Freddie Mac in Trouble, Volcker on the Credit Crisis, The Farm Bill, World’s Fastest Murder Trial, and More!

by Addison Wiggin & Ian Mathias

  • Freddie Mac losses $151 million… even after admittedly fudging its books
  • Capitol Hill “worried about the failure” of Freddie and Fannie… a few startling stats not to be overlooked
  • Dollar inches down… Paul Volcker on the event that could bring us “back to the ’70s, or worse”
  • Bloated farm bill squeezes through Congress… Kevin Kerr with the infamous bill’s biggest winners
  • Water crisis worsens… cities nationwide institute “toilet to tap” purification plans
  • Plus, the world’s quickest murder trial as witnessed by your 5 Min. editor


Freddie Mac, the nation’s second largest mortgage enabler, posted a $151 million loss yesterday. But it could have been a lot worse. Thankfully, their accounting department is deft with their calculators… and loose with the regulations.

Freddie accountants dusted off Financial Accounting Standard 157… which allows companies to estimate the value of holdings that aren’t traded. Freddie, conveniently, has $157 billion of such assets, 23% of all their total holdings.

“Coming up short? No problem. Let’s see… hmmn… ah yes… just change the way we value this little things over here… what are they called? Ah yes, mortgage-backed securities.” Click, click, tap, tap… faint whirring sound… “And there it is.”

FAS 157 saved Freddie $1.3 billion last quarter, company officials said yesterday.

Freddie’s number crunchers also extended the period in which they’re obligated to write down past-due mortgages. They used to write them down at 120 days past due… now, they don’t.

Voila… another billion in losses saved. This accounting stuff is easy.

Wall Street loved the charade. FRE jumped 9% on the “earnings”… er, loss… statement.

“I worry about the failure of [Fannie Mae and Freddie Mac],” an unusually glib Sen. Richard Shelby of the Senate Banking Committee told the Financial Times yesterday. Both Fannie and Freddie are “thinly capitalized, highly leveraged and pose a systemic risk to taxpayers.”

That’s putting it lightly. We’ve mentioned these stats before, but they bear repeating:

Fannie Mae and Freddie Mac hold more than 80% of all U.S. home loans. Those loans are leveraged over 60-to-1. At the end of 2007, the two firms together held $83 billion in cash reserves, but over $5 trillion in debt and mortgages.

The U.K. bank Barclays added its own level of concern to the pile today. It announced a $3.2 billion write-down and hinted that it may soon need to raise emergency capital. No one really seemed to notice, though.

Stocks, overall, inched up yesterday on the “better-than-expected” CPI report. Despite the fastest increase in food prices in 18 years and record high gas prices (see below), the Commerce Department says inflation at the consumer level actually dropped a skosh last month. The Dow and S&P 500 responded by gaining about 0.5%. The Nasdaq broke even.

After a small rally of its own yesterday, the dollar is back down this morning. Looking over the last few weeks, the dollar index is affixed to 73. The euro edged up a cent, to $1.55. The pound and yen weakened, to $1.94 and 104, respectively.

“If we lose confidence,” Paul Volcker warned yesterday in testimony before Congress, “in the ability and willingness of the Federal Reserve to deal with inflationary pressures and to sustain underlying confidence in the U.S. dollar, we’ll be in real trouble.” The former Fed chairman reminded the men and women on the Hill that a stronger dollar is the “linchpin” for global economies and markets.

Volcker went on to say that he sees “some resemblance” between today and the days of double-digit inflation in the 1970s. Should the Fed’s grip on inflation slip, we’ll be “back in the ’70s, or worse.”

No matter, the House had other things on its mind. Like the $290 billion farm bill it passed without so much as cracking its cover.

“You sure can tell it’s an election year,” Kevin Kerr tells us by e-mail this morning, “when the House and Senate are working overtime to make sure that everyone is happy in the farming community. The new farm bill means the big ag machine will roll right along.”

Sugar, cotton and corn-based ethanol are the big winners in the bill’s latest incarnation. Each will receive a variety of additional subsidies, tax breaks and beneficial government mandates. Trade accordingly.

The new bill is loaded — even more so than usual — with earmarks. Our “favorites” include a $126 million tax write-off for owners of Kentucky-born racehorses and a mandate for the government to sell part of the Green Mountain National Forest to a privately owned ski resort.

Members of Congress approved the bill by such an overwhelming margin that, should it be vetoed by President Bush, it would likely go into law anyway.

Crude oil remains at a record $126 today. The U.S. Energy Department tried its best to surprise traders by reporting large increases in crude and diesel stockpiles. But they were too busy in the pit trading the price up to notice.

Gas isn’t letting up, either. Americans are paying, on average, $3.77 a gallon this morning, following the eighth consecutive day of all-time highs and a 12% increase in the last month.

Our favorite yellow metal rallied $20 yesterday; an ounce of the stuff costs $880 this morning. Work it.

The city of Los Angeles announced a plan today to convert $4.9 billion gallons of “treated wastewater” to drinking standards by 2019. San Diego and Miami have recently announced similar efforts. These aren’t the first cities to launch “toilet to tap” plans, but they are the most noteworthy to date.

“If we don’t commit ourselves to conserving and recycling water,” Mayor Antonio Villaraigosa offered helpfully, “we will tap ourselves out.”

“The biggest hurdle is the public perception,” writes Chris Mayer regarding wastewater reclamation projects. “But it works.” In Mayer’s Special Situations, Chris owns the world’s largest pure-play water treatment company — up 50% since summer 2006. Also, only five months ago, he recommended a play on the replacement of sewage pipes that is up 30% since.

Mr. Mayer also announced yesterday the reopening of the “Chaffee Royalty Program” which pays back 50-to-1. It was previously closed in 2002. Now in 2008, it’s open again. Check out the details here.

“Byron is spot on with his ANWR analysis,” writes a reader from Alaska. “Three other facts the public needs to know:

1) Only 100 miles of new pipe need to be laid (and later easily removed) across the (flat) coastal plain to deliver all of ANWR’s oil to the trans-Alaska pipeline (TAP, the most high-tech, best monitored and most defended pipe in the world).

2) The TAP has capacity for 1.2 million barrels of ANWR oil per day, 6% of total U.S. daily consumption.

3) Median Prudhoe projections called for 10-13 billion barrels before TAP construction. We are pumping the 14 billion barrels now. ANWR coastal plain median projections are 7-11 billion barrels, 15-20 years of peak production and thus $0.7-1.1 trillion worth of energy (at $100 a barrel) that we won’t have to buy from the Saudis, Putin or Chavez.

“Saving and reinvesting 6% of our national oil bill, as opposed to borrowing to buy it, is a 12% move toward oil independence.”

“Your reader’s observation that underfunded state pensions are a drain on the economy is true,” writes a reader, “but the suggestion that pension allowances are overly generous is not, and advocating benefit reductions to solve the problem is unjust.

“This country has a long tradition of paying below-market wages for work in the public sector. The trade-off has always been acceptance of lower wages in exchange for virtual immunity from layoffs and the promise of a secure retirement. Public sector workers pay for the retirement security component of that equation. Employee wage withholdings for mandatory contributions to the Ohio Public Employees Retirement System are significantly higher than Social Security taxes on the same income.

“Police and fire personnel are not rewarded with early retirement because the citizenry is appreciative and generous. Fast reflexes and physical strength are essential to the work. Satisfying those needs precludes the use of older workers. Extending the retirement age in these professions simply isn’t an option, because to do so would endanger a life — perhaps yours. The necessity for shorter careers and longer retirements is reflected in significantly higher employee contributions to the pension system than are exacted from other governmental employees, who, as noted, are themselves already contributing substantially more than would be exacted from them in payment of Social Security taxes.”

“In response to the reader who suggests we all go vegetarian,” writes our last reader. “First, the national average for beef cattle conversion is 3 pounds of feed to 1 pound of gain, not the 7-to-1 ratio suggested — assuming cattle have not grown less efficient since I took beef market production in college.

“Second, these cattle don’t eat strictly grain, but rather a combination of grain and other roughage, much of which is byproduct from food and fiber processing. In addition they spend their first two years growing on mother’s milk and rangeland grass, spending only the last three months in the feedlot for fattening.

“Third, if our whole country were to go vegetarian, no one would have enough energy to work and supply our economy with labor to keep the wheels turning. Vegetarian is a great lifestyle if all you have to do is sit around the faculty lounge and dream up insidious plans to interfere with capitalism. However, the rest of us need protein provided by meat to function properly and put in a full day’s work.”

The 5 responds: Heh. That ought to stuff the mailbox.

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. “Just like a common, ordinary peer, huh?” asks a reader of our selection to serve as a juror in a murder trial yesterday. “You getting picked for a jury… any jury… makes me feel there’s still hope for this country. Bring home true justice, Addison!”

“Addison,” urges another, “hang the guy and come on back!”

Well, we’re back, but we don’t think a whole lot of justice is being meted out today. After hearing a day’s worth of testimony — and expecting another full day today — the jury was assembled in the courtroom this morning, and we were told our services would no longer be needed for the trial. We could still go pick up our $15 at the jury assembly across the street. But, “Thank you very much for serving your community, goodbye.”

We have our suspicions as to what happened. A drug deal went bad. One guy shot another point-blank in the chest. The first officer on the scene found the victim lying dead on his own front porch, being cradled by his father. But the star witness for the prosecution, the guy who was supposed to put the gun in the defendant’s hand and his person at the scene, didn’t have quite the impact the state’s attorney was expecting yesterday.

After we viewed a signed statement in which the witness said he was in a truck with the defendant and heard the defendant say he was going to get his “joint” (his gun) and “take care of the situation”… after he testified under oath repeating the same story… and after we listened to a recorded statement in which the witness repeated the story once again to homicide detectives…

We learned it wasn’t possible for him to actually be in the truck on that day or hear what he said he heard… because the witness himself was in lockup on gun charges, assaulting a police officer and narcotics possession.

Oops. The prosecuting attorney looked like he was going to blow a gasket in the courtroom. He may have been all of 25 years old.


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