President Obama [… suppress laughter …] has declared [… grip desk, knuckles whitening …] the month of April [… bite tongue …] national financial literacy month. Thanks for the laugh, Big Guy. We need it.
Part of the problem leading up to the financial crisis, the president said in making the declaration, was the use of complex investment instruments and financial chicanery to hide risk and mask the toxicity of bad debts. The evil, wicked, greedy banks wanted to keep the questionable stuff off their books, the argument goes, so that they could take on lots of debt and risk without technically violating their capital requirements. Okay ….
In totally unrelated news …
Tim Geithner says the debt of government-backed Fannie Mae and Freddie Mac shouldn’t be on the government’s books as sovereign debt and shouldn’t be counted toward the government’s overall debt ceiling. Sure, it’s $1.6 trillion of dodgy holdings, and, yeah, the government has promised an unlimited line of capital to prop up these deadbeat mortgage giants, which are functionally part of the federal government – but why not keep it off the books?
Technically, Geithner’s right, of course: Fannie and Freddie debt does not have the legal status of U.S. sovereign debt. But we’ve raised the national debt ceiling to have enough money on hand to enable that unlimited line of credit backing the GSEs, in effect allowing the Fannie and Freddie to enjoying financing that they probably could not obtain at all in the real marketplace at the very cheap rates that the U.S. government pays to borrow money. Instead of putting Fannie and Freddie’s shaky portfolios on the books, we’ve just sold a bunch of Triple-A Treasuries to prop them up, and put all that debt on the books, instead. In other words, the U.S. government is acting a lot like a mortgage securitizer: Fannie and Freddie are the subprime tranches, but bundled into an overall package, the Treasury bond, that is Triple-A — for now.
But a collapse in Fannie and Freddie’s portfolio would have serious effects on the finances and creditworthiness of the U.S. government. Looked at another way, the Treasury bond is now a Fannie Mae derivative. That can’t be good.