Sunday, January 2, 2011

Fannie Freddie and the Chinese: The IOU Laws

Wrote this around 2008 to explain the financial crisis and the implications for US China relations..

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.
If you are in the car leasing business or by extension the IOU business you need the services of the de Goon family. Dont want to deal with that de Goon family then find another line of business, that does not deal with IOU's.

I call this this the IOU law 1: If you are in IOU business you need the de Goons.

The Jewish community knows this law very well. They got the message well and truly when Shakespeare wrote Merchant of Venice. See ole Shylock entered into an above board agreement and got an IOU from Antonio. Then Antonio cant pay up and does not want to honor his IOU and has the support of the de Goons. You the reader argue what has the Portia to do with de Goon family. She is really Portia de Goonelli who "passes judgement" and then sends the Goonelli's to "enforce judgement". See Shylock was in the IOU business but he did not have the services of the de Goons. He broke IOU Law 1.

This brings us to IOU Law 2: If you are in IOU business and dont have the de Goons,you can be charged with YouDaJew, which can have penalty ranging from confiscation of Assets to to death, yes death.

If you have broken IOU Law One, you can be charged with the law YouDaJew. To explain how this law works, I turn to example from the famous history book Ivanhoe written by Scott. Mr Templar de Brute-Guinbert and his friends had given many IOU's to I-say-eek of Yak. But I-say-eek was in violation of IOU law 1: So, Mr Templar de Brute-Guinbert decides to charge I-say-eek with IOU Law 2 and confiscate I-say-eek's assets and daughter as well. Luckily I-say-eek has a friend in Ivangood and all ends fairly well. Actually Shylock was also charged with IOU Law 2 and assets confiscated, Its just that I aways liked the Ivanhoe history book.

It was after that the Jewish Community got into the bauble and stuff business, i.e. as in; I give you stuff/Baubles you give me cash. Talk about cash business and see eyes light up. The other community that loves the cash business is our South Asian compatriots up North, the Yindians. I think they are relatives of the Jewish community based on nose size. They have always done cash only business, but of late seem to be venturing into the IOU business. So for nobody has written MeYindian of Uganda, so the message hasnt got thru about the YoDaIndian law. Its the same law as YouDaJew just a different language. In Malaysian/Vietnam is the YouDaChink and in Sri Lanka its the YouDaDemala. ( More on this, i.e the bauble business, the dreams/intangible business at another time).

I know this seems to be getting too long, and you must be thinking you better get to the point. Unhappily I have to tell a fairy tail. No, No, not that kind of the fairy or tail. The main character of this story as has always been against fairies, though of late they have been making a song and dance of liking fairies. No, this story is a fairy story as in the Grimm Borthers (Grimm Brothers?, fairy tales?, I think i need to re-read this stuff). Anyways here goes.

See, there was this small town where the big Kahuna was the Johnny be Good family. In the past they used to dig up stuff in their backyard and make things and give them to the people in the village. These things made less work, like not having to walk to get to places. As usual there were the cynics, that said you had to work harder, to get the stuff to keep the things that made less work, keep working. Then there are the other who whisper that the be Good family were really de Goons who changed their name. That does not really matter for the MBS story, I think. Anyways, of late the be Good dont make stuff, the rest of the village makes stuff for the be Good's. The be Goods give the villagers IOU's for the stuff. However,there were some villagers who refused to give stuff and take the be Goods IOUs in exchange. They got slapped with the law DeDaTerrorist. This law has been around for thousand of years, but it was the be Goods who codified the law.

Let spell out those new laws

IOU Law 3: One be charged with DeyDaTerrorist, if they have got stuff and dont accept in exchange IOU's. Enforcers of this law are the be Goods. Another version of this law is DeyDaBlack. (They used another word a few years back which was like DeyDaNi......).

IOU Law 4: One is in compliance with YouMaFriend, if they have got stuff and accept in exchange IOU's. The compliance of this law is ensured the Peace Coons and Advisor be God. (be God is aclose relative of be Good).

Now that we know about the four IOU laws, lets get back to the MBS and the Freddie and Fannie story. If you remember a MBS is really a big IOU made from a whole pile of small IOU's. So, Fannie sell the big IOU to other people. Now, I like the use of the word sell, implying Fannie and Freddie are selling things. My understanding of an IOU was that hopefully some one would agree and trust in accepting a IOU. Anyways, lets use the accepted word sell. So, Fannie and Freddie sell the IOU's. The biggest buyer of these IOU's is China. You may well ask why is China buying IOU's. We need to get back in time for that.

See the good ole USofA had been wanting to get out of the making stuff business. Much cooler to be in the selling intangibles and dreams. You get to wear a suit and dont get your hands dirty. (Actually some of the makers of intangibles actually wear shorts and sandals to distinguish themselves from the sellers of intangibles). So the USofA got China to make stuff. The Chinese said thanks comrade, and got to it and started making stuff. So the Chinese were in the bauble and stuff business. The Chinese got in return from the USA, dollars which the USA said was good as gold.

I am going to digress for a little.

Everyone says dollars (or whatever) are good as gold. Why dont you bury dollars and gold in your back yard (dont put it in a box). Dig it up after a couple of years (10 years) and see which is better, I dont think the dollars (or whatever) will cut it. What about if a NM happens (Thats a Sri Lankan Experience). Essentially the then Sri lankan finance minster NM Perera decreed older Rupee notes invalid. To get replacement note just exchange your notes at the bank. The catch, beyond a cut off amount you got taxed, i.e 70% of what youhanded over. How's that for a taxation method.
Back to China and dollars. Mr. Maka Stuffa in China dont get dollars. The Chinese govt gets the dollars, and gives Mr. Maka Stuffa a couple of dollars. Cool scheme, beats taxation. Now, the the Chinese govt has boat loads of dollars. Word got around about the boat loads of dollars the chinese govt was holding. The next thing the intangible sellers, Mr Wall St (as in Saint) be Good was knocking on the door of the Chinese govt. Mr. Wall St. be Good says, "See Mr Chink (they tink its a compliment) you are loosing time value of money, your money has to grow".

Unsolicited advice on my part: If You dont know what time value of money is, dont worry about, just kick out those who say they do. They are trying to recoup what they lost learning the time value of money.

The Chinese govt guys think, these one smart cookies, wear a suit tie and all and got clean hands. They ask what should we do. Mr. Wall St. be Good " Buy Fannie Mae, MBS. Youll get all your money back and each year get interest as well". Chinese govt guys, "Heres all our dollars we got from selling stuff, Give us MBS"

You realize what happened. The Chinese went from the bauble/stuff business to the IOU business. Maybe they didnt realize MBS was really IOU business. Its also possible even if the book MeChink in Vietnam/Malaysia has been written, it is not really applicable.

So, whats the situation now. The Chinese have gazillions of IOU's from the USof A and big part of Fannie May IOU's. The Chinese can get wise and stop buying these IOU's. What happens to what they already own. This is what some call a Quandary, Conundrum. I call it "Holy shit, what the fuck should I do".

Lets see what can happen. This is really the IOU business. So the IOU laws apply.
Lets reiterate them before we proceed.

IOU Law 1: If you are in IOU business you need the de Goons.
IOU Law 2: If you are in IOU business and dont have the de Goons,you can be charged with YouDaJew, which can have penalty ranging from confiscation of Assets to to death, yes death.
IOU Law 3: One be charged with DeyDaTerrorist, if they have got stuff and dont accept in exchange IOU's. Enforcers of this law are the be Goods. Another version of this law is DeyDaBlack.
IOU Law 4: One is in compliance with YouMaFriend, if they have got stuff and accept in exchange IOU's. The compliance of this law is ensured by the Peace Coons and Advisor be God. (be God is a close relative of be Good).

a) China could say forget about the IOUs, lets move on and pretend like it never happened. The only problem is Mr. Maka Stuffa, might get pissed that the Chinese govt gave his dollars back to the Mericans to get granite counter tops.

b) The rest of the world could get together and make a gazillion big IOU for the US. This trick has been tried before for Weimar Germany. You know how that ended. The NastyVonGoons took over and enforced the DeDaTerrorist on the next door neighbors. The DeyDaTerrorist Law was called DeyNoAryan at that time. Next they went after their country guys and slapped them with the YouDaJew law, based on the IOU's being from the International Cabaal. You the reader will argue that NastyVonGoons stuff that happened had nothing to with IOUs. I say read it up or watch PBS.

c) The US could say to China, here are a couple of H-Bombs, Aircraft carriers and the like and lets call it quits.

d) The Chinese could say better pay up or we send the Mai Guns to enforce the IOU Law 1 against the USA . The Mai Guns have experience enforcing the DeyDaLama Law (Its DeyDaTerrorist Law in Chinese). That was a piddling little exercise and not on the scale to enforce a IOU Law 1 against the USA.

c) The USA could charge the Chinese with the YoudaJew law and attempt to enforce it with the be Goods. The only problem is this is not a cut and dry affair. Its unknowns as to who is the better enforcer, the Mai Guns or the be Goods.

I dont know whats going to happen. Keep tuned. Just remember this can all be explained by IOU laws.

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