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• Fannie and Freddie: Backed by the U.S., owned by China,
• To drill or not to drill? That’s today’s question,
• Ham-fisted dictators, sticky-fingered kleptocrats and more…

Joel Bowman, reporting from the pristine Vancouver coast…

It’s touchy subject time!

While trying to fashion a question that included environmental concerns, oil drilling, cash outflows to hostile, foreign lands and a clear political partisanship, we asked the inimitable Rude readership whether the U.S. should pursue offshore drilling.

Here’s what a few of your fellow readers had to say on the subject after we threw the cat amongst the pigeons over the weekend…

Reader JDA reckons…

“I am very much in favor of offshore drilling in US waters. I believe the technology supporting the industry has certainly been proven around the world. I believe the risks of spills and pollution are minimal because of that same new technology as well as 40 years experience since the spill off
Santa Barbara in the late 60’s.

“Whether or not it greatly reduces the price at the pump it is a big step toward self reliance in using our reserves. It would create more jobs and last but not least it would plug a hole through which massive amounts of US cash has gone to the Middle East, hurting our economic strength.

“Yes drill, but do so with the knowledge, technology and insight that has been developed over the last forty years and with a vision of a future of clean energy in abundance!”

Reader Jim Stiles reckons…

“Between 1999 and 2007, drilling permits increased more the 361 percent, yet gasoline prices continued up: not down. Finding more fossil fuels only postpones the problem of peak oil and we only make the global warming crises worse. The only real answer is conservation and alternative fuel.

“We have 2% of the world’s known reserves and use 25% of its fuel. We could drill on every beach and in every national park and still fall way short of meeting demands. Increased oil discoveries today would take at least a decade to have any effect on the price of fuel. As usual, Bush is playing the politically popular side of an issue: and as usual, doing the right thing is last on his list of choices.”

Reader Dwight Kothmann reckons…

“I spent some time offshore on merchant vessels supplying the oil patch. They constantly drilled but always pulled out just shy of the pool. That was the work of the completion drillers. I think we have plenty of oil, we just don’t have common sense. I mean, thirty-five years to awake from a coma and decide we have an energy crisis. Al Gore hasn’t had an original thought in his head since he was born. With the likes of his ilk, we will indeed have a never ending energy “crisis”. McCain hasn’t been told by his handlers theres a crisis, and I am sure at his age we shouldn’t shock him with this revelation. Obama will throw money at it (our money) and schmootz everyone back into a coma.

“Our energy needs can be met with applications of common sense and conservation. We are living beyond our means and the “carbon” tax is just another way to perpetuate the clowns within the beltway. Let’s just cut to the chase and use horse and buggies. This way the insurance companies would be out of the way, and the energy cos. could line up for their vouchers.  Wonder what my carbon footprint would be for a horse?

“I gave up hope a long time ago, as long as the status quo remains, nothing will change. I live on a sailboat, and I know exactly how much water, electricity, and space I use on a daily basis. If we don’t go back to the basics we are doomed.”

Back onshore in the Empire, investors and commentators are bandying about the “F” words like drunken barroom brawlers. With a few choice insights into the Fannie and Freddie fiasco, Bill Bonner offers the column below. Enjoy and send your thoughts to the address at the bottom of the email… 

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Fannie and Freddie: Playing with a Stacked Deck
By Bill Bonner

As recently as February of this year, Russian officials cleared the way for two of its sovereign wealth funds, the Reserve Fund and National Wellbeing Fund, to invest in various foreign bonds, including those issued by the twin towers of American residential finance, Fannie and Freddie.

“The prospect for every GSE bond clearly states that it is not backed by the United States government,” says Matt Kibbe, president of FreedomWorks. “That’s why investors holding agency bonds already receive a significant risk premium over Treasuries.”

The Russians ignored the warnings and grabbed the risk premium. Today, fully 21% of Russia’s monetary reserves are invested in the obligations of Fannie, Freddie and the Home Loan Banks. And the largest holder of Fannie and Freddie debt is another friendly foreigner, China. The middle kingdom, according to the FreedomWorks organization, owns $376 billion worth of U.S. agency bonds. Altogether, foreigners hold $1.3 trillion of them.

Maybe the foreigners didn’t understand what they were getting into. Or maybe they did.

Franklin Delano Roosevelt, whose family had made a fortune in the opium trade, promised the nation a “New Deal” during the Great Depression of the ’30s. But what he gave it was more like the old false shuffle. The president pulled cards from the bottom of the deck, pretending that government
bureaucrats could do a better job of allocating capital than private investors. In 1938, he set up the Federal National Mortgage Association, b.k.a. Fannie Mae. Then, as now, the national housing market was in crisis. House prices had been declining for almost a decade. Who wanted to lend money against falling collateral values? Only a fool…or a government.

For the next 32 years, the firm resembled a nationwide savings and loan institution — borrowing from large institutions and lending to smaller ones, keeping a piece of the spread for its trouble. But Fannie Mae was an imposter from the get-go. Lenders knew that it had something no free market business ever had – the full faith and credit of the US government behind it. Fannie was able to borrow at below-market rates; lenders knew they had no risk of losing their money in a default or bankruptcy. Fannie, with the aces dealt her by the Roosevelt administration, dominated the business for the next 30 years.

Then, another crisis came along, followed by another bamboozle, this one perpetrated by Lyndon Johnson. Specifically, the feds were spending too much on wars – the War on Poverty at home…and one against the Viet Cong across the ocean. Victory eluded Lyndon Johnson on both fronts, but his handling of Fannie Mae should have brought him at least a bronze star. Attempting to balance the government’s ledgers (this was in the days when Americans still believed in balanced budgets), he moved the mortgage business off of the Federal government’s books, privatizing it as a ‘government sponsored agency.’ For good measure, he created a competing organization – the Federal Home Mortgage Association, b.k.a. Freddie Mac.

Many are the ham-fisted dictators and sticky-fingered kleptocrats who have nationalized industries. Even without a credit crunch for camouflage, Francois Mitterand nationalized 36 leading French banks in 1982. Robert Mugabe grabbed farmland in the Zimbabwe. Evo Morales took the gas industry. And Hugo Chavez seized the Orinoco oil fields in 2007. But Lyndon Johnson rarely gets credit for his great advance in the history of public larceny: he privatized the profits while nationalizing the losses. This formula has been a honey pot for clever dirigistes ever since, providing countless opportunities for defeated politicians, hacks and hustlers – speaking fees, consulting contracts, board memberships, bonuses, stock options (notably, the $170 million spent on lobbyists over the past 10 years…mentioned above) – things that wouldn’t be possible for a “public” company. In effect, Fannie Mae could pick the taxpayer’s pocket twice – once by sticking him with a mortgage he couldn’t really afford and a second time by raiding the taxpayers’ vault for a bailout.

In the case at hand, by the year 2007, the CEOs of Fannie and Freddie were earning salaries that would have been respectable, even on Wall Street. Fannie’s main man, Daniel Mudd took home $13.4 million in 2007, a year in which the firm lost $2.1 billion. While the Freddie Kruger of mortgage finance, Dick Syron, pocketed $18.3 for helping Freddie Mac to a $3 billion loss and a 33% trim for the shareholders.

As recently as May of this year, Mr. Mudd told the New York Times that he was “seeing the best opportunities since I’ve been in this business.” Two months later, both Fannie and Freddie are “insolvent,” says former Fed governor William Poole.

In a better world, Mudd and Syron would be hanged…and the bondholders would be wiped out along with the shareholders. But last Sunday, U.S. Treasury Secretary Henry Paulson announced a bailout. And on Monday, an auction of Freddie Mac debt was oversubscribed. The Russians were right; the deck was stacked from the very beginning.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here: Mobs, Messiahs and Markets

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[Rude Endnote: Apprehensive traders have barely nudged the markets early this morning. The Dow, S&P and Nasdaq have all inched higher, but by less than 0.15% each. Oil too is creeping slowly higher and trades right now for a shade under $130. Meanwhile, gold’s up another four bucks. An ounce of the shiny metal will set you back $962.50.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com