TBTF-TIFT

"As Washington spins its wheels on financial reform, it's becoming painfully clear that the problem of entities that are too interconnected or 'too politically powerful to fail' is also too hard for our policy makers to tackle. ... We can't be sure who the specific members of this club are--regulators simply say they know 'em when they see 'em. But this much is certain: They've seen a lot of them lately. ... But because we are footing the bills for these rescures--and will do so again if more crises occur--don't you agree that we should know what these implied federal guarantees will cost us? ... An expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. 'If we are extending the safety net, extending the implied guarante to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,' Mr. [Marvin] Phaup said in an interview. ... He was the researcher at the Congressional Budget Office in 1996 who undertook the first efforts to assign a value to the implied federal guarantee backing Fannie and Freddie. When he prognosticated on the matter, the bailouts of those two hobbled entities were more than a decade away, but his CBO report quatified the billions in benefits that the mortgage finance companies reaped each year for their implicit government backstop. ... The CBO report enraged Fannie and Freddie because it also showed how much of that financial benefiit--fully one-third--the companies kept for themselves, their managers and their stockholders. Mr. Phaup's analysis showed that, counter to the companies' claims, Fannie and Freddie did not pass along all the benefits to homeowners in the form of lower mortgage rates. Moreover, who actually believed that the government would ever have to bail out Fannie and Freddie? Perish the though and shame on silly researchers like Mr. Phaup for even considering such possibilities. ... But owning up to future obligations associated with government backing is something that lawmakers are likely to fight vigorously. (Consider Social Security). ... Edward J. Kane, a professor of finance at Boston College, agrees that the costs associated with providing a safety net for complex and politically connected companies should be quantified. 'People talk about systemic risk, but they have no metric of measuring it,' he said", my emphasis, Gretchen Morgenson at the NYT, 14 February 2010, link:

http://www.nytimes.com/2010/02/14/business/economy/14gret.html.

See my previous posts on "government accounting". Also yesterday's post on Greece. Who believed in 1996? Your Skeptical CPA did. That's who! He goes further. He believed and always believed, F&F were created to conceal their costs and expected bailouts! As Yves Smith would say of their future bailouts, "It was a feature, not a bug". Not "too hard". Washington is just afraid of Wall Street. Metric? Janet Tavakoli, do you want to take a shot?