United for Peace of Pierce County, WA - We nonviolently oppose the reliance on unilateral military actions rather than cooperative diplomacy.

On Friday, as two enormous "Government Sponsored Enterprises" threatened to sink beneath the turbulent waters of a gathering financial maelstrom, the London Financial Times reviewed the nature and history of "Fannie Mae" and "Freddie Mac" and explained their role in the financial system.[1] -- Since "[b]oth companies have a government charter to increase the amount of affordable housing in the U.S" and "both have a $2.5bn line of credit with the U.S. Treasury, investors have long considered them to have the implicit backing of the federal government," Michael Mackenzie wrote. -- "Their sheer size, however, has long been seen as constituting a systemic threat for the financial system as their core capital represents around 1.5 per cent of their $5,000bn in total debt exposure. This degree of leverage places both GSEs in a precarious capital position as the housing market continues to deteriorate and foreclosure rates keep rising." -- Both Fannie Mae and Freddie Mac are "big users of interest rate derivatives in order to protect their portfolios against large changes in market rates. The GSEs hold $2,300bn in notional derivative contracts with the banking system. . . . In 2004, both companies were caught in an accounting scandal over their use of derivatives and were compelled to reduce the size of their mortgage assets. . . . Both companies have reported hefty losses in recent quarters, hurt by the adverse housing market and losses from derivatives." -- BACKGROUND: Derivatives are essentially speculative bets, packaged and sold as securities and held as assets, though they have little in the way of genuine assets to back them. -- Two years ago, political analyst Kevin Phillips warned of the potential danger of unregulated credit derivatives and hedge funds. -- Exotic and speculative forms of finance have proliferated in housing, mortgage, and credit-card markets, and have given rise to fear that an enormous “credit bubble” could burst and “yoke middle-class debtors” to “quasi-indentured status." -- Phillips believes such an event could undermine “world stability” and produce Asian, most likely Chinese, ascendancy (American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century [N.Y.: Viking, 2006], pp. 376-82). -- In a follow-up volume published several months ago, Phillips described in greater detail how "securitization" increased tenfold from 1995 to 2003, producing enormous profits for a deregulated financial sector (Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism [New York: Viking, 2008], p. 97). -- According to Phillips, sheer greed and an irrational belief in the "magic of markets" are the only plausible explanations for the general indifference shown by the creators of this system (still inanely referred to as "conservatives" by the mainstream media) to the uncertainty of how securitization would stand up when faced with a major liquidity crisis. -- Such a major liquidity crisis began in August 2007, a crisis aggravated by arrival of Peak Oil at the same time. -- Upon the evolution of housing prices over the next several years now depends the fate of banks and the U.S. financial system (ibid., pp. 101-19). -- On the bright side, Phillips argues that the crisis may contribute to the U.S. "abandoning the hubris of military and financial imperialism" — a positive development, since "both postures represent drags on the American future" (ibid., p. 209; these are the book’s last words)....

NEW YORK -- Fannie Mae and Freddie Mac have long occupied a unique place within the U.S. financial system, trading as publicly listed companies, with what investors perceived was an implicit guarantee from the Treasury Department.

Both companies have a government charter to increase the amount of affordable housing in the U.S. and their activities and regulation has long been a major point of debate in Congress.

Fannie -- the Federal National Mortgage Association -- was created in 1938, to help the housing market during the Great Depression. In 1968, Fannie was given a new charter by Congress and became a publicly traded company that could seek funding from the private sector.

In 1970 Congress created Freddie Mac -- the Federal Home Loan Mortgage Corporation -- as a competitor for Fannie, and over the ensuing three decades, these so-called Government Sponsored Enterprises grew rapidly. Between them, they hold outstanding debt of $1,600bn (£804bn, €1,000bn) and have debt and guarantees on mortgages in the region of $5,000bn. That compares with the U.S. Treasury market of $4,500bn.

They are also big users of interest rate derivatives in order to protect their portfolios against large changes in market rates. The GSEs hold $2,300bn in notional derivative contracts with the banking system. Their business model involved the sale of debt, a mixture of short-term notes and long-dated bonds to investors, and using the proceeds to purchase mortgages.

As both have a $2.5bn line of credit with the U.S. Treasury, investors have long considered them to have the implicit backing of the federal government. They also hold triple-A credit ratings and this enables them to issue debt at cheaper levels than the yield on the mortgages they buy.

Their sheer size, however, has long been seen as constituting a systemic threat for the financial system as their core capital represents around 1.5 per cent of their $5,000bn in total debt exposure. This degree of leverage places both GSEs in a precarious capital position as the housing market continues to deteriorate and foreclosure rates keep rising.

In 2004, both companies were caught in an accounting scandal over their use of derivatives and were compelled to reduce the size of their mortgage assets.

As the housing market has declined over the past year, the GSEs received permission this year to buy more mortgages. Their capital constraints were also relaxed as Congress sought to use them to shore up the mortgage market.

Both companies have reported hefty losses in recent quarters, hurt by the adverse housing market and losses from derivatives. That has forced them to raise more capital, but their overall capital position still remains very low. The stock prices for both companies have plunged this year as investors expect further capital raising, which will dilute their equity value.

In turn, the expectation among investors that they are “too big to fail” reassures bond holders of GSE debt that any government rescue would emphasise the mortgage and agency debt guarantee.