July 12, 2008 (LPAC)-- Fannie Mae and Freddie Mac nearly collapsed last week, an Under Secretary of the Treasury was installed as the new CEO of Wachovia bank, and California-based mortgage lender IndyMac Bank was closed.
Fannie Mae and Freddie Mac, the two giant government-sponsored enterprise mortgage companies, saw their stock prices fall dramatically during the week, particularly after Lehman Brothers said the two companies may need to raise $75 billion in capital, and former St. Louis Fed head William Poole said July 9 that the two firms were "insolvent" and might require a government bailout. The two companies have lost $11 billion over the past nine months due to the carnage in the mortgage and mortgage-securities markets. In response to the problems, both Treasury Sec. Henry Paulson and Fed chairman Ben Bernanke publicly defended the companies, Paulson saying they were "adequately capitalized" and Bernanke claiming they were "well capitalized in the regulatory sense." However, members of the Plunge Protection Team were busy--and remain so this weekend--working up contingency plans to shore up both institutions.
Fannie and Freddie were key components of the Greenspan bubble, buying mortgages and creating mortgage-backed securities, and are now crucial parts of the bankers' plans to bail themselves out by shift their losses to the taxpayers. As such, the regulators are determined to keep them going, and it is likely that the current flap is the orchestrated beginning of a bailout operation.
Wachovia Corp. announced July 9 that Under Secretary of the Treasury for Domestic Finance Robert K. Steel would become President and CEO. Steel is a former vice-chairman of Goldman Sachs, and his move should be seen as part of the Plunge Team's efforts to contain the damage at Wachovia. Goldman Sachs has been analyzing Wachovia's loan portfolio and is rumored to be considering acquiring the bank. Steel's move is reminiscent of the 1994 move by Deputy Treasury Secretary Frank Newman to run Bankers Trust after it was mortally wounded by derivatives losses.
IndyMac Bank was seized by Federal regulators on July 11, in the third-largest bank failure in U.S. history. IndyMac, of Pasadena, Calif., was a spin-off of Countrywide Financial, the mortgage bank that is now part of Bank of America. The bank had announced mid-week that it was laying off over half its staff and would cease making new loans.
Underlying all of this turmoil is the blowout of the financial bubble created by Alan Greenspan, which used hyped-up real estate valuations to keep the bankrupt banking system afloat. The resulting real estate bubble has blown out, bankrupting Fannie and Freddie and much of the rest of the banking system. Now Bernanke and Paulson are attempting to use Fannie and Freddie to convert worthless mortgages and mortgage securities into government-backed assets; it is not Fannie and Freddie they are trying to save, but Goldman Sachs, JP Morgan Chase and the other big banks.
The problem they face is that the U.S. economy does not have the productive capacity to cover the existing debts from the bubble, much less the new bailout-related debts. Furthermore, these huge injections of funds only fan the flames of hyperinflation. Continuing down this path will only blow out the dollar, and the nation, along with the banks.
It is past time to abandon this foolishness and adopt the three-point plan designed by Lyndon LaRouche. The system is gone, but we need not go down with it.
