Wrote this around 2008 to explain the financial crisis and the implications for US China relations.
Hope you see some relevance to current chaos, or at the very least understand the cynical humor.
Fannie Freddie and the Chinese: The IOU Laws
Hu’s your daddy now
or is it Yu is the Patsy
Those statements are going to make sense once you read this email. This is an attempt to explain what happening in world of high finance and world politics right now. This is Long, and you are ADD jump to the end and read the Law and the consequences.
There has been a lot of brouhaha on the Freddie and Fannie and their preferred shares.
As usual thats smoke and mirrors.
The bigger problem are Mortgage Backed Securities (MBS) issued by Fannie and Freddie and the Chinese who own a large chunk of them
For the uninitiated:
Somebody got a loan for a house. They promised to pay that back and make monthly interest payments well.The bank took that IOU note (and a lot of others) and sold it to Freddie and Fannie. Fannie and Freddie in turn collected all those IOU’s and bundled them into a Big Ole IOU. Then gave it a fancy name called Mortgage Backed Security (MBS) and that Big Ole IOU was now an Asset. If one wants to know more about MBS, and Ubernerd called Tanta has written more than you ever want to know at a place called Calculated Risk. For our purposes all you need to know is that MBS is name for big IOU which is made up of little IOU’s
See, now when I was growing up, an Asset was something you could wrap your hands around. Or you get someone else to wrap their hands around it. First a story
Right out of school, I started working in a audit firm as an articled clerk. It was a job a that paid a very much less than indentured servant (125 Rs, USD 12 per month !) and tasks not much better. One of the first on site audits I did was for Mercantile Investments, who financed cars on Hire Purchase. This type of business is called, Leasing these days; same stuff different name. So as I am checking receipts/invoices and I come across this whole pile that just says Payment to xxx. And its a lot of money (remember I was getting only 125 Rs) 3,000 Rs each month. This definitely warranted an investigation, so I asked Philip who headed the audit and was never around what I should do. Phillip (Babapulles) say “Send the guy a post card (this was before cellphone days) and ask him what it is all about”. Couple of days later, the receptionist tells me some one has come over to answer the audit questions. Now I had heard of the de Goon family of Sri Lanka but had never met one. The gentleman seated at the reception didnt need an introduction. This was an honest to God, de Goon. I didnt need no introduction to recognize a member of the de Goon family. The instinct self preservation kicked in, I apologetically said all I needed to verify if Company had actually paid de Goon. See, I had the best interests of Mr. de Goon in mind. End of conversation. Note to self: No more postcards to Mr Gune de Goon in Goontown. (Gune means good in Sinhalese).
So you ask what the hell has my job got to do with MBS and Fannie and Freddie. Please bear with me: there was a moral to that story. Continue reading “Fannie Freddie and the Chinese: The IOU Laws”