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.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. 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.