This Ultimate Financial Meltdown Insider Is Worried… About Another One

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Editor's Note: Shah spotted this crisis unfolding. It affects your money, so he wanted to let you know about it immediately. Here's Shah…

Do you remember the financial crisis of 2008?

The one caused by a meltdown in mortgages… trillions of dollars of which were owned and "guaranteed" by government-sponsored enterprises Fannie Mae and Freddie Mac?

Do you remember that Fannie and Freddie had to be bailed out by the government – I mean taxpayers – so their total implosion wouldn't trigger a global depression?

Well, the man behind their bailout, former Treasury Secretary Henry Paulson, remembers, and vividly.

He's now going public with his recollections because Congress is blocking theirs out… reaping the profits… and setting the table for a repeat performance…

The "Deadbeat Duo" Is Still on the Loose

The Washington Times recently conducted an exclusive interview with Mr. Paulson, the architect of the Fannie and Freddie rescue.

That rescue put them into a government "conservatorship" before they destroyed the financial world.

As Paulson said, "Every financial crisis has its roots in flawed government policies that lead to excesses in the markets that build up and build up, and then you get a bubble and it bursts."

Thing is, he wasn't talking about then. He was talking about now.

The interview precedes the release in theaters this week of Hank: Five Years from the Brink, a documentary collaboration by Bloomberg BusinessWeek Films and award-winning director Joe Berlinger. It's about the drama and debacle of the mortgage meltdown.

Paulson used the interview to express his fear of the increased dominance of both Fannie and Freddie since the crisis and how their still massive size and subsequent profitability (yes, they're very, very profitable now) has crowded out private mortgage insurance operations and once again puts the country and taxpayers at risk.

Paulson cites Congress' failure to break up the leviathans and instead their support of them to reap the billions of dollars in profits they now feed the Treasury. He believes that's the reason they're still around and the reason he's worried about another crisis.

Paulson believes, "Political leaders and the public have not focused as much on their critical role in the housing debacle, perhaps because he stepped in and took control over the Goliath's before a crisis occurred, in what he views as his single biggest move to stem the crisis."

"We took action before they started to unravel, before there was a failed auction. The public never saw that horror show," he said. "People never focused on what their failure or near-failure would have done," he said.

He suggested the ensuing crisis would have been much bigger than the financial collapse in the wake of the Lehman bankruptcy. They [FHLMC & FNMA] were collectively nine times bigger than Lehman Brothers "and the massive damage to the housing and mortgage markets could have been many times worse."

Paulson said, "It perplexes me that nothing has been done and both parties seem content to just allow the housing market to drift through yet another era of government dependence and dominance that potentially is creating even bigger market distortions."

The problem, which Paulson doesn't go into in depth, is that as of this week, Fannie and Freddie have collectively paid the U.S. Treasury more than $187 billion in "dividends" from operations. It's an amount larger than what the government said they used to bail out the deadbeat duo, because the payments include interest.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Tom | March 7, 2014

    Where do you get the idea that everything is collasping. The housing market, stock market and job market are all moving up. The banks are getting their finances in order. I think you are merely looking for attention.

    • fallingman | March 8, 2014

      Where? Uh, from HANK PAULSON.

      (Your clue that this wasn't some made up concern by the author might have come from the title … "The Ultimate Financial Meltdown Insider Is Worried." And once you heard the name Paulson, you should have been paying attention.)

      Note: By using the ing form … "collapsing" … you've moved the event into the present. No one said everything is "collapsing."

      This is a WARNING of what could happen … or, as I see it … what is about to happen. Only a matter of time.

      Your comment is akin to that of the skier who ignores the avalanche warning, because everything's fine. The skiing is good. Lots of snow … kinda wet, but hey, no one's been killed yet. Never mind that incident 5-6 years ago.

      And, as for those stringently reviewed mortgage apps. you mention below, they tightened up a little. A whole lot of those loans are still a long way from what any private lender would even consider. That's the problem.

      I'm with Paulson. I believe we'll get to see just how sound those mortgages are, as the loose underwriting standards are potentially "creating an even bigger market distortion" to use his words. If Fannie and Fredie weren't willing and able to make bad loans due to their government sponsorship and backstopping, why would "we" … ie. the politicians … need them?

      On the subject of Paulson, the bailer in chief, just hearing the name makes me ill. The guy should be in jail Interesting to hear these comments from him of all people.

      Very well done article Mr. G. Thanks.

  2. Tom | March 7, 2014

    Fnma is much stronger now and mortgages are reviewed stringently as before they were not so you scare is nonsense. FNMA is strong and the government can let them go back to a private institution without concern.

  3. woody | March 7, 2014

    What's going happen to gold and silver in the next year or so

    • mike | March 7, 2014

      Gold and silver will at least double in the next year to eighteen months !!!!!!!!!!

  4. Jeff P. from Canada | March 7, 2014

    I am a diehard capitalist and I do not believe that governments should be in the business of competing with other businesses. But in this case Fannie and Freddie are backing up the private lenders and not really competing with them. So I am torn between my capitalist leanings and this situation with F&F. As hard as I look, I just can't see the downside in this case, except maybe this: it could set a precedent for government involvement in private enterprise. If that becomes the norm, then we are on a slippery slope to socialism and history has already proven that socialism does not work in the long run.

  5. Dan | March 7, 2014

    During the Clinton administration Fannie Mae stock was steady at $75-85 per share with a $3.00 -3.50 annual dividend. They had some problems and fell out of favor with the Bush Admin.

    Now Obama has been using the 6.5 billion dollar quarterly repayments to the government as his spending cash since Obama refuses to make a mutually agreed upon budget between the Democrat and the Republicans and refuses to be accountable about the government money he spends and why.

    Recent comments about Fannie Mae is that they are worth at least ten times their present value as reported by Fairhome who has been buying numerous shares. It will take a f

  6. H. Craig Bradley | March 7, 2014

    SECOND CHANCE?

    Just more "smoke and mirrors" to conceal the run-away spending we have and lull the public into thinking we have a sustainable recovery. More like "eye before the storm". It means the next time we have a debt induced crisis we may not have a second chance or any chance of true recovery. Then its austerity, baby.

  7. H. Craig Bradley | March 8, 2014

    " Hank: Five Years from the Brink"

    I watched most of this move on Netflix last night. Its a good documentary of how things went blow by blow. We remember the outcome. Little has apparently changed since then. Sec. Hank Paulson gives a free pass to President Obama and Sec. Tim Gathner for their roles after he left the scene in 2009 . One more thing, Hank Paulson says the banks are stronger today. Many U.S. BANKS do not currently have a "Net Worth Ratio" of even 10% which is not anything to brag about. Many Hong Kong or Singapore banks have 30% Net Worth Ratios. How about measures of liquidity?

    Do you call low liquidity ratios of say 1.15% or so "strong"? It means we are still highly vulnerable if another financial crisis happens for any reason. This also means if the investments held by the FED on their books or individual member banks devalued by a even a small percent, they would technically be bankrupt (insolvent).

    Let's put it another way, if too many depositors run to the bank at once and demand their cash, they would probably find out today many U.S. BANKS would not be able to meet their redemption requests the same day at the teller window. I don't plan on trying but have my doubts. In any event, the next financial crisis if we ever have one, will surely include capital controls, as HSBC Bank in England currently limits cash customer withdraws of say 3,000 pounds.

  8. Mitch | March 8, 2014

    It took a long time to screw the economy and easy elastic money is too easy not real paper mashay has put us here without realization of the consequences. Let the cards fall as such. Thanks Mitch

  9. scott stevens | March 9, 2014

    Well bittcoin bit the dust you guys say silver is going up for the last three years know what?

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