Take a load off, Fanny
And you put the load right on me
- "The Weight" by The Band
Now that Fannie Mae and Freddie Mac have been bailed out by the taxpayer at the cost of hundreds of billions of dollars that we simply don't have, we can now start the next round of the most popular game on Wall Street today -- which group of thieves will get bailed out next?
The Great Taxpayer Bailout is a wonderful game. For instance, Richard F. Syron, the departing chief executive of Freddie Mac who ran that company into the ground, will be getting a severance package of $14.1 million taxpayer dollars. Syron has taken home about $17 million since 2004.
Daniel H. Mudd, the departing CEO of Fannie Mae will be collecting $9.3 million taxpayer dollars on his way out, after destroying a 70 year old institution. Mudd collected about $12 million in pay since 2004.
Both of these guys were hired in the wake of massive accounting scandals in 2003 to clean them up. So how did they do?
In interviews this week, Falcon took issue with the companies' current accounting, saying they have taken only small writeoffs in relation to their billions of dollars of paper losses on mortgage-related investments. The companies have refrained from taking a larger hit on the grounds that they expect the investments to recover their lost value.
"At some point the notion that their assets are only temporarily impaired becomes a fiction and a fraud," Falcon said. "If we're not there, we're approaching it very, very soon."
Let's not forget former Bear Stearns CEO, James Cayne, who sold his stock options for $61 million around the time of the Fed-funded bailout. Of course that's nothing compared to Countrywide CEO Angelo Mozilo, who walked away with a cool $110 million when Bank of America bought out the faltering firm.
But let's not dwell on the past. We are looking towards future bailouts for fraud and/or incompetence now. So who's next?
Another Bush Administration bailout disaster
The most obvious candidate is a government institution - the Federal Home Loan Banks.
In a sign of how close this is, just yesterday the U.S. Treasury extended a secured credit facility to these government- chartered cooperatives.
The Treasury, which made similar credit available to Fannie and Freddie as the U.S. today took over those companies, received the authority to provide the credit in a housing law enacted in July. Like Fannie and Freddie, the nation's 12 FHLBs have been paying record yields over U.S. government notes to sell bonds in the so-called agency debt market.
The reason that these institutions needs these ultra-low loans from the taxpayer is because they lost $4.6 Billion last quarter, out of its $21 Billion capital reserve. You can do the math and see how long that can continue.
The FHLBs have about $1.34 Trillion in assets, and thus are about 1/4 the size of Fannie and Freddie.
“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”
Of course this didn't happen by chance. The Bush Administraton changed the rules less than a year ago to expand the FHA into more risky loans. This increased the FHA's representation in the mortgage market from just 2% to 10%, with predictable results.
The FHA is suffering from the same problems as Fannie and Freddie.
FHA’s delinquency rate has been rising steadily since 2000-2001, and is now approaching critical levels. Consider that at 16.81% delinquency, more than 1 out of every 6 FHA single family borrowers are delinquent on their loan.
Da Boyz on Wall Street
When it comes to Wall Street investment banks, it's almost easier to list the ones that aren't in trouble rather than list the ones that are. Because of that, the FDIC is in trouble.
The next rumored deal involves a shotgun marriage involving Lehman Brothers, a Wall Street giant, to foreigners or whoever is willing to take it on with its debt problems. But perhaps the most worrisome is the possibility that the 150 banks on the Federal Reserve’s watch-list will all go under and, if that happens, the Federal Deposit Insurance Corporation will have to be bailed out.
It won't take 150 banks to push the FDIC over the edge. It'll only take one or two big ones. In fact, Sheila Bair, the chairperson of the FDIC, recently floated the idea of "tapping lines of credit with the Treasury for working capital," in her testimony before Congress.
The FDIC currently has $45 Billion to cover future losses.
As for who might be the next bank to be bailed out, the one at the top of everyone's list is Lehman Brothers.
There remains intense speculation that Lehman Chief Executive Richard Fuld might be forced to sell off its Neuberger Berman asset management division to help buoy the investment bank's ailing balance sheet...
However, an outright sale of the prized asset has been seen as harmful to both Lehman's revenue stream and debt ratings.
Lehman Brothers CEO, Richard S. Fuld made about $354 Million in compensation over the last 5 years.
Running a close second behind Lehman Brothers in the race to insolvency is Washington Mutual.
WaMu's CEO Kerry Kilinger was fired over the weekend. Then on Monday the Office of Thrift Supervision forced them to sign a “memorandum of understanding”.
What the OTC has done is put them on notice.
WaMu has $120 Billion of highly dubious mortgages on their books, and $40 Billion capital to support the bank. That's not a good combination.
WaMu could wipe out all of the FDIC's holdings just by themselves.
Washington Mutual CEO, Kerry K. Killinger made about $14 Million last year in compensation.
Wachovia CEO, G. Kennedy Thompson made nearly $25 Million last year in compensation.
An honorable mention to this list would be Merrill Lynch.
I should note that a multi-billion dollar bailout for GM and Ford is already in the works in Congress, but I wanted to stick to financial firms for this article.