German government no longer rules out euro bonds

The German government no longer rules out agreeing to the issuance of euro zone bonds as a measure of last resort to save the single currency, conservative newspaper Welt am Sonntag reported on Sunday.

Even though Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler again spoke out against euro zone bonds and debt collectivization, Welt am Sonntag reported the German government is nevertheless considering that and other measures.

"Preserving the euro zone with all its members has absolute top priority for us," according to a government source quoted in the newspaper under the headline: "Government no longer excludes European transfer union and joint euro bonds as last resort."

The newspaper, traditionally close to Chancellor Angela Merkel's Christian Democrats (CDU), indirectly quoted the source adding: "In case of emergency, one would thus even be prepared to accept the introduction of a 'transfer union' and at the end of the day even joint euro zone bonds.

"Without these euro bonds, it might no longer be possible to save the euro zone," the newspaper continued, further quoting the source indirectly. "The path we've taken so far with multi-billion rescue packages for financially struggling states is beginning to reach its limits."

A government spokesman in Berlin declined to comment on the report in Welt am Sonntag but instead pointed to the Schaeuble interview in Der Spiegel news magazine published on Sunday.

Schaeuble said Germany remains against any collectivization of euro zone governments' debt and creating common euro bonds is impossible while countries run separate economic policy.

"It still stands: there will be no collectivization of debt and there will be no unlimited support," he said. "There are certain support mechanisms that we are developing further -- with strict conditions."

"The member states that need our solidarity must reduce their deficits and reform their economies -- with at times very tough measures," he said.

Der Spiegel said Schaeuble also ruled out the issuance of eurobonds unless certain hurdles are removed.

"I rule out Eurobonds for as long as member states conduct their own financial policies and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity," he said.

"Without that kind of solidity, there is no foundation for a joint currency," Schaeuble added.

Economy Minister Roesler also spoke out against euro zone bonds in an interview in Handelsblatt newspaper on Monday: "I consider euro bonds to be the wrong approach in a Europe in which every member state should take responsibility for itself."

Pressure is nevertheless growing on euro zone leaders to take a more radical approach to the euro zone's debt crisis ahead of a potentially vital meeting of German Chancellor Angela Merkel and French President Nicolas Sarkozy next week.

Italian Economy Minister Giulio Tremonti renewed his call for a collective euro zone bond on Saturday.

Tremonti returned to proposals for jointly issued bonds that would effectively make individual governments' debt a common burden, saying they were the "master solution" to the euro zone debt crisis. "We would not have arrived where we are if we had had the euro bond," he said on Saturday.

The comments underline the sharp divisions hampering efforts to coordinate a response to the euro zone debt crisis, which escalated dramatically last month as markets turned their fire on Italy, one of the bloc's most heavily indebted countries.

What is at stake was highlighted by a new poll for the Bild am Sonntag newspaper on Saturday which showed 31 percent of Germans believe the euro will be gone by 2021.

The idea of euro bonds was also dismissed by Deutsche Bank chief economist Thomas Mayer. He told Deutschlandfunk radio that and raising the European Financial Stability Fund (EFSF) could lead to the end of the European Monetary Union (EMU).

"I believe such considerations would be poison pills for the EMU," Mayer said. "It would violate a fundamental democratic principle if the EFSF were boosted to several trillion euros or euro zone bonds were introduced."

He added: "If at the end of the day German, Dutch and Finnish taxpayers are going to be held responsible for decisions made in other parliaments as a result of raising the size of the EFSF or introducing euro bonds, that will lead to a political collapse of the EMU. That is not an option."

Cracking the housing bust conspiracy

Conspiracy theorists ran into a brick wall earlier this month in efforts to connect the collapse of the mortgage industry to politicians -- a controversial quest because most agree the housing bust was one of the first indicators, and one of the first causes, of the lagging U.S. economy.

Judicial Watch, the capital's conservative and sometimes quixotic legal watchdog organization, started the whole thing in May 2009 by asking the newly created Federal Housing Finance Agency to disclose "[a]ny and all Freddie Mac ... or Fannie Mae records concerning political campaign contributions."

No can do, the agency responded.

Judicial Watch went to court, filing a Freedom of Information Act suit to acquire the relevant documents. Understanding why the suit failed, at least short of the U.S. Supreme Court, requires an understanding of the background.

The Federal National Mortgage Association -- Fannie Mae -- and the Federal Home Loan Mortgage Corp -- Freddie Mac -- buy residential mortgages from banks, then repackage them for sale as mortgage-backed securities. Fannie Mae and Freddie Mac guarantee the securities, pledging to reimburse investors if borrowers default.

The federal appeals court in Washington nicely captures what went wrong with the two lenders.

Fannie Mae and Freddie Mac "are structured as private corporations, but they are federally chartered and play an important role in the national housing market by making it easier for home buyers to obtain loans. ... In 2009, the two companies guaranteed three-quarters of new residential mortgages in the United States."

But things had begun to go south.

"National housing prices began a sustained decline in 2006 that by mid-2008 had substantially eroded the value of Fannie- and Freddie-held mortgages," the court said. "Worried that either or both Fannie and Freddie might become insolvent, Congress passed the Housing and Economic Recovery Act of 2008 ... which created the (Federal Housing Finance Agency, or FHFA) and authorized this new agency to place the two companies into conservatorship under specified circumstances," such as when Fannie's or Freddie's assets are insufficient to meet its obligations and where the management in the relevant agency consents to a conservatorship.

"On Sept. 7, 2008, with the consent of management at Fannie and Freddie, the FHFA placed both into conservatorship," the appeals court said. "As conservator, the FHFA has power to exercise 'all rights, titles, powers and privileges of the regulated entity, and of any stockholder, officer or director of such regulated entity with respect to the regulated entity and the assets of the regulated identity.'"

Given this structure, it was natural for Judicial Watch to approach the FHFA for the documents it wanted, and then file a FOIA suit against it when the request was rejected. But that structure turned out to be part of the problem.

The Freedom of Information Act "gives federal courts jurisdiction 'to order the production of any agency records improperly withheld from the complainant,'" the appeals court said. "But under FOIA, a federal court may only order an agency to release 'agency records.' ... Judicial Watch acknowledges that Fannie and Freddie," not being federal agencies, "are not themselves subject to FOIA, but argues that the requested documents became 'agency records' when the FHFA took over as conservator."

In asking for summary judgment in the FOIA suit from a federal judge, "the FHFA acknowledged that it had access to responsive documents, but, in an accompanying affidavit, swore that no one at the agency had ever read them." The affidavit was a declaration from FHFA Deputy General Counsel David A. Felt. "The FHFA argued that until someone at the agency uses the requested documents, they cannot be 'agency records' for purposes of FOIA. The (U.S. District) court agreed and granted summary judgment for the agency."

It was like being lost in some remote area, asking for directions, and being told, "You can't get there from here."

A three-judge panel of the U.S. Court of Appeals agreed with the judge and the FHFA.

"The Supreme Court has held that FOIA reaches only records the agency controls at the time of the request," the unanimous opinion by U.S. Circuit Judge Thomas Griffith said. "Control means 'the materials have come into the agency's possession in the legitimate conduct of its official duties.'"

The opinion said it had to weigh the case based on the four factors identified in the Supreme Court's 1996 ruling in Burka vs. HHS: "(1) the intent of the document's creator to retain or relinquish control over the records; (2) the ability of the agency to use and dispose of the record as it sees fit; (3) the extent to which agency personnel have read or relied upon the document; and (4) the degree to which the document was integrated into the agency's record system or files."

At the trial stage, the judge "considered these factors and determined that the FHFA does not 'control' the documents Judicial Watch requested because the agency had neither used the documents nor integrated them into its files," the appeals panel opinion said.

"Judicial Watch argues that the FHFA controls the documents because it holds title to them and that we therefore need not consider the Burka factors in this case," the opinion said, later adding, "But our cases have never suggested that ownership means control."

The opinion concluded: "Although there is no doubt that the FHFA could consult the requested records as it conducts its business, the problem for Judicial Watch is that no one from the FHFA has done so. The Supreme Court held in (1980's) Forsham vs. Harris that documents an agency had the right to acquire would not become agency records subject to FOIA 'unless and until the right is exercised.' ... In the same way, the FHFA's unexercised right to use and dispose of the records requested in this case is not enough to subject those records to FOIA."

No word yet on whether Judicial Watch will ask the full D.C. Circuit to rehear the case en banc or ask the U.S. Supreme Court for review.

After the appeals court ruling, Jill S. Farrell, director of public affairs for Judicial Watch, sent out an e-mail describing her frustration in classical terms: "An outrage? Youbetcha. Just another day for Sisyphus; keep pushing that rock uphill."

But the rigidly non-partisan Open Secrets, dedicated to revealing the finances of lobbyists and political sugar daddies, said in 2008 it learned -- presumably from recipients -- that Fannie Mae and Freddie Mac gave $4.7 million to members of Congress, Politico reported. Among the top 10 recipients -- then Sens. Barack Obama, D-Ill., and Hillary Clinton, D-N.Y.

Accepting properly packaged contributions from corporations is no crime. But being linked to an increasingly unpopular segment of the economy would carry a political price.

The meltdown itself occurred under President George W. Bush, and at least partially under a Congress controlled by a Democratic majority.

Meanwhile, recent news is still bad for Fannie Mae and Freddie Mac. Following S&P's downgrading of the U.S. credit rating, the rating agency downgraded the two lenders to the same degree, from AAA to a slightly less than sterling AA+.

Bankrate's Greg McBride told The Baltimore Sun, "The downgrade of Fannie Mae and Freddie Mac debt is what could lead to greater spreads between Treasury yields and those on mortgage-backed securities, and the rates borrowers pay."

McBride told the Sun investors who "buy mortgage bonds often buy them because they're guaranteed by Fannie Mae and Freddie Mac. The yield they're getting is only as good as the guarantee. If Fannie Mae and Freddie Mac have been downgraded, then those investors may command a higher premium for holding that debt, and that would translate into higher mortgage rates."

Right now, he said, a weak economy is keeping mortgage rates low. But if and when the economy picks up, rates will rise.

The Boston Globe said local financiers told it the downgrade of U.S. credit and Fannie Mae and Freddie Mac is "fraying nerves and making a double-dip recession closer to reality." But higher lending rates are more of a long-term problem.

"Long-term, the downgrade is going to mean inflation," Rob Lutts, president of Cabot Money Management of Salem, Mass., told the Globe.

All this likely will lead to more consumer anger. Whether the courts will cooperate with efforts to direct that anger at select politicians remains up in the air.