Government in the Securitization Business

Thought bail outs were over?   Think again.    Last Friday the government bought $50 billion in toxic assets from three corporate credit unions.

The government’s National Credit Union Administration seized three corporate credit unions on Friday and announced a plan to separate the $50 billion of troubled assets from the industry.

What is a corporate credit union you ask? A corporate credit union is kind of a wholesale or bank to the regular credit unions which consumers use.

The NCUA press release overviews their Corporate System Resolution to deal with buying billions of worthless crap derivatives. What are they doing? Repackaging $50 billion in worthless derivatives as $35 billion in government backed derivatives. I kid you not. The government is in the securitization business.

La de da, look at the NCUA's statement on how the corporate credit unions got into trouble:

Several large corporate credit unions made large investments in private label mortgage-backed securities that are now worth much less than the amount the corporates originally paid for them. This affected corporate credit unions in two significant ways.

First, it impaired their ability to access sources of liquidity as they historically had done. Second, the corporate credit unions recorded losses on the mortgage-backed securities that threatened their solvency. In some cases, the losses were absorbed by the retained earnings and capital of the corporate credit unions, including the paid-in capital (PIC) and membership capital (MC) held by their member consumer credit unions.

In other words, corporate credit unions bought MBSes just like the rest of the Suckers & Schmucks. Now they are worthless and the credit unions' bankers are in big, big trouble. The NCUA has seized 5 such corporate credit unions:

Conservatorship of five critically undercapitalized corporate credit unions – U.S. Central Corporate FCU in Lenexa, KS; Western Corporate FCU in San Dimas, CA; Constitution Corporate FCU in Wallingford, CT; Members United Corporate FCU in Warrenville, IL; and Southwest Corporate FCU in Plano, TX.

While the NCUA claims this isn't a government funded bail out, the reality is they are creating a trust to hold these toxic assets, mortgage backed securities and sell the ones with the government guarantees:

Isolate and fund legacy assets - Legacy assets will be segregated and managed in an asset management estate. The legacy assets will be securitized. This strategy will result in a lower overall cost of resolution than immediate outright sale of the legacy assets and will also allow the costs of resolution to be funded over ten years rather than immediately. By lowering the overall cost and spreading the assessment period over ten years, the NCUA plan minimizes impact on credit unions and provides adequate time to plan for and adjust to the assessments.

While the NCUA claims this isn't a bail out of the credit unions, in a way it is because Fannie Mae & Fannie Mac guarantee many of these mortgage backed securities (MBSes), which in part explains the never ending black money hole of Fannie and Freddie.

Bloomberg has an initial cost estimate of $9.2 billion, but this money is from the retail credit unions, not the indirect costs to our pockets. Obviously packaging up a bunch of MBSes, CMBSes and the like with a government guarantee and reselling them, implies more real losses to tax payers, funneled through Fannie Mae and Freddie Mac.

That said, if the NCUA was not doing a resolution trust, the losses would be much greater. So, in terms of bail out structures, at least they aren't going to Congress for a blank check.

Did you know the FDIC also is in the securitization business?

The government agency said late Friday that it sold securities in a deal backed by $471.3 million of performing single-family mortgages originated by 16 failed banks. The transaction, part of a pilot program, marks the first time the FDIC has securitized assets during the current financial crisis, it noted.

This is the current amount of mortgage backed securities held by the Federal Reserve:


Durable Goods


Considering the $1.1 trillion, what's a few more MBSes under the rug, hidden by Fannie Mae and Freddie Mac, not sloughed off to the Federal Reserve balance sheet? What's $50 billion in the $5 trillion in mortgage guarantees by Freddie Mac and Fannie Mae.

The CBO recently estimated Fannie Mae & Freddie Mac will cost $53 billion over 10 years.

Here is the mortgage debt outstanding Q2 2010 report, detailed, unlike the Federal Reserve flow of funds (that I could determine).

There are strange things on this report that I do not quite understand. Namely, the GSEs (Fannie, Freddie, Ginnie) guaranteed about $5 trillion in mortgages, yet officially guarantee Mortgage backed securities. Note the massive drop off in MBSes from this graph, but this is an illusion.


Durable Goods


While the above GSE mortgage pools dropped like a stone, at the same time we have huge spikes in Fannie/Freddie mortgage debt outstanding in Q1 2010. The Federal National Mortgage Association, aka Fannie Mae, has a huge spike in mortgages, from the above balance sheet. In Q4 2009, Fannie held $417 billion, then in Q1 2010, Fannie Mae ballooned to $3,002 billion, Q2 2010, $2,992 billion. Then, the Federal Home Loan Mortgage Corporation, aka Freddie Mae, looks like: Q4 2009 $128 billion, then in Q1 2010: $1,908 billion, Q2 2010: $1,901 billion.

So, it appears that the Federal Reserve is moving the books and accounts around, taking the MBSes and reclassifying them as mortgages and seemingly doing ???

Examining the flow of funds report and the above has been an exercise in Where's Waldo?  Regardless, these toxic assets, derivatives, MBSes, CMBes and the like still exist and to make matters stranger, now the government is getting into the business of creating more of them.