Barney Frank, known primarily for his irritating lisp, incoherent rambles and of course his now infamous statement "Fannie and Freddie are not in danger...and pose no systematic risk to the financial system." Of course, further research found that he once dated someone at FNM who was basically the lobbyist for the upper echelon there to have their will imposed on lawmakers to 'look the other way' and as we all know now, Frank was one of the largest recipient of FNM/FRE campaign donations. Also, keep in the forefront of your mind that Frank chairs the House Financial Services Committee and this committee can set forth proposals to shape the financial services industry of our country.
Having said all that, now we are at the point where Frank, obviously having not learned anything about the FNM/FRE collapse wants to spread the 'zero risk to the taxpayer' model to Municipal Bonds. This spells doom if history is any professor. He stated that FNM/FRE would 'pose zero risk to the taxpayers' but of course we know how much that has cost us now...well over $200 billion that we can actually document. So what exactly is his proposal that could effect the Muni Bond market?
First a recent history review...State and local govts have been having a hard time issuing debt because citizens in those states and buyers of that debt feel that the default risk is inching higher, meaning repayment of that debt is growing more unlikely and that taxes will have to increase. Late last year Frank pushed a bill to force S&P & Moody's to raise their bond ratings on municipal bonds. This would effectively make 'Joe Public' feel more secure that the rating they are getting when purchasing the bond is more secure. So the rating agencies wouldn't be rating debt issuance based upon actual default risk they would be rating debt based upon pressure from, not only shareholders, but also the US Govt. Wait, they are now one and the same right since we the taxpayer's elected government owns FNM/FRE. Sound familiar? If not, look into the MBS nightmare that now plagues our financial system.
So, not having learned the lesson that 'for profit' rating agencies will do the bidding of the shareholders to boost profits, Frank intended to have them forced to issue faulty debt ratings. Wow! But now, an even more dubious stretch to doom the taxpayer he wants an FDIC like insurance program whereby jurisdictions issuing debt would pay insurance premiums into a government fund and the government would guarantee the debt against default. Large private companies, like Warren Buffet's Berkshire Hathaway, MBIA and Ambac, already insure muni bonds. If Frank believes that the state and local governments overpay for this insurance than one must assume that the government will charge less and thereby undercut the private market by charging lower premiums. What did we just learn about purchasing insurance and cheap costs spread across a debt obligation? If you don't recall google 'credit default swaps and economic collapse' and you will get over 101,000 links.
Who is one of the largest holders of municipal bonds? Pension and retiree plans. So who does this 'zero risk' really effect? Anyone who ever wants to retire and has some financial advisor or institution controlling your money investing in muni bonds as a 'safe haven of protection against a decline in equity markets.' Many state and local governments have run up huge pension and health-care obligations to retirees that will come due over the next couple of decades. When these bills hit these localities will have to choose to raise taxes, cut benefits or screw the bondholders. Hmmm, I wonder which one they will choose? Raise taxes on the middle and lower class? Not likely. Cut benefits to the elderly and retiring working class? Not a chance. Well, that leaves...you guessed it.
Barney Frank had already issued one guaranty, that FNM/FRE posed zero risk to the economy. Now he wants us to double down on his new ploy. You would think that would collapse of the Ponzi Scheme that was the GSE's would have ruined his career (like Madoff) but when Joe Public is told to look the other way while a politician dazzles you with 'AIG bonus outrage' or 'Stimulus Bill or risk the collapse of our economy.'
Is it any wonder why we don't trust 90% of our elected officials? Sound the alarm on this one if you invest in retirement plans managed by an institution and you ever plan to retire. At the alarming rate our government is changing the landscape none of us will be allowed to retire lest we live by paultry means to do so.
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