Why Fannie, Freddie and AIG All Had To Be Bailed Out

By Ellen Brown

“I can calculate the movement of the stars, but not the madness of men.”

– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
(more…)

By Bob Chapman
The International Forecaster
September 18, 2008

Losses and bankruptcies of the major banks that we predicted, trouble for the taxpayer who now shoulder a trillion in debt from bank failures, Why do we have to bail out Wall Street fraud? Lehman Brothers left to expire, We are watching our Zombie economy implode, Buy-outs are just throwing good money after bad, Toxic waste eats your equity capital, eats your stocks, your bonds, and eats your retirement funds. 1929 all over again.

The business end of Hanky Panky Paulson’s bazooka is glowing red hot as it continues to fire round after round of high explosive moral hazard contains an up to 85 billion dollar, two-year bridge loan from the Fed to the world’s largest insurer, AIG, to be guaranteed by the US taxpayer via the US Treasury.

Warrants convertible to up to 80% of the common stock of AIG will be pledged as collateral to secure the US Treasury’s loan guarantee to the Fed, with proceeds from the sale of AIG’s now virtually worthless assets being supposedly used to pay down the loan. It’s just Bear Stearns mixed with Fannie and Freddie. You have a loan from the Fed guaranteed by the US Treasury being used to bail out AIG directly instead of being used to facilitate the assassination of BS by a predatory lender (i.e. JP Morgan Chase), and you have what will be ultimate taxpayer ownership of AIG’s toxic waste by having common stock pledged as collateral instead of being purchased through equity injections, as with Fannie and Freddie.

The Treasury’s potential 80% ownership greatly dilutes the value of the existing common shareholders, and the Treasury has been given the right to stop dividend payments on both common and preferred stock of AIG shareholders, which means basically that they have both just been vaporized. The Fed’s Fascist Follies continue.

You, the US taxpayer, will now not only end up owning nearly worthless stock in these corporate cesspools, you have assumed all of their liabilities up to the amount of the loans/capital injections. Remember, the bondholders are still ahead of you!!! BS was $29 billion (plus), Fannie and Freddie are $300 billion just for openers, soon to grow into a loss in excess of one trillion, perhaps even as much as two trillion or more, and now we pour another 85 billion into the pot of boiling moral hazard for AIG. As we inhale the radioactive fumes from the detonation of this latest round of DU laced moral hazard, the stock markets and the dollar rally, while gold and silver decline, all thanks to the manipulation of markets that are rigged daily by the same scum who are bailing out the fraudsters. It is nothing short of surreal.
(more…)

By Darryl Robert Schoon

Last weekend started early for Timothy Geithner, President and CEO of the New York Federal Reserve. At 6 pm, Friday, Geithner called an emergency meeting to discuss the possible collapse of Wall Street investment bank, Lehman Bros.

The troubles of Lehman Bros had worsened during the previous week and the current Fed playbook dictated a solution be found on the weekend to calm financial markets opening Monday; but, this weekend, the Fed playbook came up empty, Lehman Bros. declared bankruptcy.

It’s official. The storm is here. In How To Survive The Crisis And Prosper In The Process, I predicted a global financial crisis would happen where real estate prices would fall 40-70%, stock markets would crash and a Great Depression would result.

Eighteen months later, the median price of housing in California is down 40 %, global stock markets are in disarray and although another depression has yet to begin, this weekend’s failure of Lehman Bros combined with the pressured sale of Merrill Lynch and the prospect of an AIG collapse are clear signs that we are now that much closer to the predicted end.

This is the end of a system. It is not a cyclical correction. It is not a market pullback and it is not a repricing of risk in an otherwise resilient marketplace. We are witness to the end of an economic system based on credit-based paper money that began 300 years ago in England. All beginnings have endings—and that we didn’t expect it to end doesn’t mean that it wouldn’t.

THE BANKERS’ BEGGING BOWL

Because Lehman Bros.’ CEO Richard Fuld received a $22 million bonus for his “work” in 2007 or perhaps because Fed officials had been openly criticized at their annual Jackson Hole soirée for their continuing bailouts of US investment banks, last weekend US officials unexpectedly informed Wall Street bankers that a government bailout of Lehman Bros. was not possible.

There is no political will for a Federal bailout…

Timothy Geithner, September 12, 2008

Geithner’s statement really means that Wall Street no longer possesses the requisite political muscle to extract more US dollars from a bankrupt electorate. Last weekend, Wall Street bankers finally understood that their privileged position in the welfare line of US government largesse had come to an end. This time, the banker’s begging bowl would remain empty.

With their co-conspirators in the US government no longer able or willing to provide additional US guarantees, the position of investment banks has now become increasingly fragile; and their newly hatched liquidity plan concocted by the bankers over the weekend is another indication of just how fragile their system is.
(more…)

The United States Treasury announced today that it will supplement funding to the Federal Reserve in order to shore up the central bank’s balance sheet. The Treasury said that the Federal Reserve requested the additional funding as they have gone through all their balance sheet assets trying to save the U.S. financial system.

In plain English this announcement by the Treasury means the Federal Reserve has run out of financial ammunition and as a result will start printing Federal Reserve Notes in order to buy the Treasury bills in order to fund its balance sheet. This also means this financial crisis is far from over as the Fed feels it needs to shore up its balance sheet.

Is it any wonder gold is up over $80 on the day as Ben Bernake crosses over the Rubicon in his helicopter?

by Bill Holter

To all; we are now entering uncharted territory. The government seizure of FNM and FRE opens up the next and terrifying chapter of the credit crunch. As I have posited many times before, this has NOW ENDED UP IN THE LAP OF THE U.S. TREASURY! The Treasury is now the backstop to all things paper. This will be a real life “Atlas shrugged”. There are huge implications to this step. The Treasury will now have between $5-6 Trillion of mortgage loans added to its balance sheet. The Treasury is in a huge deficit already to the tune of $10 Trillion of funded liabilities and over $70 Trillion of unfunded future liabilities. It is over. The U.S. Treasury is broke. This will take the entire banking system with it. The banking system will need to writedown $36 Billion of Fannie and Freddie preferred stock that is carried as core capital. This means at a 6% reserve ratio, that another $500 Billion of credit must be withdwrawn to keep capital ratios from collapsing. The Treasury stimulus plan was $140 Billion [remember those $600 checks]. Now 3 times that amount will have to be withdrawn from the credit pool unless Treasury doesn’t magically credit these banks with $36 Billion.

There is no telling how much the carried loans are really worth in todays market as even prime loans are only fetching .80 cents on the Dollar. This will cost at least $1 Trillion at a minimum for starters. It will all be printed. The credit rating of the U.S. will be downgraded, the interest rates the Treasury will now have to pay will increase substantially. This is so Dollar negative it goes beyond words to describe it. The borrowing ability of the Treasury is now being hamstrung by the same credit crunch that we were assured last Sept. was “contained”. I’m sorry but the ruse is over. A government running a deficit can only do two things to cover the gap, borrow more or print. They can’t raise taxes because that will implode the economy even worse than it already is. They will find it more and more difficult to borrow the sums needed until the auctions begin to fail. Then the “black helicopters” will be out in full force spreading freshly printed Dollars. The dilutive effect to the Dollar will be astonishing. We are entering the Weimar Republic phase. The Treasury will be crushed under debt and the Dollar [Fed] will be crushed through overissuance of new currency used to buy the Treasury debt.
(more…)

by James McShirley

Now we know. The giant black hole of derivatives at JPM is about to become the size of Jupiter. With the utter failure of Fannie and Freddie (a culmination of what I predicted 12 years ago) Fannie and Freddie’s massive derivatives portfolios can now be hidden from public scrutiny. These trillions of derivatives, which in likelihood have already failed, can now be whitewashed with the able assistance of the US taxpayer. Also the true values of their mortgage portfolios gets deep-sixed. This is no doubt the single largest financial failure in the history of the world. The Fed had every reason to previously discontinue M-3 reporting. Can you imagine what is about to happen to the dollar supply once this catastrophe starts getting paid for? Look for wild market gyrations as these derivatives get dealt with by the insiders who will now know both sides of the trade. What a deal, the taxpayer backs you and you know both sides of the trade, how can you lose? The derivatives may now become hidden from view, but the inflationary implications will become VERY evident. Another ominous problem facing FNM and FRE is a collapse in their pension plans and retirement funds. Retirees and current employees holding FNM/FRE stock will get wiped out, however a pension fund collapse would mean open revolt. This is another side-bailout I see coming.

Since FNM/FRE’s gigantic derivatives allegedly hedged against rising interest rates I think it’s safe to say you won’t be seeing any Fed interest rate hikes coming soon. This government takeover of the largest financial entity in America has in one fell swoop put into question ANY guarantee of debt, sovereign or otherwise. With this news gold should be up hundreds, maybe a thousand dollars if free markets were allowed. They will need to throw the kitchen sink at paper gold to prevent it from revealing the truth of what just happened. US Treasury bond prices now look egregiously high. This time it might not work. Next up for the weekend-only government news release program? Bailouts for GM, Ford, the entire banking industry, and who knows, if I’m hearing Bill Gross correctly maybe even PIMCO.

By Antal Fekete

Gold Standard University Live

The title refers to Aesop’s tale about the wolf that has lost his tail in a trap. As he felt uncomfortable being so different from others in the pack, he tried to persuade his fellow wolves that they, too, should get rid of this cumbersome and useless appendage. He declared that “the tail of a real wolf is a barbarous relic”. Read on to find out how an experienced wise old wolf answered him.

Like all of Aesop’s tales, this one also has a modern message. When Uncle Sam in 1971 defaulted on his gold obligations, he did not want people to call a spade a spade. He wanted them to call the American default, more elegantly, the ’demonetization of gold’. He was trying to persuade others to demonetize gold, too, by discarding it as a “barbarous relic”. Yet he was disingenuous enough to keep the remnants of his gold while pushing others to sell theirs. He urged them to auction off that cumbersome and useless appendage and put the proceeds into US Treasury paper.”"Cut off your tail to save my face!”

The late Mr. Ferdinand Lips asked me to write an introduction to his book “Gold Wars”. I was delighted and the outcome is reproduced below. In my dedicated copy Mr. Lips wrote the following kind words:
(more…)