Fannie and Freddie

[Solon]

I'm surprised that the financial geniuses in these parts have left this story alone so far today. I was waiting to read what they had to say.

http://www.economist.com/finance/displayStory.cfm?story_id=12078933

This is a pretty huge development, IMO. While it's clear that the feds had to do something to keep Freddie and Fannie afloat, I'm a little sick when I think of how much it might cost taxpayers in the long run.

Meanwhile, their executives have been extremely well paid (e.g. http://www.msnbc.msn.com/id/25740405/)

I don't know how all the ramifications will play out.

PS - maybe I should have put this in current events. Sorry if it's misplaced.

[Mormon Red Death]

Per Today's TMQ:

Next Government Press Release: "Deficit Spending Good for Your Children": Perhaps Washington had no choice but to take over Fannie Mae and Freddie Mac, considering what we now know about years of self-serving lying by the management of both institutions. But taxpayers have been put on the hook for at least $200 billion in loan guarantees. Buried in the conservatorship declaration is word Congress may add extra subsidies to Fannie and Freddie to keep mortgage interest rates low. Washington has been involved in many loan guarantees, but never in mortgage rates. This all-new subsidy will make mortgage markets political on a permanent basis -- any time rates rise, borrowers seeking mortgages will demand taxpayers subsidize them. By shifting to taxpayers (and to our children, via still more deficit spending) some of the cost of borrowing, this may only further distort the mortgage market, encouraging buyers and brokers to generate imprudent loans and then passing costs along to taxpayers.

Note another aspect of the Fannie-Freddie takeover that politicians don't want to talk about. On paper, the takeover looks like a bankruptcy. In a bankruptcy, creditors receive preference (because they hold a promise of payment) while shareholders are wiped out (because equity positions are speculative and known to buyers to guarantee nothing). The Fannie-Freddie takeover preserves the companies' bondholders, while making shareholders appear to get clobbered -- the government receives a warrant to claim up to 80 percent of shares, which would slash a share in Fannie or Freddie to 20 percent of current value. But the government must exercise that warrant. If not, shareholders are bailed out too. As soon as attention shifts to the next screw-up, lobbyists for the rich quietly will twist White House and Congressional arms for assurances the warrants are never exercised. If this happens, average people will be taxed to protect the wealth of Fannie and Freddie shareholders. "We only wish [Treasury Secretary Henry] Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure … [share]holders deserve to lose everything." Who said this, some left-wing fanatic? The editorial page of the Wall Street Journal.

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I'll post my thoughts later.. as I am busy at work.

[FMCoug]

It seems to be pretty clear that we have "progressed" from an economy that understands the invisible hand and business cycles to one where the governement feels like they have to do whatever it takes to keep it growing.

Paulson's comments sickened me. The basic rationale was that because the economy can't recover until the housing market turns around, we (the gov't) are going to artificially "fix" the housing market.

Disgusting.

[Cali Coug]

I'm surprised that the financial geniuses in these parts have left this story alone so far today. I was waiting to read what they had to say.

http://www.economist.com/finance/displayStory.cfm?story_id=12078933

This is a pretty huge development, IMO. While it's clear that the feds had to do something to keep Freddie and Fannie afloat, I'm a little sick when I think of how much it might cost taxpayers in the long run.

Meanwhile, their executives have been extremely well paid (e.g. http://www.msnbc.msn.com/id/25740405/)

I don't know how all the ramifications will play out.

PS - maybe I should have put this in current events. Sorry if it's misplaced.

The government had to step in if they cared at all about market stability. Fannie and Freddie have issued over $5 TRILLION in agency paper. That is a HUGE amount of cash, and the government can't afford for Fannie and Freddie to look like they can't cover the paper. If they did, the dollar would be weakened tremendously, markets would seize up, money supply would tighten, etc. It would have been a disaster. I also think the government structured the "takeover" very well. The deal created a new class of preferred stock that will be issued to the government. In effect, by becoming a preferred stockholder, the government told the markets that the paper will be covered no matter what. In a liquidation, creditors are paid off first, followed by preferred stockholders, followed by common stockholders. By becoming a preferred stockholder, the government preserved the interests of the debtholders first, and we know the government isn't going to allow a default for the debtholders when it means the preferred stockholders (i.e., the government) would get nothing back.

The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under.

[cougjunkie]

The government had to step in if they cared at all about market stability. Fannie and Freddie have issued over $5 TRILLION in agency paper. That is a HUGE amount of cash, and the government can't afford for Fannie and Freddie to look like they can't cover the paper. If they did, the dollar would be weakened tremendously, markets would seize up, money supply would tighten, etc. It would have been a disaster. I also think the government structured the "takeover" very well. The deal created a new class of preferred stock that will be issued to the government. In effect, by becoming a preferred stockholder, the government told the markets that the paper will be covered no matter what. In a liquidation, creditors are paid off first, followed by preferred stockholders, followed by common stockholders. By becoming a preferred stockholder, the government preserved the interests of the debtholders first, and we know the government isn't going to allow a default for the debtholders when it means the preferred stockholders (i.e., the government) would get nothing back.

The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under.

I just came back from a training on this. The government also has the option to buy up to an 80% share if they would like. They have also opened a direct line to the US treasury for Fannie and Freddie. This has been huge for the mortgage industry and rates have dropped drastically. For those of you who have been looking to refinance you might want to call your broker today. The market is still fairly volatile but if you play it right the low 5s are a possibility.

[BYU71]

The government had to step in if they cared at all about market stability. Fannie and Freddie have issued over $5 TRILLION in agency paper. That is a HUGE amount of cash, and the government can't afford for Fannie and Freddie to look like they can't cover the paper. If they did, the dollar would be weakened tremendously, markets would seize up, money supply would tighten, etc. It would have been a disaster. I also think the government structured the "takeover" very well. The deal created a new class of preferred stock that will be issued to the government. In effect, by becoming a preferred stockholder, the government told the markets that the paper will be covered no matter what. In a liquidation, creditors are paid off first, followed by preferred stockholders, followed by common stockholders. By becoming a preferred stockholder, the government preserved the interests of the debtholders first, and we know the government isn't going to allow a default for the debtholders when it means the preferred stockholders (i.e., the government) would get nothing back.

The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under.


Market fall out of love fast. Have you seen today. How about Lehman down to about $7. The greedy SOB's on wall st have totally messed up the financial structure. Before you blame Bush, why don't you check out the party ID's of some of the biggest Wall St. players.

Especially the ones that come up with these f'ed up schemes every so often.

[MikeWaters]

I learned something important in the past several months. The hard way.

Never have most of your retirement in a bank stock.

:)

[cougjunkie]

Market fall out of love fast. Have you seen today. How about Lehman down to about $7. The greedy SOB's on wall st have totally messed up the financial structure. Before you blame Bush, why don't you check out the party ID's of some of the biggest Wall St. players.

Especially the ones that come up with these f'ed up schemes every so often.

I have some insider trading tips on Lehman brothers. Their rates suck!

[MikeWaters]

I'm glad things are looking up for CJ. BYU71, I am not investing too much concern. He filched on a hot dog.

[Cali Coug]

Market fall out of love fast. Have you seen today. How about Lehman down to about $7. The greedy SOB's on wall st have totally messed up the financial structure. Before you blame Bush, why don't you check out the party ID's of some of the biggest Wall St. players.

Especially the ones that come up with these f'ed up schemes every so often.

Lehman is bad, but they have been bad for a while. I think they are about to be sold (their stock price is moving very tightly right now). I bet you see a private equity firm take them over shortly. Maybe Al Gore's group.

[Mormon Red Death]

ok here are my thoughts.

In the short term (1-2 years) this will help mortgage industry. In the long term this will be an albatross on our society. As my quote from TMQ says above the standards for giving out loans which have tightened over the last year or so now get thrown out the window because the government owns it. Not to mention the debt future taxpayers will need to pay.

The really bad thing about this is the precedent it sets. We've become a nation standing in line for bailouts.

[MikeWaters]

ok here are my thoughts.

In the short term (1-2 years) this will help mortgage industry. In the long term this will be an albatross on our society. As my quote from TMQ says above the standards for giving out loans which have tightened over the last year or so now get thrown out the window because the government owns it. Not to mention the debt future taxpayers will need to pay.

The really bad thing about this is the precedent it sets. We've become a nation standing in line for bailouts.

the loans were guaranteed by the govt. anyway. In other words, the U.S. Taxpayer was still on the hook, bailout or not.

[Solon]

The really bad thing about this is the precedent it sets. We've become a nation standing in line for bailouts.

Yeah, that's it. Everyone wants "relief." While in principle I feel bad for families (esp. kids) who lose their homes, I don't feel bad for people who make bad investments (with full knowledge, etc. Obviously, the cases where brokers lied or misled borrowers are a different issue.). To quote INXS, "Sometimes you kick. Sometimes you get kicked."

I recently read somewhere (was it on this board?) that a major difference between this economic downturn and ones past is the amount of consumer debt Americans (and Brits, and other Europeans) are carrying. They have little wiggle room to handle the painful economic adjustments that are going on. When things finally finish re-setting, with higher fuel, food, and credit prices, they're going to have a really hard time making it work.

While it's obvious the gov't. had to do something with Freddie and Fannie, this mentality is killing me. From Bear Stearns to this, the Feds may be trading short-term stability for long-term suffering. Once they start trying to control and regulate risk, we're all screwed.

But it's not like I have a better idea. Just 20-20 hindsight.

What a mess.