A Merry Christmas For Fannie and Freddie, A Hammered New Year's For The Rest Of Us.

You’d better watch out; you’d better not cry. Mr. Taxpayer, just take out your wallet and accept this new Optimus Prime Beat-down like an adult instead of a baby. Our old friends Fannie Mae and Freddie Mac are coming to town.

Thanks to Sec Treas. Timothy Geithner, they now have unlimited bar tabs linked electronically to the already empty US Treasury. Details of the latest imperial surjection on behalf of Bailout Nation follow below.

The Treasury snuck in another big bailout on Christmas Eve: It removed the cap on the amount of money it will provide to Fannie Mae and Freddie Mac to cover their ongoing mortgage losses. There is now no limit on how much we taxpayers will shovel down these black holes.

Prior to this surreptitious money raid, Fannie and Freddie have actually offered us a pleasant surprise in comparison to Gubbermint Motors, Copenhagen, and Wine-Besotted Max Baucus’ Healthcare Extravaganza. They were originally given a $200M teat from the Sec Treas. and unlike most programs offered a de facto budget line, they only sucked it for a paltry $111M. Clearly, Mr. Raines no longer works with these people. So why the stealth bailout, deliberately announced on Christmas Eve?

Henry Blodget of Clusterstock.com speculates that bond holders had grown nervous and sought reassurance. I pity them. I’ve lost plenty on my TSP the last couple of years. Maybe I should go cry on Timothy Geithner’s shoulder for a few hours. I’m certain he’ll feel my pain the same way he felt Chris Dodd’s and Angelo’s pain.

This entire stupid idea failed to match what Henry Blodget was hoping Santa Barack would bring him for Christmas. Predictably, he points out the following effluvium of suck factors which could result from such grandiloquent stupidity. Here’s his take on the new unfunded tax liability he just found in his stocking.

The removal of the cap will further distort prices and activity in the housing market, which is now massively subsidized by government programs. It will continue to reward bondholders for being stupid. And it will likely result in additional huge losses for taxpayers.

So again, why this mordant stupidity? There were only seven days left in 2009. Were the guys at The White House hoping to land one more good sucker punch while everybody’s guard was down? Is moral hazard really what’s for breakfast these days?

A credit analyst named Edwart Pinto offers us a more amusingly paranoid take on these issues. It seems The US Treasury has no treasure to speak of anymore, but it sure has a five-point plan.

It starts with modifications to the HAMP (Homeowner Affordable Housing Program). This bailout of delinquent mortgages originally renegotiated interest rates on loans. It left principal untouched so that the properties could hold their original value. This no longer works efficiently enough to salvage deadbeats, so now the government is actually seeking to make the home prices cheaper.

HAMP loses could originally be written off over a 30 year period on a standard mortgage. The interest rate modification was not a lump sum reduction. Hence, the bailout didn’t cause the immediate liability for the entire reduction of the price of the mortgage. Whacking 10% off the principal of a mortgage would lead to the occurrence immediate 10% loss to the bailout paying agencies. They’ll need a bigger bucket to bail in this fashion.

Pinto speculates that Fannie Mae and Freddie Mac are now holding the bag on all of their own dirty MBS paper that TARP was supposed to have gotten rid off in 2008. The US Treasury is discontinuing this support, but the bonds are still of dubious pedigree and provenance. Someone has to eat this proverbial Five-Dollar Foot-long of Feces. Fannie and Freddie have just been told “Bon Appétit.”

Pinto agrees with Blodget that bondholders in Fannie and Freddie are nervous. He explains that they worry that MBS spreads may become substantially wider than those of treasury notes. Agency bondholders could get made to eat a holiday sandwhich of their own. This is the sort of thing that happens to normal people who are holding junk paper. Chris Dodd, Rahm Emanuel and Jamie Gorelick are too important to America’s future to face consequences like normal people.

Fourth, the government has quietly removed many of the differences between Fannie and Freddie and your typical government agency. The public-private partnership has become increasingly less private as execs at the two agencies no longer receive compensation in common stock. Again, these people are just too important to the future of the country to be re-privatized and actually have to stay within a logical budget.

Finally, the government plans to cut the risk premium it requires on Fannie and Freddie MBS paper in half. This would allow them to sell more readily as institutions would be required to hold less dead money in reserve to pay for potential risk each time they buy one of the bonds. Again, the value and liquidity of Fannie Mae bonds is so vital to the American People that tax payers must undergo exsanguinations to maintain this vital national resource.

Pinto, like Blodget, feels this is the public policy equivalent of sticking your tongue on a metallic flagpole as the cute little snow flakes swirl around your head. He offers the following analysis on where this is all headed.

The above actions would preserve and strengthen the government’s involvement and control over the country’s housing finance system and make it harder to reintroduce substantial private sector involvement later on. They would also continue distortions in the marketplace leading to who knows what unintended consequences. Finally these steps would do nothing to deleverage the housing finance system, a key step in returning it to any degree of normality.

Yet again, the Democrats endeavor to solve the consequences while the problems in our real estate economy rage like uncontrolled wilderness fires. They protect the bondholders and use the flying buttress of bureaucratic prestidigitation to prop up the dropping property values and bond portfolios. These stop-gap panaceas secretly passed on Christmas Eve keep the lid atop the pressure-cooker. If they hold that lid on indefinitely, the long term will not matter. As John Maynard Keynes once remarked. “In the long term, we will all be dead.”