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Out of Control Policy Blog Archives: 5.6.12–5.12.12

Fannie Mae Breaks Its 14 Quarter Bailout Streak


Fannie Mae performed a magic trick this past quarter: they made a net profit including their dividend payment to Treasury for the first time since the fall of 2008 when they were taken into conservatorship. This week, Fannie Mae's 1Q 2012 earnings statement was actually an earnings statement. They posted a $2.7 billion profit, and were able to make a $2.8 billion payment to Treasury, covering the balance of the payment with a few hundred million built up in positive net worth, according to The Wall Street Journal. 

Last year, Fannie Mae lost a net of $16.4 billion. With the $0 loss figure through the first quarter of 2012, that means the updated complete taxpayer bailout total (3Q2008 to 1Q2012) for Fannie Mae remains:

$116.2 billion

So while a few kudos are in order for not having to go hat in hand to taxpayers for a 14th straight quarter, Fannie Mae is far from being out of the woods. Of that $116.2 billion bailout given to Fannie Mae, $22.6 billion has been paid back, leaving a remaining balance of $93.6 billion.  

There were a few different reasons that Fannie was able to turn a profit. The WSJ reports:

Part of the profit is due to gains that resulted from an upswing in interest rates earlier in the year, according to Jim Vogel of FTN Financial. He pegs the contribution to profit at around $1 billion. With rates having retreated recently, this could reverse in the current quarter.

Another factor was an improvement in credit quality leading Fannie to set aside less money to cover souring mortgages. That the company needed $2 billion in provisions for credit losses, compared with $10.5 billion a year earlier, is positive. It shows Fannie's losses are growing at a slower rate, while profit from more recent, better-quality loans should bolster results going forward.

Fannie also said the serious delinquency rate for single-family mortgages declined to 3.67% in the first quarter from 5.47% a year earlier. A slower rate of home-price declines has helped on this front. 

The challenge for the future is that the Fed is promising continued low interest rates for the coming years, and there are million of homes that will be foreclosed on in the coming years as well. Losses will likely slow, but continue to mount in coming quarters. 

Freddie Mac also had a relatively good quarter, asking for "just" $19 million to cover losses from the first three months of the year. The combined total taxpayer bailout from 3Q2008 to 1Q2012 for Fannie and Freddie is now:

$71.365 billion (Freddie) + $116.2 billion (Fannie) = $187.565 billion

Here is an updated list of Fannie Mae's quarter bailout needs:

  • 1Q 2012 — $0B
  • 4Q 2011 — $4.6B
  • 3Q 2011 — $7.8B
  • 2Q 2011 — $5.1B
  • 1Q 2011 — $8.5B
  • 4Q 2010 — $2.6B
  • 3Q 2010 — $2.5B
  • 2Q 2010 — $1.5B
  • 1Q 2010 — $8.4B
  • 4Q 2009 — $15.3B
  • 3Q 2009 — $15B
  • 2Q 2009 — $10.7B
  • 1Q 2009 — $19B
  • 4Q 2008 — $15.2B
  • 3Q 2008 — $0B

See last quarter's post on Fannie Mae's losses here.

See full coverage of Fannie Mae and Freddie Mac here


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Washington Outer Beltway and I-495 BRT Have Benefits

Last Week transportation reporter Martin Di Caro of Metro Connection received a dressing down by David Alpert of Greater Greater Washington. Alpert argued in a column that Di Caro’s transportation article was one sided. Specifically, Alpert took notion with the idea that an Outer Beltway or other arterial highway could solve congestion in the Washington area. Other environmental and smart growth advocates issued similar critiques. 

Alpert accurately highlighted some of the shortcomings of the article. He was honest in noting that all of his articles are opinions and in detailing the difference between editorials and objective news coverage. I also agree with him about the quality of transportation coverage. Washington DC is fortunate to have dedicated, knowledgeable transportation reporters such as Robert Thompson of the Washington Post. But transportation is not as big a priority as issues such as taxes or defense. Sometimes transportation beat reporters are just passing through to other more lucrative positions. Most of the DC media tries very hard to offer balanced transportation coverage; but transportation is often the red headed stepchild.

However, I think there are several good reasons that Albert is not considering for building a parallel expressway. While some pro-highway groups can serve as boosters for new roads that may not be justified, some environmental groups are just as guilty of bias. Environmental groups have delayed many needed highways with minimal environmental impacts. 

Yes, new highways do induce demand. But that does not mean highways should never be built. A highway linking western Fairfax and western Montgomery could also serve drivers trying to avoid the Capital Beltway. As Alpert notes the Capital Beltway does not serve its original purpose. As many commuters travel from one location along the Beltway to another, travelers trying to bypass Washington D.C. become stuck in the 4-hour morning and 5-hour afternoon rush-hour traffic jams.

New highways do not necessarily induce new development. Several steps can be taken to lessen this phenomenon. First, the number of exits can be limited. Much of the new development occurs near exits because highways offer quick access between existing jobs and new residences. Second, the exits can be placed in areas that are already developed. Small existing communities are prevalent in Western Fairfax and Western Montgomery counties. 

Further, Washington is a growing metro area. While some new residents move to the District, Bethesda, or Tysons Corner those locations are not right for everybody. Some residents prefer to live outside the beltway or in the exurbs; others cannot afford to live close-in. Proclaiming that we are never ever going to build new highways is “solutionism” where one solution is the answer for every problem. It is no better a policy than deciding to build new highways everywhere, wherever there is a slight amount of traffic congestion. 

The region absolutely needs better transit solutions between Bethesda and Tysons Corner. The challenge is finding the best solution. In many corridors it is bus-rapid-transit (BRT) and not rail. BRT runs managed lanes such as high-occupancy vehicle (HOV) or high-occupancy toll (HOT) lanes. In addition to providing operating space for reliable, cost-effective and attractive transit, managed lanes encourage carpooling and vanpooling. Virginia will allow single person vehicles to use the managed lanes providing they pay a small toll. However the tolls will rise and fall with congestion to ensure buses will always travel at 45 miles per hour or higher. Virginia is building managed lanes from I-95 to The Dulles Greenway. Maryland is studying the system. A managed lanes system from The Dulles Greenway to I-270 could be operational in less than ten years. 

In many situations the solution is not rail. The most recent cost estimate for Maryland’s proposed purple line from Bethesda to New Carrolton is almost $2 billion. While Maryland is hoping that the federal government will pick up half the tab, opposition to the route and the cost continues to grow. A deluxe BRT system would cost less than a third of the light-rail line. The BRT system would also cost about $10 million less per year to operate. More details on why BRT is a better choice for that corridor are available here.

Unfortunately, many urban interstates were built through low-income minority neighborhoods. Routes were built in these locations because land prices were the cheapest and opposition the least well organized. In addition highways were used for socially nefarious goals. While urban interstate construction was often curtailed for good reasons, DC never built a highway network. As a result there are a limited number of ways for traveling in the DC region. The Potomac River and the lack of interjurisdictional cooperation further increase congestion. While it is much more challenging to build a new highway now than it was 40 years ago, a well-placed new expressway could provide many benefits. 

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Latest Articles on Reason Foundation

A Long Slog Ahead on Unemployment

There have been a lot of stories lately about the challenges of college graduates finding a job. They aren't without merit. Here is a snapshot of the problem from The Wall Street Journal:

Graduating college students face a mixed job market at best this year, and most will leave school without an offer in hand, despite an uptick in hiring by on-campus recruiters... In a study to be released Thursday, the John J. Heldrich Center for Workforce Development at Rutgers University found that recent graduates are taking awhile to find work. Only 49% of graduates from the classes of 2009 to 2011 had found a full-time job within a year of finishing school, compared with 73% for students who graduated in the three years prior.

Daunting numbers. Here is how BLS April 2012 unemployment numbers look— 

The links to those numbers will update each month so if you're reading this in June 2012 or later follow the link to see what the status is.

As bad as these numbers are, the unemployment problem is really worse than this. To start, the labor force participation numbers are artificially reducing the headline unemployment number, so there is more than 8.1 percent of the work force that is unemployed. Beyond that, there are several long-term demographic trends that are weighing on the labor force today. In a column over at Reason.com this afternoon I outline these trends and frame up a pretty negative outlook for the employment market.

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(Video) Interview on Reason's New Mortgage Reform Study

Earlier this week I appeared on Fox Business to discuss our recent Reason Foundation study "Restoring Trust in Mortgage Backed-Securities." We argue that to end the government housing monopoly and reduce the $5.8 trillion in mortgage debt liability taxpayers have as a result, that Congress should authorize MBS investors to have access to more information about the mortgages they are buying, and that the mortgage industry should create a group to create clear mortgage definitions that do not rely on federal regulations like the qualified residential mortgage.

Read the full study here

See our press release here.

Also, read our summary op-eds at RealClearMarkets and the DailyCaller.

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Private Screening Could Solve TSA Theft Issues

The Transportation Security Administration (TSA) is hiring screeners without adequately checking their backgrounds. Recently, the TSA purchased equipment that does not work, mishandled screening of congressional members and allowed a loaded gun on a plane.

According to Bloomberg:

The arrest April 25 of two current and two former TSA screeners at Los Angeles International Airport marked the third bribery case involving agency employees this year. Also in April, a TSA screener admitted to accepting $1,200 in bribes from drug traffickers sending the narcotic oxycodone from Florida to Connecticut through an airport in White Plains, New York.

Agency officers have also been accused of stealing iPads, cash, laptops and jewelry from baggage.

“This pattern suggests there’s something wrong in the vetting process TSA uses in hiring and screening its own people,” said Robert Poole, director of transportation studies at the Reason Foundation in Los Angeles, which advocates for free market solutions to policy issues. “It’s certainly a question Congress should be asking.”

All TSA security officers undergo thorough criminal background checks, submitting their fingerprints to the FBI and cross-checking names against terrorist watch lists, Kawika Riley, a TSA spokesman, said in an e-mail. 


Applicants are supposed to be disqualified for any one of 28 criminal offenses ranging from interference with navigation to espionage, treason and felony arson. Theft and bribery felonies are on the list, as are unpaid taxes, child support arrears or $7,500 in delinquent debt.

The TSA said in a 2008 post on its official blog that more than 200 employees had been fired for theft. Last year, taking a closer look at agency numbers, the news website New York Press concluded the number had expanded to about 500.

Agents were sentenced to jail terms after being convicted of stealing $40,000 from a checked bag at New York’s John F. Kennedy International Airport.

All agencies both public and private are going to have some personnel issues. Hiring is an imperfect science. However, the TSA has a problem with a much higher percentage of its employees than other government departments or private companies. Assuming DOT is accurately checking the background status of its employees, the agency is targeting the wrong people. The agency needs to study its hiring and recruiting standards to determine why so many future employees might be tempted to steal from customers.

One solution for solving this problem is for TSA to set the security standards but have private companies run the screening operation. If private screening company employees engage in criminal activity, the companies could face penalties or contract cancellation. As a government monopoly the TSA has no incentive to improve its hiring. Creating a better process would be the “right thing to do” but I am not convinced TSA leadership will be moved by a moral argument. 

The U.S. screening model is different from the process in many other countries. In most European countries and Canada private screening is the responsibility of private companies. The Governmental Accountability Office and others have studied private contracting and found the performance of TSA screening contractors to be as good or better than that of TSA’s own screeners. A 2008 catapult study commissioned by the TSA suggested that the agency expand private screening to several different types of airports. Instead of implementing the report's findings, TSA ignored its own study and refused to publish the results.

In the recently passed FAA reauthorization bill Congress requires that TSA now provide details on any opt-out application it denies. In the past, TSA has denied most of the applications because they did not provide a "clear and substantial benefit."

According to my colleague, Bob Poole, in March’s Airport Policy and Security Newsletter #77:

CNN reported on Feb. 2nd that TSA turned down two pending airport requests to take part in the Screening Partnership Program while approving one. Both Mooney Airport in Montana and Orlando Sanford in Florida (in Rep. John Mica’s district) were denied access to the program, because they “failed to demonstrate an operational, security, or cost advantage that provides a clear and substantial benefit over federalized screening operations.” Those criteria are not in the 2001 Aviation and Transportation Security Act legislation; they are the creation of Pistole and his TSA team. Moreover, insisting that the airport demonstrate a cost savings in advance is very difficult, since the airport itself is unable to issue an RFP and select the most responsive and cost-effective TSA-approved company. Instead, the way TSA has always managed the process, the airport applies to TSA for permission and if TSA deigns to grant it, TSA itself selects (by a process known only to itself) the security firm it deems the best fit for that airport. 

The airport that was approved is West Yellowstone in Montana. That airport is only open about half the year, and so under TSA screening, the agency flies in a team of its screeners each spring, puts them up in local lodging, and flies them home again in the autumn. Hence, if the airport hires qualified locals to do the screening, the cost will be about half, once travel and lodging costs are eliminated.

In the past, TSA director John Pistole and the Obama Administration relyed on ideological reasons and not sound policy analysis for their rejection of private screening. Maybe the new aviation bill will change that; but its doubtful.

Safety and cost issues should override politics in something as critical as airport security. But that’s not how the TSA operates.

For more details on private screening see the Annual Privatization Report 2011: Air Transportation.

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Bair on U.S. Bond Bubble Possibility

The United States government, the Fed and financial markets don't have a great track record when it comes to spotting bubbles. The financial markets missed the dot com bubble in the late 90's and, more recently, the Fed didn't pay close enough attention to the housing bubble, which peaked back in 2006. Is it possible that we could be in the midst of yet another bubble?

There are potentially multiple bubbles starting to inflate, but In a column published last week in Fortune, former FDIC chairwoman, Sheila Bair (whom we've highlighted opinions from in the past), focuses  on one potential bubble in which we may be in the middle of. She argues that the U.S. is currently experiencing a bond bubble that is being fueled by the Federal Reserve. Bair argues:

"The Fed has maintained interest rates at or near zero for four years running, even though the financial system has been relatively stable since 2009. The Fed's actions have kept Treasury bond prices high (while keeping the government's interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in."          

Her argument is dead on. The Fed has maintained a zero interest rate policy since late 2008 and actively pursued policies designed to further lower interest rates on bonds (ex. Operation Twist, though it didn't quite work). What has been the result? When you look at countries in terms of their debt-to-GDP ratios, the United States (estimated at 104.8%) is among the likes of Ireland (104.9%), Portugal (110%), and Italy (120%).  But unlike our undistinguished company, we have fairly low bond yields on  10-year treasury bonds compared with the yields on comparable 10 year (9 year for Ireland) government issued bonds from the previously mentioned countries  (1.88% compared to 6.82%, 11.06%, and 5.44% respectively). This translates to higher prices on U.S. bonds (hence the inflating bubble analogy) than we should theoretically have.

Bair acknowledges that defenders of the Fed's policies will point to Japan as an example of a country, which has run up huge debts without experiencing a bond bubble burst. And in some respects we are similar to Japan, which has an astronomically high debt to GDP ratio (at 233.1%), yet only a 0.92% yield on its 10-year bonds. But Bair points out some key differences.

"Japan enjoys a trade surplus, and its debt is held domestically. In contrast we run persistent trade deficits, and foreigners hold over half our public debt. To the extent foreigners keep buying Treasuries, it is because Europe's problems are worse. In short, we are the best-looking horse in the glue factory. "

You know the country is in bad shape and there is some economic danger when defenders of the Fed's policies have to justify themselves by pointing to Japan, a country which has been economically stagnate for decades, as an economic role model. Beware the bubble bond. 

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Freddie Mac Takes $19 Million More from Taxpayers

Freddie Mac reported last Thursday it needs $19 million from the U.S. taxpayers to remain solvent after making a dividend payment to the Treasury department following first quarter 2012 financial reporting. The government-sponsored enterprise made a net profit in the first quarter, but that was before factoring in the dividend payment they have to make to Treasury for the luxury of being bailed out of losses from previous quarters. Freddie asked for a total of $19 million from Treasury for for the first quarter of 2012. 

In total, Freddie Mac has received $71.365 billion in bailout money from the U.S. Treasury since FHFA took the GSE into conservatorship in late August 2008. Here is the most recent breakdown of taxpayer quarterly checks for Freddie Mac:

  • 1Q 2012 — $0.019 billion
  • 4Q 2011 — $0.146 billion
  • 3Q 2011 — $6 billion
  • 2Q 2011 — $1.5 billion
  • 1Q 2011 — $0
  • 4Q 2010 — $0.5 billion
  • 3Q 2010 — $0.1 billion
  • 2Q 2010 — $1.8 billion
  • 1Q 2010 — $10.6 billion
  • 4Q 2009 — $0
  • 3Q 2009 — $0
  • 2Q 2009 — $0
  • 1Q 2009 — $6.1 billion
  • 4Q 2008 — $30.8 billion
  • 3Q 2008 — $13.8 billion

Last quarter Freddie asked for $146 million, so at least their asks have been declining since the third quarter of 2011. (See full details here.)

See our full coverage on Fannie Mae and Freddie Mac here.

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Video: French and Greek Elections Were Not Proof Austerity Doesn't Work

Over the weekend France elected a new president, the Greeks shuffled their parliamentary make up, and Germany's leading party lost some local elections. The votes are viewed as a push back against the way European governments have handled the continent's sovereign debt crisis. Some analysts have been quick to argue that this proves austerity doesn't work. 

And that is the basis of the debate in the video below, a panel discussion from RT last night. However, I argue that this doesn't prove much of anything about austerity in general. Citizenry are not to be blamed for being upset with austerity measures. The whole point is that it doesn't feel good to get your fiscal house in order after a spending binge. The democratic reaction doesn't suggest the viability of the plan's capacity to achieve its goal of reducing government debt. 

While the elections don't say anything about the viability of the idea of austerity, at least the Greek election suggests that the form that austerity has taken in Greece is not the best approach. The big winners in the parliamentary elections were groups that despise outsiders and want to take back control of their country. Their win was the Greek people (at least the very low 65 percent of them that turned out to vote) saying it is unfair for Greece to take sharp budget cuts while still being saddled by the Euro so that the rest of Europe can avoid GDP losses that would occur if Greece left the European monetary union today. Eventually they will have to leave, but for now Europe gets to wall off that threat and plan for an orderly break.

In France, the election could also be seen as a nationalistic movement. All indications are that the vote was more anti-Sarkozy then pro-Hollande. There is a bit of populism that likes his tax the rich mentality. But Hollande seem to win over France with his Mr. Normal pitch vs. Sarkozy's flashy style that has worn out its welcome in France. Moreover, there could be some frustration in France that Sarkozy allowed Germany so much run of the house on the debt crisis negotiations. Germany will now have to deal with a more nationalistic government when sorting out coordinated actions to bail each other out.

(Side note on Greece: it is unlikely they will be able to form a government that lasts. The two parties receiving the most votes only form about 30 percent of the parliament, making it necessary for a big tent coalition to work out in order to avoid a new election. And even if that happens, such a coalition will be very susceptible to the need to make big decisions on budget cuts and handling negotiations with the rest of Europe. Further complicating the matter is the scatter shot approach that the Greek populace took in their choice of representatives this year. Not only did a far-right, neo-nazi group get 20 seats, but a far-left, old line communist group also got more votes then they'd seen in a long time. History does not need to be consulted that far back to suggest that the combination these two failed ideologies mixing as one is not likely to be the chemistry needed to get Greece on solid footing.) 

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