The biggest financial scandal in the history of the world

The biggest financial scandal in the history of the world is now unfolding so there are sure to be some interesting political games played over the next few months and years. Democrats are the chief scalawags involved and they probably have laundered and stashed most of the loot, but since the thievery has been proceeding more or less in plain site for 16 years it's sure that at least some Republicans have managed to glom onto some goodies as well, if only to keep them quiet during the times when they have controlled the congress.

In some ways it's a complicated scandal, and the politicians are sure to make it seem very complicated indeed as they select the five or six designated fall guys to take the rap, but at base it's very simple.

In 1992 Federal Regulators appointed and controlled by the then Democratic Congress gave Freddie Mac and Fannie Mae a special dispensation to continue to operate like banks and keep all of the profits they made on loans, but without the troublesome necessity of being responsible for most of the risk on the loans and with extra special super-duper permission to violate all normal rules of banking by maintaining only a thin facade of cash reserves in their vaults. Armed with those advantages over other banks Fannie and Freddie, as they are affectionately know by political bag men, proceeded to grow like weeds.

Now I'm not a financial analyst but it's possible even for a schlub like me to make a rough estimate of how much those special regulatory perks were worth to Fannie and Freddie as they and their political contacts gorged and swilled over the past 16 years. Right now, you see, is when the chickens are finally coming home to roost and crap all over the heads of the two special banks. And the Wall Street Journal today helpfully printed a chart which shows that between the two of them they have about $80 Billion in Reserves whereas two normal banks heir size would be required to have over $180 Billion in Reserves. The special dispensations mean that Fannie and Freddie are short $100 Billion, and they've been able to be short of reserves for 16 years.

Now it's not fair to estimate the extent of the loot based on the current $100 Billion of missing reserves because the two banks have been growing fast during all of those 16 years, so I'm going to give the thieves the benefit of the doubt and assume the average shortfall of reserves has only been $50 Billion during each of the 16 years. And I'm going to assume that being allowed to be short of all that cash in the vaults only resulted in a 5% bottom line advantage for Fannie and Freddie. That would make the value of those special dispensations 5% of $50 Billion which is $2.5 Billion times 16 years for a total of $48 Billion. But that $48 Billion has a time value, just like all other cash. If we assume a conservative 6% rate of return it's actually worth about $96 Billion in current 2008 dollars.

Now Fannie and Freddie surely didn't give all of that loot to the politicians in envelopes, they only gave them a commission. How much of a commission? In this regard most politicians are actually pretty cheap in my estimation, they're mostly too stupid to be sharp negotiators. I doubt they got more than 6% or $6,000,000,000* or so, and it may well have been less even though this was the ultimate sweet deal - thievery in plain site, a very long time frame before the theft was noticed by the public, plenty of time to launder the loot, and even testimonial dinners and awards praising those politicians and Fannie and Freddie executives as public spirited citizens.

The great train robbers in London only got about $6 Million and they got a movie made about them. Here we have politicians hauling off something like one thousand times that much. It's worth at least a movie. I say it should have a cast of hundreds and be set on Devil's Island with whips, chains, snarling dogs and a special iron time out box in the sun for anyone who talks back to the warden. But, given the way politics works, the movie about this crime of the millenium will end with four or six or eight** peripherally involved folks spending a few years at a special resort whose main inconvenience to them will be lack of a masseuse on call down by the prison pool.

*$6,000,000,000 is $6 Billion. That's about five hundred big suitcases full of $20 bills neatly packaged in bank wrappers like the ninety large they found in Democratic Congressman William Jefferson's freezer down in New Orleans. It's probably a thousand or more suitcases of loose used $20's stuffed in there the way Democratic Congressman Patrick Kennedy would do it while, uh, disoriented, or the way Congressman Wilbur Mills and Fannie Foxe would have done it before going for a swim. Note - Fannie Foxe is not related to Fannie Mae even though they may appear to have more in common than their first names.

**It has to be an even number because the rules of Washington are that an equal number or Democrats and Republicans have to take the fall for any sizable scam, especially one that involves as unindicted co-conspirators every Congressman, Senator, Federal Judge, Treasury Department official and Securities and Exchange Commission manager who hasn't gotten around with a seeing eye dog since 1992. Come to think of it a thousand big suitcases wouldn't have been nearly enough for all the payoffs, they must have used medium sized ones.