Let's Make the Mortgage Due for Fannie Mae and Freddie Mac

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You can call it a bailout, a rakeover - I mean, takeover - or socialism for cash. It's all that and more.

But, whatever you call it, it's not going to last.

The $187.5 billion bailout of Fannie Mae and Freddie Mac back in 2008 was absolutely necessary.

Before you tell me I'm crazy, let me tell you why...

There are no ifs, ands, or buts about it. Forget that Fannie Mae and Freddie Mac caused their own demise - that's another discussion. Once they imploded, they had to be saved for the sake of every American bank, more than a few giant global banks, the U.S. economy, and probably the global economy.

Fannie Mae and Freddie MacTo live and die another day, Fannie and Freddie had to issue senior preferred securities to the U.S. Treasury for bailing them out. The preferreds paid a 10% dividend to the Treasury.

(Remember that Fannie and Freddie don't make mortgages. They buy mortgages from lenders, package them to sell to investors, and guarantee the securities they issue. This all makes them a pretty good investment, so they buy their own stuff by the fistful.)

Of course, there was a problem. Neither could make the payments. So, our government being the generous sort it is, lent Fannie Mae and Freddie Mac money to pay the government. How's that for good business sense?

Well, wouldn't you know it, by 2012, this pair of government-sponsored enterprises were again enterprising and making tons of money.

That's when the Obama administration, never one to miss an opportunity to extract or extort cold hard cash from any wounded-warrior veterans of the economic drain game, changed the rules for being paid back. In August 2012, the Treasury made the dynamic duopolies deliver all their profits to the saviors who bailed them out.

There would be no more piddling 10% dividends - Uncle Sam wanted all their profits. And he got them. To date, Fannie and Freddie have paid the Treasury more than $200 billion. By June, that amount will have risen to an estimated $213 billion.

OK, so they got paid back. We, the taxpayers, got paid back. That's good, that's very good.

So here's what's not very good. We might even call it.... oh, I don't know, bad.

Last Thursday, just as the dumb-ass duo was forking over another $10.2 billion to the Treasury, the Senate Banking Committee, on the same day, lost control of its opportunity to revamp the whole stupid arrangement that gave life to the world's biggest government-sponsored enterprises (aka GSEs). Come to think of it, there are pretty much no other GSEs. Well, there are, but they're "state-owned" entities, some of which are sponsored by communists and socialists. As they say, if the shoe fits... wear it.

But I digress.

And who stopped the reform efforts in the Senate? A few good Democrats, that's who.

You can't blame them. Honest extortion tactics are hard to come by these days.

Don't get me wrong, I don't give a hoot that Fannie Mae and Freddie Mac have to pay back everything they make to the government. I care that this stupid government of ours spends - make that wastes - this money like a drunken sailor.

But that's another discussion.

What's really galling is that these two Frankenstein monsters weren't broken up when they should have and could have been.

Fannie and Freddie's moneymaking ways are about to end. The extortion game is going to turn into another black hole when they stop extorting money themselves. The two are making so much money because they're suing big banks for billions upon billions of losses they incurred on the crappy mortgages they bought from the banks. Fannie and Freddie then packaged this junk into crappy mortgage-backed pools that they themselves bought, which is really what sunk them.

When it comes to making the same mistakes again and again, it's not a question of "if," but "when."

The government has to get out of the mortgage business. They got into it during the Great Depression, and it made sense then, for a while. But that's a long, long time ago.

Fannie and Freddie have spent hundreds of millions of dollars paying lobbyists to make sure Congress doesn't take away their GSE stinking badges. They can't pay out money directly anymore. But that doesn't mean they won't be able to down the road when this past little kerfuffle is all forgotten about.

It's extortion all around. And who's the biggest victim of this rakeover? The taxpayers, as usual.

For heaven's sake, the Fannie Mae and Freddie Mac Expressway to Hell has to be derailed before it steam-rolls the economy again.

More from Shah Gilani: The numbers are in, and they're ugly. First-quarter U.S. GDP is only 0.1%, despite the Federal Reserve spending $3.2 trillion to boost the economy. Simply put, the Fed's "growth-buying" scheme is failing...

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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