Have you been watching, reading or talking about the news lately?
It's Government, Incorporated. (I'll call it "GINC" for short).
First, a discussion of the mechanics of what happened to Fannie Mae, Freddie Mac and AIG. My principal source for this information is today's front page articles in the Wall Street Journal. This is a bit long, but bear with me.
In one year, AIG's market value fell from $178.03 billion to $10.08 billion. (Imagine if your house went from a value of $100,000 to $6.00. Same thing.) AIG's market value fell because it (1) insured investors in various assets; (2) made mortgage loans; and (3) and insured mortgage lenders against mortgage loan defaults. The crisis happened because as loan defaults rose, the value of AIG's assets fell. Like consumers, AIG has a credit rating, and its credit rating got so bad that AIG's customers would be able to demand more collateral for loans and cash. To meet those demands for collateral and cash, AIG either (1) needed a ton of cash to meet those demands or (2) file for bankruptcy protection. So in exchange for $85 billion in loans, AIG gave GINC the right to purchase 79.9% of AIG in the future. (Again, back to your house: Imagine you needed a mortgage to pay your bills, and you got the money from the bank, but in return the bank has the right to sell 79.9% of your house whenever it wants to.)
Now Fannie Mae and Freddie Mac
These two companies provided the funding for most of the mortgages in the country for the past five years. Fannie and Freddie are the reasons why there were no-doc mortgages, 10% down, five percent down, zero percent down, cash-out refinances, interest-only mortgages, reverse amortization mortgages, etc. GINC, until recently, did not guarantee Fannie and Freddie's obligations, but since so many of the companies that loaned money to Fannie and Freddie were foreign banks and governments, GINC made it known that it would guarantee those obligations in a crisis.
And the crisis came. People started falling behing on their mortgage payments. Those adjustable rate mortgages went up. Principle payments started. Here, in New Jersey, property taxes kept going up, sometimes by one to two thousand dollars per year. As the late payments, defaults, and bankruptcies mounted, Freddie and Fannie ran out of money to make their loan payments, run their companies, and have sufficient reserves for the defaults. And, although they tried to raise more capital, the capital markets stopped loaning them money - in part because the market knew GINC would come to the rescue.
And it did. On September 6, GINC took over Freddie and Fannie.
So what does this all mean?
Freddie and Fannie (now controlled by GINC) provide the funding for 75% of all new mortgages, and hold or guarantee $5 trillion (yes, trillion) in mortgages. According to the Economic Times, AIG has 74 million customers and insureds and 116,000 employees in 130 countries. GINC now controls them.
GINC now controls or has the ability to control your mortgage. GINC also controls the prime rates, which influence the rates charges by banks in bank-to-bank loans and loans made to the private sector. What happens if AIG continues to tank? What will Congress do to make sure GINC gets its money back?
I can't think of a more urgent call to action. Already, Congress is seriously considering creating an agency or corporation where banks and investment banks can deposit their "toxic" (bad) investments, where they can be resold over time. Get involved. Write to Congress. Write on this blog. Tell your representatives to get out of the mortgage and insurance business immediately. Let the private market unwind out of their positions and, like GINC allowed in cases such as Lehman, enter bankruptcy protection. If you want to do something and don't know what to do, call or email me anytime (
If we don't act now, there won't be another call to action. It will be a call to arms.