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Josh Rosner, of Graham Fisher, has a column out over at The Financial Times where he discusses what's really going down with the credit crises in general and Freddie Mac and Fannie Mae specifically:

In a capitalist economy, losers are expected to take losses and winners to gain. Private enterprise is best able to allocate capital efficiently and, where it fails to do so, markets make adjustments and capital is reallocated to efficient users. This basic tenet supports good and productive assets moving from the hands of weak players to stronger. Where this is not possible, the US system gives the government a hand in fostering that move through an efficient process called bankruptcy or reorganisation. This rule of markets and of law has always been the basis of our national supremacy in innovation and the reason ours was the world’s clear choice of a reserve currency. That was the world we lived in previously.

He goes on to detail the mission of Freddie and Fannie:

The core of the GSEs’ (Freddie and Fannie) mission is to purchase mortgages from mortgage originators, charge a guarantee fee to issuers to protect their ability to stand behind these loans, and securitise these mortgage-backed securities with assurances to MBS holders they would receive 100 per cent of their anticipated returns. To this end the GSEs have guaranteed $3.5 Trillion in mortgage-backed securities These securities are backed by real housing assets and there is little question that, assuming they are well serviced, there will be relatively little loss over a longer period.

So far so good. The problem is that the GSE's got in a little trouble when they started dabbling in businesses from which they should have stayed away:

Over the past decade the GSEs have increasingly used their portfolios to speculate in aircraft leasing, manufactured housing, interest-only mortgages and other securities they are specifically prohibited from buying as part of their mission. In recent years, through these portfolios they funded nearly 50 per cent of the riskier private label Alt-A mortgage market, invested in aircraft lease securities, manufactured housing and other assets that leveraged them into trouble. To achieve this speculative, hedge fund-like growth they issued almost $1.5 Trillion of senior corporate debt. By their investments, debt buyers supported speculation in non-mission-related activities and did so with a clear understanding they were funding non-mission-related activities. They also knew GSE debt was explicitly not an obligation of the US taxpayer and that was repeated constantly by the government and the companies.

And so now we have the U.S. taxpayer bailing out the same management team that is almost criminally culpable. It's called "privatizing the gains and socializing the losses." What comes after this is even more massive U.S. Government debt which means a further weakening of the dollar which will inevitably lead to $200/barrel oil and $10/gallon gasoline.

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