"Geithner's and Lockhart's statements to Congress are in direct conflict with each other. One of them has lied to Congress. It is vital that the American people find out which one."—ALG President Bill Wilson.
April 7th, 2010, Fairfax, VA—Americans for Limited Government President Bill Wilson today condemned Treasury Secretary Timothy Geithner for excluding Fannie Mae and Freddie Mac's $6.3 trillion balance sheet, including $1.6 trillion in debt, from the current $12.6 trillion national debt despite 2008 testimony from a federal agency that the government was providing "an explicit guarantee" to the mortgage giants.
"Somebody has lied," Wilson said, adding that "they must be held accountable for misleading the American people."
In a letter to Congressman Scott Garrett, Geithner wrote that the "corporate debt of the GSEs is not the same as U.S. Treasuries, nor should it be considered sovereign debt."
The letter continued, "By statute, all obligations and securities issued by the GSEs must include a statement that makes clear that such obligations and securities are not guaranteed by the United States and do not constitute a debt or obligation of the United States."
In the same letter, Geithner wrote, the "Treasury is committed to supporting the GSEs while in conservatorship and to ensuring that the GSEs have sufficient capital to meet their debt obligations and honor their guarantees."
Fannie Mae and Freddie Mac were placed under conservatorship by Congress in 2008 under the administration of the newly-created Federal Housing Finance Agency (FHFA). According to the agency's website, "As of June 2008, the combined debt and obligations of these GSEs totaled $6.6 trillion."
But that was not added to the national debt, despite the FHFA director James Lockhart's Congressional testimony that "the conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac," as reported by Bloomberg News.
At the time, the agency distinguished between "an explicit guarantee" and the "full faith and credit of the United States", and Lockhart clarified that he meant "an effective guarantee because there's $100 billion backing their equity provided by the U.S. Treasury…That does give them effectively a guarantee of the U.S. government."
"Geithner's and Lockhart's statements to Congress are in direct conflict with each other. One of them has lied to Congress. It is vital that the American people find out which one," Wilson delared.
Wilson said the Treasury "is trying to have it both ways; they want to tell markets that they are guaranteeing Fannie and Freddie and tell taxpayers that they are not."
Wilson also blasted what he termed "financial system takeover" legislation for not addressing the problems surrounding the GSE's. "Fannie and Freddie underwrote almost every new mortgage in the country and sold their worthless securities all over the world, but neither Chris Dodd's legislation in the Senate nor Barney Frank's companion House legislation would do a thing about it," Wilson said.
Wilson said "The Obama Administration wants to assume the power of controlling the mortgage market without assuming the risk of putting the $6.3 trillion mortgage giants on-budget."
"The Treasury cannot have it both ways, and it only has two options at this stage: either the underlying assets of Fannie and Freddie are sold to privately-held institutions, or they are in effect guaranteed by taxpayers, as Lockhart stated," Wilson added.
Those assets included, according to Bloomberg News, $4.7 trillion in mortgage-backed securities (MBS). Of that, $1.5 trillion had been sold to foreign investors, as reported by the New York Times.
Since that time, the Federal Reserve has purchased $1.25 trillion of the MBS, although they have not disclosed which securities it has purchased. According to the Federal Reserve, the securities are purchased at "Current face value of the securities, which is the remaining principal balance of the underlying mortgages."
Wilson wants to know if foreign nations got bailed out, saying the exclusivity of the program was "cause for concern." According to the NY Fed, "Initially, the investment managers will trade only with primary dealers who are eligible to transact directly with the Federal Reserve Bank of New York. Primary dealers are encouraged to submit offers for themselves and for their customers."
Wilson noted that several of the primary dealers are foreign institutions. The so-called Troubled Asset Relief Program explicitly prohibited that foreign central banks or institutions owned by foreign governments from participating in the Treasury-administered program to purchase MBS, but Wilson said there was no such restriction on the Fed-administered MBS purchase program.
"It's a legitimate question: Did the Fed buy back the mortgage-backed securities from the foreign investors, including China, Japan, and other sovereign entities?" Wilson asked.
According to the NY Fed's website, the Federal Reserve is not guaranteeing the securities nor Fannie Mae and Freddie Mac by extension either: "Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal."
Wilson said since Fannie and Freddie depends on the Treasury to keep up with its obligations, and the Federal Reserve will not guarantee it, "that can only mean taxpayers are the guarantors of Fannie Mae and Freddie Mac."
"Essentially, the Federal Reserve printed $1.25 trillion to buy back the mortgage-backed securities from investors. So, if the Federal Reserve is not backing up Fannie and Freddie's worthless securities, then it bought those securities back with the implicit if not the explicit backing of U.S. taxpayers, just as they were sold," Wilson concluded.