Jim Millstein on the Massive Risks of Any 'Mar-a-Lago Accord' | Odd Lots

The Biden administration's CHIPS Act and Inflation Reduction Act have already spurred significant investment in US manufacturing across all 50 states, particularly in red states, creating a political barrier to the Trump administration simply zeroing them out despite Trump's stated criticism of these programs.

“The reality is that there's all sorts of activity now both in the under the chips act subsidies and through the inflation reduction act which was another one of the Biden administration's policies to promote uh investment in the United States. The reality is is that those investments have been made and are continuing to be made around the 50 states most particularly in the red states. And so there will be political push back on the Trump administration to just you know zero those out going forward.”

The goal of reshoring manufacturing is not for the US government to directly fund it (like the Biden administration did with the CHIPS Act) but to create a favorable market environment through lower interest rates and tariff protection so that private capital voluntarily deploys to manufacturing, reflecting traditional Republican preference for private-sector-led industrial development.

“crucially, the manufacturing buildout is supposed to be done by private capital. To Joe's point earlier, it's not, you know, we've had efforts from the Biden administration, the chips act to try to uh boost some of those industries, but the emphasis under Trump is really we want to create a beneficial market environment so that private capital moves in. Yes. Um there there's obviously a kind of you know traditionally Republican bias in favor of private capital and scaling back the use of public investment to promote uh industrial development.”

The federal budget is structurally composed of entitlements (Social Security, Medicare) and defense, which together account for the vast majority of spending, leaving only about $700 billion of the $6.75 trillion budget for discretionary non-defense spending on education, transportation, housing, and infrastructure.

“The part of the budget that actually you know supports education, transportation, housing, infrastructure, right? The wider economy. Some people that sort of stuff that you know is building human capital, building physical public capital, building housing uh structure. That part of the budget is a mere 700 billion out of a total spending of 6.75 trillion. The rest of it is interest on the debt, retirement security, defense, and healthcare support.”

Agency mortgage-backed securities (guaranteed by Fannie/Freddie) are treated as very safe and liquid assets for bank capital purposes because Fannie and Freddie guarantee prompt payment of principal and interest, supporting a $7.5 trillion outstanding agency MBS market.

“And so to fulfill their guarantee of prompt payment of principle and interest on those securities, they buy the mortgages out of the pools, restructure them and and modify them, which is why agency MBS is treated as a very safe and liquid asset for bank capital purposes. Exactly. because Fanny and Freddy are there to guarantee the prompt payment of principal and interest.”

The federal government functions as 'a retirement program attached to an army' or 'an insurance program' because the largest spending categories are Social Security (income security for retirees), Medicare (medical security for retirees), defense, and interest on debt, leaving only about $700 billion out of $6.75 trillion total spending for education, transportation, housing, and infrastructure.

“someone joked that the federal when you look at the federal government, it's really a retirement program attached to an army. Yeah. Right. We I mean the largest I've heard it called an insurance program, but it's the same thing. Yeah. Exactly. You have you have, you know, income security in the form of social security for retirement and you have medical security in the form of Medicare for retirement. But when you add it all up, the parts of the budget that, you know, Elon Musk is and his merry band of pranksters are off trying to slash is a relatively small part of federal spending. But it is the stuff that actually you know supports education, transportation, housing, infrastructure, right? The wider economy. Some people that sort of stuff that you know is building human capital, building physical public capital, building housing uh structure. That part of the budget is a mere 700 billion out of a total spending of 6.75 trillion.”

If Fannie Mae and Freddie Mac were privatized without proper regulatory constraints, there is risk they would revert to pre-2008 behavior: expanding balance sheets, taking on leverage, and buying speculative securities to boost earnings, repeating the pattern that caused the financial crisis.

“This is this is a critical question of whether they're going to be allowed to go back and do the kinds of crazy things they did prior to the financial crisis that got them into hot water.”

US government owns substantial hidden assets not marked to market: gold reserves at Fort Knox marked on books at $42/ounce while current market price is >$3,000/ounce, worth ~$890 billion if remarked to market; roughly one-third of all land west of the Mississippi; vast mineral rights in western states and Alaska.

“So we the balance sheet of the United States has a variety of hidden assets uh that have are not really marked to market. You've heard a lot of talk recently about uh our gold stocks, right, that are I think at $42 an ounce when the price of gold is, you know, north of 3,000. If you remarked the tons of gold at Fort Knox uh that we own to market, it's probably 8900 billion dollars. That's against a 36 trillion debt balance. That's a drop in the bucket. But nothing, but it's not nothing. It's not nothing%. We own probably a third of the land uh west of the Mississippi. You know, the western states complain about this all the time that the federal government and the Bureau of Land Management is a absent landlord.”

Jim Milstein served as chief restructuring officer of the US Treasury during the financial crisis, where he restructured TARP investments in AIG, Ally Financial, Citi, and BofA; previously worked on Argentina's debt restructuring in 2005 and Puerto Rico's default and restructuring, and as a lawyer worked on Brady Bond restructurings across Latin America.

“You know, so I had this uh awful job and a great title called chief restructuring officer of the United States Department of the Treasury during the financial crisis... But before that, you know, I worked on the restructuring of Argentina, the Republic of Argentina's one of their many restructurings. You got debt. In 2005, we did a big exchange offer for their international bond and debt. I worked on Puerto Rico's debt default and restructuring back in the odds. Wait, were you on the hedge fund side of Argentina or the country? I was on the Republic side. Oh, okay. Yeah. And then when I was a lawyer back in the 80s, um, my firm Clary Godly worked on all of the Brady Bond restructurings across Latin America.”

After the collapse of the Soviet Union, the Russian Federation acknowledged and paid off Tsarist Russia bonds to French and British bond holders as a condition of gaining access to European capital markets.

“Shortly after the collapse of the Soviet Union, the French government and the British government representing French and British bond holders got uh the Russian Federation to acknowledge those bonds and make a payout on them because the Russian Federation uh was desirous of having access to the capital markets in Europe and the quid proquo was to pay off it the debts of Tsarist Russia.”

Bringing manufacturing back to the US during globalization required losing manufacturing competitiveness (the US went from 25% of global manufacturing 40 years ago to 15% today, while China went from zero to 35%), and the US created the semiconductor industry in the 1960s through coordinated government policies (R&D grants to IBM/AT&T and procurement policies from NASA/defense department).

“uh you know we once dominated the semiconductor trade. Uh we actually created that industry in the 1960s through a series of government policies research and development grants to IBM and AT&T that created the semiconductor technology. then a series of procurement policies at NASA and the defense department to commercialize that industry and eventually we created you know the calculator industry and the computer industry and the TV industry and all of that. Uh but that was all a byproduct of a coordinated set of federal policies. Fast forward 40 years, 50 years later and you know semiconductor manufacturing is mostly being done particularly at the high end in a strategically vulnerable country uh across the straits of China from China in Taiwan and that has created a sense you know now going back in the 10 years in the defense establishment that we have a problem uh and not just in semiconductors but in a number of advanced industries where we're really reliant as a country on the importation of critical technologies and critical intermediate inputs.”

Terming out debt (extending the maturity from short-term bills to long-term bonds like century bonds) removes refinancing risk and reduces the interest burden of servicing debt over time because a fixed payment schedule is locked in.

“what they're calling century bonds, a a you know hundredyear bond at a low interest rate, which takes the refinancing risk uh of uh indebted country away from it because we don't have to touch that debt for 100 years. Terming out duration terming out duration um on the one hand and reducing the interest burden of servicing that debt over time.”

Proposed House reconciliation spending cuts of $880 billion over 10 years represent only about $100 billion annually against Medicaid and other social spending categories (Medicaid ~$600B/year, housing/transportation/education ~$700B/year), and if coupled with tax cuts on tips and overtime, will not meaningfully address the deficit.

“in the House in the framework for the House Reconciliation Bill, they call for 880 billion. That's over 10 years. So, it's really not a lot. It's really like about a hundred billion of spending cuts annually in Medicaid, transportation, housing, and education. you know, out of that Medicaid is about 600 billion a year and the housing, transportation, education, that part of the budget is about 700 billion. So there's a they're calling for a reduction of a hundred billion a year against that 1.3 billion of Medicaid and social the other social spending. So it's not it's not a big ticket. uh and it's not going to make a massive change in the deficit, particularly if they add incremental tax cuts uh on tips on on overtime on social security as they've talked about. Um you know, they're not really attacking the deficit.”

The Federal Housing Finance Agency (FHFA) created under the Housing and Economic Recovery Act of 2008 has significant supervisory and regulatory powers to constrain the business model Fannie Mae and Freddie Mac can pursue, and recently confirmed Bill Py as its director, providing regulatory guardrails against pre-crisis behavior.

“one of the great innovations along with DoddFrank coming out of the financial crisis was a a new statute governing both the federal home loan banks Fen and Fenny and Freddy. It's this housing and economic recovery act of 2008 which created a new stronger regulator called the federal housing finance agency. This is the agency to which Bill Py has just been confirmed as the director. But that agency has significant supervisory and regulatory powers to constrain the business model that Fanny and Freddy can pursue.”

Restoring US manufacturing dominance, particularly in critical industries essential to defense, requires not only tariff barriers but also R&D subsidies, investment subsidies, and use of procurement (government buying) to create demand for these new industries—a comprehensive industrial policy combining multiple tools.

“if we really want to uh restore American manufacturing dominance, particularly in critical industries, critical to our defense establishment, we're going to have to use a mix not only of high tariff barriers, but of R&D subsidies, of investment subsidies, uh, and use procurement as a way to create demand pull for these new industries.”

Post-crisis reforms, including the Housing and Economic Recovery Act of 2008, created the Federal Housing Finance Agency as a strong regulator with significant supervisory power to constrain the business model Fannie Mae and Freddie Mac can pursue, preventing them from returning to proprietary trading or hedge fund operations.

“One of the great innovations along with DoddFrank coming out of the financial crisis was a a new statute governing both the federal home loan banks Fen and Fenny and Freddy. It's this housing and economic recovery act of 2008 which created a new stronger regulator called the federal housing finance agency. This is the agency to which Bill Py has just been confirmed as the director. But that agency has significant supervisory and regulatory powers to constrain the business model that Fanny and Freddy can pursue.”

Federal debt is now equal to GDP (100%), the US is running deficits at 7% of GDP while the economy grows at only 2%, meaning debt is growing faster than GDP and becoming an increasing drag on the economy, with interest expense now the second-largest category of federal spending.

“Today federal debt to GDP is one one federal debt is equal to GDP. We're running deficits at 7% of GDP and the economy is kind of growing at one two little north of 2%. So the debt is growing faster as a result of the imbalance in the federal budget where deficits are growing at the rate of 7% of GDP which means the debt's growing at the rate of 7% of GDP where our debt is growing now faster than GDP and is becoming an increasing overhang to the extent that when you look at the federal budget interest expense has become the second largest category of federal spending issuing bonds to pay off bonds.”

Forty years ago, the US represented 25% of global manufacturing; today it represents only 15%, while China has risen from essentially zero to 35% of global manufacturing, driven primarily by China's admission to the WTO in the early 2000s and subsequent globalization.

“we represented 40 years ago, we represented 25% of the manufacturing industry. Now we're a mere 15% of global manufacturing. China was nowhere to be seen. Now they're 35% of global manufacturing.”

Treasury securities are the U.S.'s biggest export, and Trump is focused on promoting exports, creating an irony that he could theoretically benefit from exporting Treasuries while claiming to oppose the debt

“treasuries are kind of the US's biggest export. Yeah. And Trump is obsessed with exports. I know. I know. But he doesn't want to export those particular things.”

Only about 15% of US government debt ($36 trillion outstanding) is held offshore by foreign central banks and foreign private investors, meaning that even a successful exchange offer targeting foreign creditors would affect only a small fraction of total US debt, with the remaining 85% owned domestically by banks, insurance companies, endowments, wealthy individuals, and mutual funds.

“one problem is that when you look at who holds US government debt uh not more than 15% of it today is held offshore. Yeah. And much of it down a lot. Yeah, it's come down a lot and much of that 15% is not in the hands of you know government instrumentalities but rather in foreign private investors. So inducing that crowd to come in to this exchange offer even if you could succeed you're touching a very small part of the debt. So where's the rest of it? Where's the other 85% of our $ 36 trillion of outstanding debt? It's basically owned by us.”

Any discussion of federal spending is fundamentally about competition for resource allocation—reducing deficits means freeing up consumption somewhere to create availability for consumption elsewhere in the economy.

“any discussion of federal spending is about a competition for resource allocation, right? So we know that a huge component of what drives persistent deficits is the social safety nets uh social security, Medicare, Medicaid, etc. And when we talk about the debt or the deficit in the abstract and when people talk about tackling the debt or the deficit, what they're really talking about is freeing up resources somewhere, freeing up consumption somewhere and creating availability for consumption and resources elsewhere in the economy.”

Revaluing gold from $42/oz to current market prices ($3,000+) is an accounting trick that does not produce real resources (doctors, hospital beds, food for seniors); it is merely a balance sheet adjustment that does not solve the underlying resource constraint problem.

“you could revalue the gold in Fort Knox and probably people are sitting here thinking like, why wouldn't you do that? if it's, you know, it's $3,000 and we have it at 40 or whatever, of course, no, just do it. But that doesn't produce more doctors. It doesn't produce more beds for hospitals. It doesn't produce more food for senior citizens, you know, like when we're talking about these resource constraints, which I is how I sort of think about it. It's an accounting trick, right? Because it doesn't ultimately it doesn't create any new factories. It does uh do any of that.”

The consequences of fundamental geopolitical shifts (like German rearmament triggered by NATO uncertainty) will not be known for decades, making their long-term impact unpredictable

“decades from now you know, we don't we might not know how uh the consequences of the ways geopolitics have been reshaped by that decision.”

Any discussion of tackling the federal deficit or debt is fundamentally about reallocating resources in the economy—freeing up consumption from one sector (like retirees receiving social security and Medicare) to make it available elsewhere (like private investment in manufacturing).

“any discussion of federal spending is about a competition for resource allocation, right? So we know that a huge component of what drives persistent deficits is the social safety nets uh social security, Medicare, Medicaid, etc. And when we talk about the debt or the deficit in the abstract and when people talk about tackling the debt or the deficit, what they're really talking about is freeing up resources somewhere, freeing up consumption somewhere and creating availability for consumption and resources elsewhere in the economy.”

The Trump administration's goal through the Mara Lago accord is to weaken the dollar (via tariffs and threats of security umbrella withdrawal) to make US exports more competitive and less attractive to import, thereby enabling manufacturing reshoring, without disrupting the financial flows that currently finance US debt.

“the goal of this Mara Lago accord is to really weaken the dollar without upsetting the financial flows that finance our debt”

Century bonds (100-year bonds at low interest rates) would 'term out duration' and reduce refinancing risk because the debt would not need to be touched for 100 years, and would reduce the interest burden of servicing debt over time.

“you're going to have to swap your debt uh that you currently hold, which is generally short-term uh bills into what they're calling century bonds, a a you know hundredyear bond at a low interest rate, which takes the refinancing risk uh of uh indebted country away from it because we don't have to touch that debt for 100 years. Terming out duration terming out duration um on the one hand and reducing the interest burden of servicing that debt over time.”

The 85% of US debt held domestically is owned by government trust funds (Social Security, Medicare), banks, insurance companies, endowments, wealthy individuals, and mutual funds (money market funds), meaning any serious debt restructuring would require cooperation from domestic actors, not just foreign governments.

“Where's the rest of it? Where's the other 85% of our $ 36 trillion of outstanding debt? It's basically owned by us. Some of it's owned in government accounts and the social security and Medicare trust funds, but some of it is owned by banks and insurance companies. Some of it's owned by endowments uh and wealthy individuals. Some of it's in the bond in the mutual fund market, you know, underwriting our money market funds.”

We are 'now slowly sinking behind a huge pile of debt' in a 'classic recipe for disaster' because we are issuing bonds to pay interest on existing bonds, not even treading water.

“That's right. So, we're we're now we're now issuing bonds to pay the interest on our bonds. Uh this is a classic recipe for disaster. We're not even treading water. We're now slowly sinking behind a huge under a huge pile of debt.”

The Biden administration's investments through the CHIPS Act and Inflation Reduction Act have created substantial private capital investments and manufacturing activity across 50 states, particularly in red states, which creates political obstacles to the Trump administration simply zeroing out these programs.

“there's all sorts of activity now both in the under the chips act subsidies and through the inflation reduction act which was another one of the Biden administration's policies to promote uh investment in the United States. The reality is is that those investments have been made and are continuing to be made around the 50 states most particularly in the red states. And so there will be political push back on the Trump administration to just you know zero those out going forward.”

The proposed House Reconciliation Bill calls for only $880 billion in spending cuts over 10 years (roughly $88 billion annually), which is inadequate to address deficits running at 7% of GDP, particularly if it is coupled with new tax cuts on tips, overtime, and social security benefits.

“in the House in the framework for the House Reconciliation Bill, they call for 880 billion. That's over 10 years. So, it's really not a lot. It's really like about a hundred billion of spending cuts annually in Medicaid, transportation, housing, and education. you know, out of that Medicaid is about 600 billion a year and the housing, transportation, education, that part of the budget is about 700 billion. So there's a they're calling for a reduction of a hundred billion a year against that 1.3 billion of Medicaid and social the other social spending.”

Government spending is built on norms—a loan to the government is a promise, which is a human construct embedded with values, narratives, and norms, and we are now in a period where those norms around US debt are beginning to change.

“I like to think about this. Sure. I like to ask like think about the big picture in bonds and I always say bonds are built on norms right yeah so government spending is built on norms so you lend money to me and I pay you back it's basically a promise which means it's a human construct and there are all these values and norms and narratives that are embedded in those constructs in those promises and that's what I find really fascinating especially when those values start to change and I think that's what's happening now.”

Treasury Secretary Scott Bessent has articulated a desire to reduce demand/consumption from sectors perceived as unproductive (retirees) to free resources for more productive uses (private investment, re-industrialization).

“Secretary Scott Bessant and some of his recent interviews talked about, you know, we want to relever the private sector and so we want to get rates down and therefore that makes investing more appealing for companies, etc. Uh and so the idea of like okay we're going to like reduce demand reduce consumption from various sectors of the economy that are perceived to be unproductive such as retirees etc. and then open up expansion so then there's less consumption and then that creates resource availability for other things which are perceived to be more productive like re-industrialization.”

China was historically perceived to be the Soviet Union as its main adversary and did seek U.S. protection, creating historical precedent (though not recent) for a deal where a country accepts U.S. security guarantees in exchange for favorable terms

“at one point in time, China perceived its main adversary as the Soviet Union and did uh, you know, try to have that protection with the United States. So there is not zero history for that.”

The US currently marks its gold reserves (Fort Knox) at $42 per ounce when the spot price is north of $3,000, meaning the US is carrying $900 billion of gold at an artificially depressed book value, or roughly 2.5% of the $36 trillion debt.

“We the balance sheet of the United States has a variety of hidden assets uh that have are not really marked to market. You've heard a lot of talk recently about uh our gold stocks, right, that are I think at $42 an ounce when the price of gold is, you know, north of 3,000. If you remarked the tons of gold at Fort Knox uh that we own to market, it's probably 8900 billion dollars.”

Revaluing gold or other accounting tricks do not produce new economic output (doctors, hospital beds, food), and from a resource allocation perspective are merely accounting adjustments that don't create new factories or real productive capacity.

“But that doesn't produce more doctors. It doesn't produce more beds for hospitals. It doesn't produce more food for senior citizens, you know, like when we're talking about these resource constraints, which I is how I sort of think about it. It's an accounting trick, right? Because it doesn't ultimately it doesn't create any new factories. It does uh do any of that.”

Fannie Mae and Freddie Mac have built approximately $200 billion of combined capital since dividends were stopped in 2018, approaching the minimum capital requirement (CCT1 capital levels) set during the conservatorship, likely within two years of reaching full regulatory compliance.

“And so during that seven-year period, Fanny and Freddy have built between the two of them almost $200 billion dollars of capital. That's still short of the capital rule, the capital regulation that was created for them during the conservatorship, but they're pretty damn close, probably two years away from being at meeting their minimum capital, their so-called CCT1 capital levels.”

Fannie Mae and Freddie Mac are approaching their minimum capital requirements (CCT1 levels) and are estimated to be just two years away from reaching fully capitalized status, while stress tests show their losses in severely adverse scenarios would be less than $10 billion.

“they're pretty damn close, probably two years away from being at meeting their minimum capital, their so-called CCT1 capital levels. You know, there are many of us who think that the capital rule that was created for them grossly oversolved for their how much capital they should carry right after the financial crisis, everyone's nervous. Yeah. Exactly. And so, you know, the as with the big banks, the so-called cies, um Fanny and Freddy have been subject to so-called stress tests uh to see how they would fare in a severely adverse scenario. um uh where you know the financial markets decline by 20%, the interest rates go up by 10%, unemployment skyrockets, housing prices collapse, blah blah blah. They've been subjected to stress tests over the last couple of years. And those stress tests show that basically their losses would be less than like $10 billion.”

The Congressional Budget Office estimated that Fannie Mae and Freddie Mac have total equity value (of which the government would own 90%) between $300-$500 billion based on a dividend discount model valuation.

“The CBO did a recent analysis and said, "Well, this is the Congressional Budget Office did a recent analysis, and it's, you know, filled with lots of assumptions, and you could quibble with some of them, but it's a dividend discount model, which isn't um, you know, unheard of in the valuation of financial institutions. And you know they suggested the equity the total equity of which I think the government ends up with at least 90%. When you recapitalize and the total equity is worth somewhere between 300 and $500 billion.”

If the U.S. securitizes a portion of its assets into a sovereign wealth fund, it would effectively shift from issuing unsecured Treasury debt to issuing secured debt backed by collateral, similar to the 'incumbrance' concept in covered bonds

“it sounds like basically a shift from the US issuing unsecured treasuries to secured debt. And when I hear that, I think back to a term that I used to encounter a lot um when I was covering European covered bonds, incumbrance. like there's a limited amount of collateral that you can put up into a bond and at some point you start to run out of it.”

Trump's true motivation appears to be revenue from tariffs rather than the intellectual framework of manufacturing repatriation, suggesting gap between the academic papers justifying tariffs and Trump's actual policy reasoning.

“Meanwhile, Trump is like, 'No, I just want more money for tariffs.' Like, I don't know. He like there's this intellectual infrastructure around it. I'm not sure that Trump himself buys into this.”

An alternative strategy rumored from the Trump administration is the creation of a sovereign wealth fund using US government-owned assets (land, mineral rights, equity in commercial enterprises like TVA, Fannie Mae, Freddie Mac), which could directly intervene in foreign exchange markets to weaken the dollar without relying on coercive debt exchanges.

“if the game plan here of that Mara Lago accord is to weaken the dollar so as to improve the competitiveness of US domestic manufacturing there is another approach and that you've also heard rumor of uh from the Trump administration and that is the creation of a sovereign wealth fund to take assets that the US government currently owns, dump them in a central fund managed by the Treasury Department and allowing the Treasury Department then to intervene directly into the currenc foreign exchange markets to try and push the dollar down.”

A sovereign wealth fund capitalized with $2 trillion from monetized government assets (land values, mineral rights, privatized commercial enterprises) could intervene directly in foreign exchange markets to weaken the dollar without requiring debt restructuring or coercive tactics against foreign debt holders.

“let's say there's a $2 trillion of land values, mineral rights, ownership in commercial enterprises that could be uh that could capitalize a sovereign wealth fund...So there you would have, you know, $2 trillion fund that could intervene in the foreign exchange markets to try to intentionally weaken the dollar without having to engage in this exchange offer and term out our debt and try to, you know, browbeat with security umbrellas and tariff walls, uh, foreign countries to help us in that endeavor.”

There is a gap between the intellectual architecture outlined in Moran's white papers and what Trump himself actually understands or cares about; Trump is fundamentally motivated by tariffs as an end in themselves, not as a tactic toward manufacturing reshoring

“Okay. So, so and this is all coming out of Morance's paper as Tracy indicated at the beginning. I mean, he's put together the most kind of comprehensive uh strategy and he acknowledges there's a very narrow corridor within which this might work and in some sense the president has already gotten out ahead uh with his tariff tactics and also his wi threatening to withdraw the security umbrella from NATO. uh because those are the two critical sticks that Moran advocated we use”

Upon privatization with proper recapitalization, the US Treasury would end up owning 90-94% of total common stock in Fannie Mae and Freddie Mac, and the Congressional Budget Office estimated total equity value (of which government owns ~90%) between $300-500 billion, a 'decent number' for sovereign wealth fund capitalization or deficit reduction.

“The CBO did a recent analysis and said, "Well, this is the Congressional Budget Office did a recent analysis, and it's, you know, filled with lots of assumptions, and you could quibble with some of them, but it's a dividend discount model, which isn't um, you know, unheard of in the valuation of financial institutions. And you know they suggested the equity the total equity of which I think the government ends up with at least 90%. When you recapitalize and the total equity is worth somewhere between 300 and $500 billion. That's a decent number. That's a decent number to put in your sovereign wealth fund or to pay down some of the deficit.”

Fannie Mae and Freddie Mac have paid the Treasury Department $32 billion in dividends on a $192 billion preferred stock investment made during the 2008 financial crisis conservatorship, and have built nearly $200 billion in capital during the 2018-2025 period while the dividend stream was suspended.

“They have paid the Treasury Department back now $32 billion on that in characterized as dividends on that $192 billion par investment. Yeah. Not only are they profitable, they've also, as I understand it, kind of restructured their business and increased their capital. Basically, like gotten ready for a sale while generating a profit, which is pretty impressive. Yeah. So the that the dividend stream to Treasury which generated $32 billion was turned off in 2018 to allow them to build capital in anticipation in Trump administration one that they would be privatized. And so they allowed them to build capital. And so the Treasury Department hasn't received any dividends since uh 2018. So 7 years ago. And during that seven-year period, Fanny and Freddy have built between the two of them almost $200 billion dollars of capital.”

The Mara Lago accord attempts to resolve tensions in the Trump administration's economic agenda: the simultaneous desire to reshore manufacturing, shrink the deficit, and address the perception that the US isn't compensated enough for its role in global security—while also paying down debt.

“So the way I think about it, it's an attempt to resolve some of the tensions embedded in the Trump administration's economic agenda. We spoke about it with Jim Biano and those tensions are primarily the desire to reshore manufacturing and shrink the deficit and also I guess address the sort of emotional sense that the US isn't getting compensated enough for its role in the global economy or global security. Excellent summary. All while paying down the debt, right? So having your cake and eating it too.”

Post-crisis stress tests show Fannie Mae and Freddie Mac would face losses of less than $10 billion in a severely adverse scenario (20% financial market decline, 10% interest rate increase, unemployment spike, housing price collapse), yet they are required to carry 156 billion (Fannie) and 120 billion (Freddie) of capital, suggesting overregulation relative to actual risk.

“um uh where you know the financial markets decline by 20%, the interest rates go up by 10%, unemployment skyrocks, housing prices collapse, blah blah blah. They've been subjected to stress tests over the last couple of years. And those stress tests show that basically their losses would be less than like $10 billion. And so to have them carrying around in Fann's case 156 billion of capital and in Freddy's case 120 billion of capital against what the stress tests show would be negligible losses seems like a pretty a waste of that of that capital uh just grossly oversolving them”

The tariff threat in the Mara Lago accord has become 'extant' rather than 'imminent' because Trump has implemented tariffs inconsistently and repeatedly changed course (on-again, off-again), destroying the credibility that a future threat would be executed, making the threat ineffective as a negotiating tool for debt exchange.

“he's he's on again, off again with the tariffs. Uh so the threat isn't isn't imminent, it's extant. And as you say, the trust that he might change his mind the day after the exchange is compensated is real.”

The key question for Fannie Mae and Freddie Mac privatization is whether credit rating agencies will maintain near-sovereign credit ratings on mortgage-backed securities even after privatization, given that the agencies have historically treated them as near-risk-free; this will be a negotiation with Moody's, S&P, and Fitch.

“the big question is half a trillion dollars of capital standing behind the guarantees enough to keep the credit ratings on the MBS uh stable and in place. I think it is, but you know, at the end of the day, there'll be a conversation with Moody's and S&P and Fitch, and they'll have to decide whether they remain near sovereign credit.”

During the first Trump administration, the Treasury Department investigated ways to extract payouts on Chinese imperial bonds (bonds issued by predecessor Chinese governments) as a way of raising revenue, while simultaneously the SEC was prosecuting someone for selling those same bonds to investors and promising payouts.

“This actually came up in the first Trump administration. The Treasury was looking at ways to get a payout on the Chinese bonds. And funnily enough, it was doing that at the same time that the SEC was prosecuting someone for selling those bonds to investors and promising a payout.”

Secretary Scott Bessent has discussed wanting to 'relever the private sector' by getting rates down to make investing more appealing for companies, implying a policy goal of shifting from government consumption to private investment

“Secretary Scott Bessant and some of his recent interviews talked about, you know, we want to relever the private sector and so we want to get rates down and therefore that makes investing more appealing for companies, etc.”

The US can potentially raise additional government revenue by collecting payment on defaulted bonds issued by previous Chinese governments (imperial debt) or the UK still owes the US money from World War II loans; the Treasury explored this during the first Trump administration while simultaneously the SEC was prosecuting people for fraudulently selling these same bonds to retail investors.

“And this actually came up in the first Trump administration. The Treasury was looking at ways to get a payout on the Chinese bonds. And funnily enough, it was doing that at the same time that the SEC was prosecuting someone for selling those bonds to investors and promising a payout. That's fun. That could be fun. So, so these are I don't know anything about this. So, these are bonds issued by predecessor governments in China.”

Treasuries are the biggest US export, and Trump is obsessed with exports, yet he does not want to export treasuries despite the fact that debt can help grow the private economy.

“The one thing, well, there are a lot of things that I think are funny or ironic in some of this discussion, but one of the big ironies I think about is treasuries are kind of the US's biggest export. Yeah. And Trump is obsessed with exports. I know. I know. But he doesn't want to export those particular things. Even though you could make an argument that debt helps to grow the private economy, as Jim was discussing.”

The Trump administration's strategy, articulated in Moran's paper, involves two primary tactics for inducing foreign holders to swap short-term treasuries into century bonds: a high tariff wall as punishment for non-compliance, and withdrawal of US security umbrella protection from NATO.

“So the two primary tactics that uh Moran lays out in his paper are sort of you know the way you do exchange offers in the private markets that I traffic in. Um the way you do an exchange offer is with carrots and sticks. Uh you offer a sweetener and you threaten uh you know doom and gloom. So the two primary tactics here uh that you foreign country are going to face on the one hand a high tariff wall unless you play ball and on the other hand the withdrawal of our security umbrella.”