24T. That would put true Debt to GDP at 160%. So in reality, the USA is worse off than Greece, Portugal, Spain or Ireland. In another four years, the additions to all of these categories of debt will bring us past Japan’s 200% Debt/GDP.



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ekm's picture

Yo Bruce

You are the KING OF DIRT DIGGING. A gazillions of thank yous.

Did you work as a garbage man in your youth:)?



Bear's picture

"A realistic assessment of the imbedded risk of the long-term guarantees would be closer to 4%" ... This is only true if BHO is not elected this year. If he is all will be 'forgiven' and the potential 4% becomes a real 25%

Lumberjack's picture

Great work Bruce!  Short sweet and to the point. I have been keeping tabs on this one for awhile too. The for profit education bubble is filled with many players including senators and their spouses, (and oh, is there a story there)... kin of former presidents (yes that is plural) and the lobby. I suspect that TSWHTF shortly. 

BTW, the stories you have done on the solyndra story were spot on and you wouldn't believe what is happening with wind.


Love the art work. 



Don Levit's picture


That's not my idea.

But, many people on,, and I assume angry bear (I was kicked off for citing too many reputable government sources to Bruce Webb's liking) attest that all government bonds are equal, whether borrowed against or not.

Just as a dollar is worth something in your wallet, so, too, are all government bonds.

I posed this question several times without a reply:  "In that case, is Medicare Part D fully paid-up?"

Don Levit

blunderdog's picture

The connection is lost on me.

Medicare-D is a spending program.  It's not collateralized.  It's not funded at all. 

What does that have to do with the difference between a "dollar" (zero-coupon bond) and a Treasury bond?

Dollar = "just a fucking piece of paper"  AND Treasury bond = "just a fucking piece of paper"

I'm now even more confused by the "left-leaning" thing.  There's nothing at all right or left about any of this.  This is basics of finance and accounting.

Don Levit's picture

Devil's Principle:

I agree with you that the loan must be collateralized for Social Security.

Many left-leaning people would say that the Treasury securities are fully collateralized, because they are backed by the full faith and credit of the U.S. Government.

They see no difference between Treasuries which have been fully borrowed against (real dollars, that were borrowed from the Social Security trust fund), paid current expenses, and lowered deficits, and those Treasuries which have been paid for, say, from individuals.

Both securities are as good as gold!

Don Levit

oldschool's picture

"Many left-leaning people would say that the Treasury securities are fully collateralized, because they are backed by the full faith and credit of the U.S. Government."


Collateral is something you can seize and sell to repay a defaulted debt.  How does that work with "faith and credit"?  

It is hopelessly circular to say this promise to pay (Treasuries) is secured by the debtor's promise to pay.  But that's the world we live in.

blunderdog's picture

   Many left-leaning people would say that the Treasury securities are fully collateralized

Where'd you get that idea?

Pitchman's picture

It is all obfuscation.

Look at what is happening to the Carlyle Group IPO ... bad intent from the very beginning.

"Has The Rank Criminality MF Global Greased The Skids For Carlyle Group's IPO?

Or, is it just a foisted "red flag" as the Washington based asset management firm puts itself up for half of it's rival Blackstone group's IPO, though each has about $150 Billion under management. Whatever the case, their one sided deal could be greed shooting itself in the foot.

Talk about negative baggage: Bin Ladan, inside dealings with the House of Saud, terror ties and blatant conflicts of interest between their adviser Bush Senior and GW.  As the most negatively lopsided IPO in history who in their right mind will invest in these sociopathic baby killers?

"When people whose job is to buy low and sell high – and who have done a pretty damn good job doing it – are selling, why the hell would you be buying? Do you think you’re going to get a better return than they are? Best of luck!" -  Stone Street Advisors...

Aside from the putrid odor can anyone smell a market top?"

See: WAR PIGS: Carlyle Group's Lopsided IPO That No One Cares About


Warren Buffett: The Paradigm Puppet - Who Is Worse; The Criminals Or The Men Who Enable The Criminals?


onlooker's picture

Very Good article Bruce. I find it quaint that almost all who read ZH may agree that the U.S. Government statistics are not always 100%. Impure or tainted, spun or twisted, a ruse or a deception.


So when one of the smartest men in the room makes observations based upon questionable data reports, I must wonder where we are in this quagmire. Obviously, one has to base observations upon something and then use that data observation to make opinions.


Kinda like finding out the Tooth Fairy, Santa Clause, and Obama’s Transparency of Government are not real.

DevilsPrinciple's picture

For example, future Social Security payments, those beyond the current year, are not considered a liability.

If you don't have a liability, why set up a reserve?

Don Levit


The liability and risk is in non-performance. All loans MUST have collateral and the associated reserve (aka liquidity) to fund non-peformance at some level. So your idea only explains how we got here in the first place.

Blue Horshoe Loves Annacott Steel's picture

I keep telling people, "There's no need for terrorists to attack the USA.  The US government will finish the job for them & the people'll cheer right along as they all go off the cliff together".

The terrorists are probably relaxing on a beach in the Caribbean, patiently waiting for the USA to implode.  No need for them to waste energy on the US.  Enjoy another Rum Punch & hit the waves!

Ben Bernanke's done more damage than any 1 suicide bomber could dream about.

Dan Conway's picture

Bruce, way to kill a good buzz!  The market and AAPL is up again and you post this stuff. 

By the way, who is going to pay this all back?  The answer is nobody!  Which means the people with their palms up will be disappointed some day and they will make those Greek protestors look like rank amatuers.  Too bad they won't protest where it properly belongs like DC, state capitals, and city hall, etc.  They will loot the malls, their neighborhoods, and parks.  Go figure!

HoofHearted's picture

Greece is a trial balloon. If we take 80% off the US debt, then it is much more manageable. I would not be long UST for any long period of time...

Blue Horshoe Loves Annacott Steel's picture

This article tells the truth about the deficit.  That is un-American!

That just emboldens the terrorists by weakening our government's ability to run up more debt.

Zerohedge is a terrorist organization.

Fix It Again Timmy's picture

Well, since NOBODY IN DC is ACCOUNTABLE for ANYTHING, the edges of the known universe as well as any unknown universes are the limit - WHEE!

Amish Hacker's picture

Thanks, Bruce. Another one of those articles that could be entitiled, "It's Even Worse Than They Want You to Know."

Don Levit's picture

The reason this debt is not included in the budget is that the budget is a cash-based budget.

For example, future Social Security payments, those beyond the current year, are not considered a liability.

If you don't have a liability, why set up a reserve?

Don Levit

Common_Cents22's picture

In other words Don, a ponzi scheme.   Depends on more new inflow money replacing the outflow, don't worry about the future ;)

cbaba's picture

You can find a good job in Obama government.

NotApplicable's picture

Why sure it's "fair." It's the four-letter "F-word" after all.

FAIR: Fuck All Ignoring Reason

NotApplicable's picture

Besides, all this off-balance sheet mortgage debt will be the basis of the new currency.

(Pope tol' me so)

NEOSERF's picture

I got to plant me some apple trees and start building a bread board...

Shizzmoney's picture

But we can just bomb the shit out of people, so it doesnt matter.

Well, until we ask soldiers to work for free.  THEN DC might have a little problem.

AndrewCostello's picture

This is the whole problem - all this off balance sheet debt and the constant money printing, some declared, some not.  Eventually this is all going to fall apart as even the stupidest people are going to pick up on it sooner or later.


If you'd like to protect yourself from the financial apocalypes that is coming, then read the book that I read and follow it to the word.

Blue Horshoe Loves Annacott Steel's picture

After throwing in such shameless promotion, shouldn't U change your name to "Abbott & Costello"?

Common_Cents22's picture

Nothin wrong with believing in your work!   Heck, I give all my own comments a green thumbs up.  Afterall, if I didn't like what I posted, I wouldn't post it.  ;)

ViewfromUndertheBridge's picture

As difficult as it is I am attempting to trade profitably through this historical moment, for my children and theirs. They will look back as the information Bruce provides will have entered the history books, and to their generation it will all seem so obvious. I keep harking back to the Weimar period, almost no-one in Germany understood what was happening.

A heartfelt thank you, Bruce, for helping us understand in real time. 

lincolnsteffens's picture

Ahh Bruce, but the MSM news is so upbeat today. Why spoil the party?  This reminds me of the Twilight Zone episode where the surgeons are trying to fix the hideous face of a woman. Until the procedure is over you can't see the faces of anyone. When the lights go on we see the surgeons and the nurses are hideous and the failed surgery reveals a beautiful woman.

When the lights eventually go on and the true economic picture is discovered the reaction of the public will be far worse than the fictional surgeons.

Thanks for the report.

Rainman's picture

The term ' fair value ' is as subject to interpretation as the BLS employment numbers. All .gov accounting is politicized, pasteurized and similar. The headline number is only what they want it to be.

Begin with the desired numerical result and work backward.

JohnKozac's picture

I really enjoy your articles...thanks.

disabledvet's picture

Here's a little "sweetener" your way: Export/Import Bank. One of my favorite museums I happened upon was in Fort Benning, Ga (open to public...see for yourself!) outside was a war prize from the First Gulf War. YEP! "An M1A1 Abrams tank financed by the export/import bank sold (?) to Saddam Hussein!" oh, yeah..."and in this tight credit environment they're expanding"!

Ruffcut's picture

My favorite museum was in san diego , "The Museum of Man"

My brother asked me whether the building was shaped like a BIG TURD.

Judge Arrow's picture

So what you are presenting here, Mr. Krasting, is evidence that our government should be declared  pyschotic by virture of its lethally destructive behavior and dropped into a loony bin.

Now, in my court we take transgressors out and hang the sonsabitches after a fair trial and let the psychobabblers work it out later among themselves.

Are we ready to go to trial, sir?

rsnoble's picture

That's a lot of $ to train future Mcdonald's assistant managers.

Blue Horshoe Loves Annacott Steel's picture

Whoever U are, your comments are 99% funny.  Keep it up.  We all need more laughs watching this clusterfuck.

Dermasolarapaterraphatrima's picture
MF Global Still Set to Pay Bonuses



Three top executives of MF Global Holdings Ltd. when it collapsed could get bonuses of as much as several hundred thousand dollars each under a plan by a trustee overseeing the securities firm's bankruptcy case, people familiar with the matter said.

Everybodys All American's picture

why shouldn't they get bonuses? They executed the plan perfectly.

Now it's time for the Justice Department to begin executions.

Encroaching Darkness's picture

Now it's time for beginning executions at the Justice Department.


there, FIFY

miker's picture

Outstanding report!  Thanks for the work.

I think I need to buy a gun's picture

TV is saying we are in great shape and since we are the reserve currency and can print unlimited amounts of cash we can't default,,,,,everything is fine,,,,,,

Common_Cents22's picture

When everything collapses we can sue CNBC!   brilliant!

ISEEIT's picture

Insane. If it it were not such an outragous thought, one could almost come to the conclusion that the U.S. is being intentionally set-up for collapse. In reality though I'm sure that those pushing the buttons and pulling the levers have a plan to make things right? They surely must. Nothing to worry about, it's all under control.

Common_Cents22's picture

That's what happens when nobody is accountable, nobody at the wheel.   A rudderless ship in an ice berg field.   Nevermind, just pass the drinks around!

Hey, I feel pretty good!  Then man says who fell off the top of the 20 story  building as he passes the 10th floor.

pvzh's picture

"I'm sure that those pushing the buttons and pulling the levers have a plan to make things right?"

For themselves, yes. Everybody else -- not so much.

Badabing's picture

If I shorten a 1 foot rule and measure myself have I grown?

Do I actually have 100 up ticks?

Is that air your breathing?

Thanks Bruce

LawsofPhysics's picture

Deep thoughts...  but more importantly, does she like me?  What is it with women?  My wife worry so much about what all the other parents think of her.  I keep trying to tell her it's a waste of time because in reality everyone else is really worryied about what she thinks of them.

Hell, what do I know, same as it ever was.

narapoiddyslexia's picture

They're worried about what she thinks of them because she's so worried about what they think of her?

Which brings us back to the thread.

The US govt is hiding its "Greekness" from the other sovereigns because its worrried about what the other sovs will think, just as the other sovs are hiding their equally bad problems from us.

The bankers sit back, knowing all about it, pulling all the strings, laughing all the way to the office.


LawsofPhysics's picture

Nice work Bruce, but come on.  Since the 70's the "art" of accounting has become all about hiding risk and never ever ever letting true price discovery actually happen.  Same as it ever was, "mark to unicorn" and ZIRP forever!  Only those with a politician in their pocket don't worry about risk.  Fewer and fewer are willing or can afford to play the game.  Unfortunately it only ends when everyone stops playing, and that could be a while.

bank guy in Brussels's picture

The money quote here from Bruce Krasting:

« ...true Debt to GDP at 160%. So in reality, the USA is worse off than Greece, Portugal, Spain or Ireland. ... »

Great work, Bruce, as you do so often.