Thursday, November 15, 2012

Geithner To Bailout FHA?



So two days ago the WSJ runs the story that the FHA is soon to be in default due to a shortfall in its reserve fund. Sure enough, it’s now official:


The government’s finances are creating a three-ring-circus of events. I’m thinking to myself, “Where’s the tent?”

Just a quick thought on the timing of FHA’s bad news. This was “known” two months ago (or more). The leak, and the announcement, came a comfortable two weeks past election day. If you believe that’s just a coincidence, well, I guess I have nothing to say.

The FHA says the shortfall in the books comes to a modest $16.3Bn. As bailouts go, that’s chump change. It’s small beer today, but next quarter there will be another shortfall as the “book” of nutty mortgage’s works its way through (and steam rolls) the FHA. The losses being booked today (and next month) result from mortgage guarantees made back in the dark days of 2008 -09. These loans were programed to make losses. The chickens are coming home to die roost. I think FHA will need a line of credit for at least $50Bn.

Given that we are already on the brink of warfare in Washington over a bunch of money issues, the timing for FHA to go into the red is terrible. The Republicans must be peeing in their pants with glee over this affair. After all, FHA, is a child of the Democratic Senate. In the end, elder statesmen and learned stewards like Chuck Schumer (D-NY) were supposed to be keeping an eye out for FHA. Oh, well.


If you have an worries about FHA, and its ability to keep grinding out those ultra cheap 97.5% LTV mortgages, let me assure you that this will not be a problem at all. You can keep buying those high flying builder stocks, and maybe even buy a home of your own. The bottom of the RE market was a year ago already, right?




The problems at FHA are going to be swept under the carpet. In an ironic twist of history, Tim Geithner will put a pen to the FHA bailout before the end of the year. It will be his last act as Treasury Secretary. Our boy Tim came in bailing, he is going out bailing. He is, and always will be, the Bailout King.

Here’s how it will work:

- Geithner will use his own bank, The Federal Financing Bank (FFB). This bank is owned by the US Treasury, and Geithner is the  the Chairman of the Board.

- No Congressional legislation is required for Geithner/FFB to make loans to, or guaranteed by, government agencies. Geithner doesn’t even have to take a call from a Senate Republican. Tim has the only signature required.

- FHA will get a $50Bn line of credit from FFB. It will immediately draw $20Bn in order to replenish the reserve accounts. FFB will book the advance as a loan. FHA will book it as a subordinated capital note, and therefore treat it as tier one equity. Of course this is all accounting rubbish. Just what’s necessary to maintain the charade.

- Speaking of charades and accounting rubbish, the loan from FFB will not be reflected in America’s debt profile. The FHA loans are not part of the Debt Subject to Limit. That’s just the rules of this game. Loans to Solyndra were guaranteed by DOE, so the money Treasury borrowed to make the bad loans to Soly never showed up on the books. Talk about a neat trick!

- Treasury will issue a few more notes to the public to come up with the cash that FHA needs to honor its guarantees. That’s not a problem at all. Maybe Bernanke will buy some of the paper, just to keep a necessary balance.

- With Ben B Zirping, the Vig for the FHA will come in at a very low rate. The FHA will borrow $30-40Bn and not pay a dime over 3/4 percent. Can you say “magic?


The foregoing is well more than a guess on my part. There is a road map for this type of problem. The FDIC was down to nickels back in 1991. It got a line of credit from the FFB for $30Bn. Later the FDIC line was increased to $100Bn. When the SHTF in 2009 the line went to a cool half trillion. When it comes to providing credit to government agencies that have outstanding guarantees to the public, the FFB is the way to go when in need of some cheap/fast cash.



There is a lot of talk going around that reads, “The debt doesn’t matter”. Maybe that’s true. That, or the whole thing is smoke and mirrors. The FFB bailout of FHA will be of the smoke and mirrors  variety.






  1. Conscience of a Conservative says:

    They couldn’t use Fannie & Freddie as a gov’t piggy bank so they switched to the FHA. The FHA making uneconomic loans is a big reason the private sector cannot compete and if they did want to compete would need a ponzie scheme like back in 05-07 when they duped investors into taking ownership of that risk

  2. Bruce: We are not an investment site but do post various articles about the government and the economy. We would like permission to occasionally post one of your articles (like this one on the FHA bailout) with a link back to your site.

    Mike W.
    Editor, usACTIONnews.com

  3. When republicans ran 400 billion dollar deficits, democrats screamed about it and made fun of cheney for years about a comment he made saying the deficit doesn’t matter.

    When they get into office and run 1.5 trillion dollar deficits, they call republicans hypocrites for not approving of them when they ran 400 billion deficits. Who’s the hypocrites? The people who ran 400b and don’t approve of 1.5t, or the people who didn’t approve of 400b and now run 1.5t? It’s obvious, but if nobody will state the obvious, then the public is once again bamboozled.

    And then the “intellectuals” get into the act. Like they always do on any political issue. Suddenly, after decades of screaming about deficits, the “intellectuals” now come up with a new theory of economics to confirm that deficits don’t matter. It’s called modern monetary theory. So now they have the “science” of economics behind their new theory of running trillions in deficits and letting the fed buy it all up. So now it’s a-ok to run humongous deficits and have the fed buy it all. And if you don’t buy it, then of course you are one of those anti science clowns. Right?

    Just one more thing. When Steven Hawking can come up with a mathematical formula to prove that every thing can be created from nothing all by itself, you know they aren’t going to have too dificult of a time coming up with “proof” that you can run trillions in deficits and monetize it through fed buying and all to the good. Mao might have had the right idea.

    • If deficits don’t matter, why not just lower all taxes to the absolute minimum necessary to pay the interest on the debt and finance everything else with bonds?

  4. But What Do I Know? says:

    Thanks for staying on this topic, BK. I find it interesting that the Treasury Secretary can simply spend money on whatever projects he wants with no oversight.

  5. Bruce, the stated policy of the government is to get out of mortgage financing. Fannie and Freddie are supposedly winding down their mortgage investments and possibly getting out of mortgage guarantee. Yet, four years into the crisis, the Fed is now 40% of the mortgage lending market. The Fed would also seem to be providing loans below market rates. Are we really making progress?

  6. All part of the plan. Government finds ways to give away money. Geitner bails out money negative programs. Big Ben buys resulting debt issuance and puts it on his books. Nothing to see here.

  7. Housing industry would have disappeared over the past 4 years without the FHA and impact on jobs and housing resale prices would have made everyone on this blog depressed! The reality is that housing stock and the related mortgage job markets employ lots of people and without government intervention since the bubble burst it would not have survived. Hysteria would be the best term to describe what American economy generally would look like today if Housing had continued its free fall while housing prices will continue its downward slide the rate of the downdraft will be significantly less given the FHA response. The sad reality is that the House/Senate does not have the political brains to fund the FHA properly during the bubble burst leaving it up to Treasury to provide the necessary funds.

  8. Ron, you are spot on in that both houses cannot fund. The I.O.U. bucket from SS/medicare funding was used up a long time ago. Bush Tax Gut was to stop future funding to that bucket, hence making America feel lucky.
    Kicking this can down the road maybe 1 or possibly 2 more times is all we got before we face the fire-pit, imho.

  9. In Calif we are finally free from the Republican idea of government which is basically to kill it through in action. That is not to say the Democrats are better at government but at least they put forth ideas and discuss alternatives and present them to the public. Modern life requires significant government interaction, nationally,state and local as we are not a nation of self sufficient rural farmers/hunters throwing rocks at our dinner or spending our day tilling the fields. While I am not happy about how the FHA has gone about saving the housing industry I realize that it has brought us time to generate alternative economic revenue possibilities that MAY over the long run prove to be more beneficial then throwing the current housing industry into the gutter destroying family and corporate incomes without any alternatives.

    • Do you live in California or in reality, that passed prop 30 to fund an educational institution that is leaking money as a faster rate due to its collapsing investment games. California has upped the speed of its death march led by the grandstanding Democrats. We are leaving. You are welcome to go over the edge with it.

    • The last time Jerry Brown was Governor of California, he did such a job that he was followed by 4 terms of Republicans — two George Deukmejian and two Pete Wilson. Then Democrat Gray Davis was such a spectacular screw up that he got recalled and replaced by a body builder / actor wanna-be. Dem Davis got recalled for the same budget problems CA faces today and during Jerry V1.0. Gubernator described himself as a very liberal leaning republican — he enacted a whole mess of social programs, but was unable to get the democratic legislature to control spending And so far, Jerry v2.0. failed to enact any spending controls despite his flower power and party control of the legislature. Mostly he is back to using a lot of accounting slights of hand.

      The California legislature has been solidly Democrat controlled for decades.

      • Calif until recently had a 2/3 requirement for passage of spending/budget items which the Republicans had used to enforce there spending agenda, no more, its over. Its time to get off the old ideas and move forward as Governor Brown has done since taking over including the important decision to eliminate the cities ability to continue the redevelopment sham, these monies will now be sent back to the state to use on more constructive projects. The John Birch society agenda has finally ended and hopefully the Republican Party will reform itself and become a constructive element in how to move our society forward.

        • @Ron you ignorant fuck up:

          1) California passed the 2/3rds voting requirement for taxes in 1979.

          2) that is the fourth time I have Googled your bullshit lies in under 5 seconds and found what you say to be flat out false.

          3) this blog is for people who want to discuss financial markets and hear BK’s thoughts on markets. Take your uneducated propaganda bullshit over to a political blog

          • @bubba a little bit of Calif history for you

            “California’s fate is being dictated by the Zombie Death Cult that was once known as the California Republican Party. And it is the 2/3 rule that is primarily responsible for this. Since 1996 Californians have rejected Republicans by ever-increasing numbers, with only Arnold Schwarzenegger being able to break through – and even then he had to run against his own party.

            Like their federal counterparts, California Republicans have a shrinking regional base and are dominated by ideologues. No amount of redistricting can make inroads on these safe regions without even more intensive gerrymandering than what has previously been attempted. Instead the Republicans feel accountable to their own internal purity tests, administered by KFI radio’s John & Ken and carried out by the Senate caucus when necessary.

            The only way out, and the first reform that we must undertake – the tree blocking the tracks, the door that opens the path to all other reforms – is eliminating the 2/3 rule that gives conservatives veto power over the state and turns the majority Democrats into a minority party on fiscal matters. It’s been talked about frequently on Calitics and in what remains of the media’s coverage of state politics. So it seemed time for an in-depth discussion of the issue and the prospects for restoring majority rule to California.

            The story begins in the 1930s, when California was last mired in a severe economic crisis. Unlike the rest of the nation, California never had a New Deal. Republicans and conservative Democrats, worried by the FDR surge and the possibility that his agenda might take root in Sacramento, decided to change the Constitution to prevent the New Deal from coming to California, and got voters to approve a ballot measure to require a 2/3 vote for any budget that would increase spending by more than 5%.

            In 1962, that was changed to require a 2/3 majority on all budget votes. This was the height of Pat Brown’s power, when Republicans and Democrats alike agreed on the need to spend money to build infrastructure and provide economic security for California.

            There things stood until 1978 and the great constitutional revision that was Prop 13. How exactly it was that the California Supreme Court held Prop 13 was not a “revision” of the Constitution or a violation of the single-subject rule is beyond me, but here we are. Prop 13 required that the legislature also had to have a 2/3 vote to raise any tax, and that most local tax votes would have to meet the same standard. In 1996, Prop 218 closed some remaining “loopholes” to ensure that ANY tax vote in California had to be approved by a 2/3 majority of voters.

            The reason this was included in Prop 13 was because, as you ought to know, Prop 13 wasn’t really about property taxes. It was about destroying government. Property taxes were merely the cover, the way that Howard Jarvis and Paul Gann convinced the public to back their radical scheme. Even at that time conservatives understood their place on the political margins in California (the last time Republicans held a majority in either the Assembly or the Senate was 1970) and wanted to make sure that Californians would never be able to undo the damage that Prop 13 was about to unleash.

            In short, it created a permanent conservative veto over California policy. It didn’t matter how often Californians rejected conservative Republicans – and it was often – as long as they could hold on to at least 1/3 of the seats in either chamber, they would still have veto power over policy. It was California’s version of the liberum veto that eventually caused Poland to self-destruct as an independent nation in the 1700s, as the 2/3 rule ensured conservatives would put their own ideology above the survival of the state. That is the entire point of the 2/3 rule.

            Fast-forward to 2002, when the budget crisis last brought the state to its knees. Republicans began exploiting the 2/3 rule to make the state – and Gray Davis – appear dysfunctional. That summer Republicans dragged out the budget delay for weeks, hoping to weaken Davis in the fall election. It didn’t work, as Davis was narrowly reelected that year, but after Darrell Issa bought a place on the ballot for the recall, Republicans proceeded to use the 2/3 rule to drag out the 2003 budget talks again, weakening Davis ahead of the October recall vote that kicked him out of office.

            Since summer 2007, when the budget again went into deficit, Republicans have persistently used the 2/3 rule to demand things they could never get through a fair or open process. First it was an attack on AB 32, then Maldonado demanded more cuts and a guarantee of reelection in 2008. Last summer the same situation played itself out, and the budget wasn’t signed until September 23.

            Now the 2/3 rule has brought California to its knees. The state is now entering financial collapse. It is happening as we speak. But the Zombie Death Cult refuses to do anything about, insisting that we go over the cliff with them. And as long as the 2/3 rule is in place, their demands rule the day.

            Recent events:
            voters approved a ballot measure to lower the threshold for the state Legislature to pass a budget and revoking lawmakers’ pay when a budget is late. Voters also said yes to making it harder to raise fees.
            The budget measure, Proposition 25, won 55 percent to 45 percent yesterday, according to the California Secretary of State’s elections office. It lowers the margin needed to pass a budget from a two-thirds majority to simple majority. It doesn’t change the two-thirds vote needed to increase taxes.
            2012 Election: both houses now have 2/3 democratic control, end of story

            Bubba do some reading on the subject might help you better understand the issue

            • @ron — more bullshit political propoganda

              I special interest group pushing an agenda is hardly a neutral source, much less accurate. You have done nothing but express your obvious hatred about republicans — are you a member of this group and you can’t get attention to your nonsense anymore?

              Lets have more financial market discussion, and less political bullshit lies.

  10. When this debt game ends there will fireworks! And it will end, sooner than most think. I predict around 2016. Obama will get out just in time, the lucky fool.

  11. FHA, yet another violation of our rights. The gov’t constantly violates our rights.
    They violate the 1st Amendment by caging protesters and banning books like “America Deceived II”.
    They violate the 4th and 5th Amendment by allowing TSA to grope you.
    They violate the entire Constitution by starting undeclared wars.
    Impeach Obama.
    Last link of “America Deceived II” before it is completely banned:

  12. Bruce — It is true that Geithner has long demonstrated a lack of ethics, and a willingness to steal from future generations. Its also true that Obama might pardon Geithner now that Obama doesn’t need to worry about re-election (and we all know Geithner needs a pardon). Given Geithner’s Christmas Eve massacre of children when he unilaterally decided to have future taxpayers pay for FNMA / FHLMC losses (not shareholder Warren Buffett nor Congressional cheerleader Barney Frank) … Geithner obviously does not care about stealing from children.

    But lets also look at this from Obama’s perspective for a moment. Geithner has nothing to lose, but his actions will effect Obama’s second term.

    Media rhetoric aside, Obama faces gridlock in Congress. Whatever crook Obama wants to appoint after Geithner flees is going to face a lot of grilling in confirmation hearings. Mr Candidate, what do you think of Timmy Geithner stealing from babies not once but twice? Mr Candidate, do you think it is fair to raise taxes on American business while cheating on your own taxes? Allowing Geithner to steal from future generations, Obama would be inviting another really embarrassing investigation. Foreign policy failures in Benghazi and now the Gaza strip, Assad is still thumbing his nose at Obama from Syria (and from Tehran), not to mention Obama’s entire national security team is apparently sleeping with the cast of Real Housewives. Obama wants to regain momentum, not get bogged down in yet another investigation

    Second, Obama likes to blame Bush for everything that ever went wrong. If Obama does a big housing bailout, he owns it. And he owns the costs. Yeah yeah, Dick Fuld says it was all just a temporary liquidity issue. Back in the real world, the housing mess is still a $2 trillion hole in the economy. Take $14 trillion in mortgage debt in 2008, home prices declined 20% nationally, and lets assume owner equity was 5% on average — a net 15% loss to someone, and very little of that loss has been realized yet. If a politician wants to “fix” the housing fiasco with GSE bailouts, that politician needs to find a spare $2 trillion. Youtube videos of Barney Frank lying on the floor of Congress that taxpayers will never have to bail out the GSEs already sent that loser into retirement.

    Third and most important, Obama doesn’t need to “win” the next budget crisis, he has to win four of them. Anyone who can do simple math knows Obamacare is a complete cluster fuck — and that is being nice about it. Impossible to cover 335 million for the same price as 300 million unless you implement rationing that makes HMOs look generous. Obamacare will cost hundreds of billions more than advertised during the next four years, and Obama is taking a lot of money out of medicare already. If Geithner steals $50 billion to bail out FHA, Obama loses credibility and negotiating clout on much bigger issues — Obamacare costs, pretending social security isn’t just a ponzi scheme, etc.

    And this accounting fraud of labeling spending “off budget” is so stupid its not even fooling the credit rating agencies.

    • Got cut off there…

      The point is that mortgage debt will get repudiated by Bernanke’s policy of US dollar inflation. From the viewpoint of a collapsing political system, it doesn’t need to be addressed.

      Accounting fraud is needed to do more and more and more new spending — not to pretend to fix yester-years spending mistakes.

  13. I have never been able to reconcile my view of reality to the idea that debts don’t matter.
    Debts matter if someone must lend you the money to continue spending more than your income.
    Debts matter if at some point the general perception changes from “I’ll get the money I loaned to them back” to “They will never pay me back.”
    Off course, if the primary source of your loans is someone that can simply ‘create’ the money they are giving you and if your ‘money buddy’ doesn’t care if the money is ever returned (since it isn’t the the medium their wealth is stored in and they prosper by handling the transaction) you are golden. Until…
    People decide that the paper promises they are handed in return for their labor or the products of their labor isn’t WORTH THE PAPER IT IS PRINTED ON! (Sorry, for shouting)
    How close are we to the event threshold when suddenly it dawns on, first a prescient few, then the maddening crowd that paper money is just ‘paper’ not ‘money.’
    At that point, the same geniuses that developed MMT will exclaim: “I was never involved, I knew all along it wouldn’t work, I tried to point this out.” The government will exclaim: “How did this happen, who was responsible, we are shocked, shocked I tell you, but all our advisers told us it was all good, no one could have seen this coming.”
    The modern curse of Cassandra is: Those than understand are not believed and those that believe cannot understand.