moneypolitics & government

The Great Co-signer

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We’re getting some funny reactions to the eclipse of Solyndra. One tactical dismissal is the old threatened filibuster; you want to talk about the money wasted on Solyndra? What about all the money wasted on coal, gas and oil? Hmmm? And it is a good question. The presumption is that while there may be ups and downs in the New Frontier of alt energy, we KNOW “fossil fuels” are obsolete or at least bad, so…. And all talk is smothered under a threat of a days long energy policy seminar for which you feel yourself ill-equipped. Underlying this threat is the certainty that nobody…. that would be NO body is going to simply say, okay, stop it all. Of course they are correct. If ethanol, which starves the world but enriches Iowa while costing the nation billions can yet hold together a coalition of granolas and agri-business, the Solyndroids have solid grounds for their conviction. Log-rolling is a most popular sport in political fields even if it is not yet in the Olympics. So the total Solyndra loss is not much at half a bil and is only 3.4% of the outstanding solar loan portfolio. Alright, we can wait on that point until losses are at 30% as it won’t be long.

But another even more vapid “context” is the notion that no government cash went to Solyndra, only a loan guarantee. Of course it is true that the Dept of Energy program is one of loan guarantees for the most part. In other words, as you could get your folks to co-sign a car note for you if you are a young buck without a credit history, so Your Federal Family has vouched for a loan made to Solyndra. Now, one fact that rubbishes this defense instantly is that the loan was also made from the accounts of Your Federal Family; from the Federal Finance Bank in specific, which is an element of Treasury. It is as if your father co-signed on a loan from your mother. But that isn’t the idea generally. What the co-signers hope is that with their backing, those making the loan will see a lowered risk and respond with either better terms or a larger total amount. Perhaps both. In this instance though no one who is in the business of investing could see a good prospect of being repaid on ANY terms. Given that Solyndra’s products cost $6 to produce, sold at $4 and were entering a market where the going rate is $.75 (per sq ft) it is not surprising that accountants and big money investors would look askance. Another problem though was the government’s involvement itself. If you are a $10m creditor to a company that owes the gub half a billion and things go sideways you are sent to the back of the line for political reasons. The auto-bailouts and the brutal handling of corporate bondholders by Administration hirelings taught that lesson. So the gub stepped in, offering fab terms that actually put itself at the tail end of the line of creditors to mitigate the intimidating effect. Yes, this did allow Solyndra to raise a bit more private capital but it also means that we, as investors in the Federal Finance Bank, have essentially NO chance of being repaid. But that’s okay. The DOE will pay it. If you are crinkling your forehead into a furrow wondering how in the hell that would work, welcome to earth! Hopefully you recognize this as an internal version of a Credit Default Swap; those ugly buggers that have done so much harm in their implosion. But even when we are not simply co-signing on loans we have ourselves made there is always and to this day a great temptation to tap the well of our country’s borrowing and money printing power. This is that thing called The Full Faith and Credit of the United States of America, an account which is highly overdrawn.

The two mortgage giants of Fannie Mae and Freddie Mac likewise were built on that foundation. You know what they do, when your bank makes you a mortgage they are only lending you that money for a few days or weeks. While the bank services the loan, taking in your checks and sending you those little reminders of this or that, you really don’t owe them a centavo. Fannie Mae has come in one day recently and bought up all the mortgages your bank created. Therefore that money they loaned you has already come back to them to be loaned yet again and bought up by Fannie yet again with the bank pocketing those tasty closing costs. While you appear to pay the bank it is merely a flow-through transaction to repay Fannie. Neither Freddie nor Fannie is the government, however, despite the word Federal that is prominently in their full legal names. These are a hybrid like a Prius or a tangelo. A Quasi-Autonomous Non-Governmental Organization is what we are dealing with; QUANGO is the alarming term and they have a startling longevity and growth rate.

It is not, actually, government money put to work through Fannie. Like other corporations Fannie has stockholders, sells bonds and otherwise deports itself as a good corporate citizen like Lehman or Pepsi. She finds it a bit easier to be a good citizen however as she is specifically exempt from the kind of oversight and reporting requirements others suffer. Being a public company that has been chartered by the US government is a groovy deal. While it is not part of their explicit construction, it is generally assumed that if a QUANGO should go into spasms the Feds will come put a wallet in their mouth. With that backstop assumed, investors ask less return on their bonds or in their shares because they perceive less risk. And they have been right. With the tumbling of the real estate market, you would think the single biggest player in that field would feel the pinch. Oh, nothing of the sort! As institutions Fannie and Freddie got bailed. The asserted need to do so was much of the reason ordinary banks got bailed since the twins were strongly intertwined in commercial and investment banks. But in the whole operation there was and is one underlying trick; using The Full Faith and Credit of the United States to borrow what the open market would not lend you.

The otherwise opaque Credit Default Swaps are best understood as a web of co-signers. And like the relatively simple example of Solyndra, often these co-signers were co-signing each other’s loans or even their own! Both loans they loaned out and loans they took out. If you are wondering how all this could possibly be considered economically worthy activity the explanation is always the same: we can do such and such and make scads of money but we can’t get the cash to do it. What we need is a co-signer. The relative worthiness of the loan becomes immaterial. The only question to the lender is, can I get the note repaid? When your co-signer can actually print the money you can tell your loan officer, yessir, that debt will indeed be repaid, one way or the other.

The problem is that everyone doing the co-signing is as certain as your mom or dad that they will not ever have to pay up. What is it the co-signer always says to the co-signee? “I don’t want to ever have to hear about this again.” But they do. So you co-signed on Junior’s Camaro and that is HIS affair.  But no. By co-signing you have made it YOUR affair. You may not want to hear that Junior has not been able to get as much overtime this year as he was anticipating and has missed a couple payments, but brother you WILL! That signature does not have an expiration date. Well, they can just repossess the car then. Okay, maybe so but the car is probably STILL underwater, perhaps damaged or just not in demand. What they sell the car for goes to the note (minus repo expenses) but the balance, the kid still owes and guess what pops? That means YOU still owes. Owe, yes!

And your good old Uncle Sugar (who draws his paycheck from YOU) has signed every slip of paper that you, your neighbors, your kids, your cousins or just about any Swinging Richard can get before his rheumy eyes. Ah, he is quite certain the kid is good for it. He wouldn’t ask otherwise, right? Student loans, home loans, business loans and myriad others all have the same co-signer at their root. That is Uncle Sam who uses his Full Faith and Credit to keep domestic peace and dole out favors. Now he is paying up on some of those notes and you would think that would give him pause but oh no! Just now comes the news that the funding for the government is again stalled. Why? Because the hellish Republicans want to cut the loan programs for alt energy just a skoosh. But that would mean a slow down on the co-signing. Can’t have that.

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