What Kind of Government Support Will Fannie and Freddie Get? 67 comments
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The chance that American taxpayers will actually lose any money if Ben Bernanke and Henry Paulson decide that Fannie (FNM) and Freddie (FRE) need government support is very low:
- The interest payments they have coming in are greater than the interest payments they have going out.
- Their government guarantee is itself a very valuable asset that they have made a lot of money off of in the past and will make more off of in the future.
- They are not even in liquidity trouble--unless they begin to have problems rolling over their discount notes...
- As long as it is generally understood that they are too big to fail, they should not even have liquidity problems--absent a depression that bankrupts many currently-solvent homeowners, that is.
Nevertheless, there is now a risk that Fannie and Freddie will need some form of government support in the next month:
- The situation could require a lot of government-provided liquidity at any moment
- It might even require more liquidity than the Federal Reserve can provide with its current balance sheet. Either the Fed needs to be given the power to pay interest on reserves immediately--so that it can swap interest-paying reserve deposits for mortgages next week--or this has to become not Fed but Treasury business.
The game the Fed and the Treasury are playing right now is as follows:
- Keep risky asset prices from collapsing...
- So that the flow of savings to finance construction and manufacturing expansion continues...
- So that employment declines in construction and supporting occupations are roughly balanced by employment expansions in export and import-competing manufacturing and supporting occupations...
- So that the economy does not fall into a depression deeper than that of 1982...
- In which case all bets are off.
Supporting Fannie and Freddie may be something Ben Bernanke and Henry Paulson decide we need to do in order to win this keep-the-economy-near full employment game:
- They are not in the business of rescuing feckless financiers from bankruptcy.
- If their actions do have the consequence of rescuing some feckless financiers from bankruptcy, that is a side effect of their keeping the financial crisis from spilling over and destroying the jobs of millions of Americans.
- To have the government step back in order to teach feckless financiers a lesson is simply not worth destroying the jobs of millions of Americans.
- They are grownups with good judgment and as much experience in this business as anybody.
- They are backstopped by committee chairs--Chris Dodd and Barney Frank--of equally good judgment.
Bernanke and Paulson have asked for additional regulatory authority:
- They should get it.
- Fannie's and Freddie's troubles make it more and more clear that the financial-market deregulation agenda of the late 1990s that Phil Gramm spearheaded was a more serious mistake than almost of any of us realized back at the time...
- There are a bunch of options if push comes to shove:
- Having the government formally guarantee GSE debt.
- Having the government provide capital to the GSEs.
- Having the government guarantee GSE preferred.
- Putting the GSEs into "conservatorship."
- The moral-hazard worriers in the Treasury will probably favor the last--that option penalizes GSE shareholders in the same way that Bear Stearns and LTCM shareholders and principals were penalized. The cautious will favor the first option, as running the least risk of aggravating uncertainty.
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This article has 67 comments:
Freddie is leveraged above 50 if you define leverage in the next way:
X = total amount of what Freddie is responsible for,
Y = total market cap.
Suppose X/Y = 50, in that case a decline of just 2% in X wipes out all market cap Y. Of course you can delay a bit with derivatives or other tricks but in the end every 2% decline in X wipes out one Y.
Furthermore, the last 16 months did see ever increasing decreases of house values so we are not even halfway with house price declines.
And if you compare median family income to median house prices over the period 1996 to 2006 (the top of the housing market) you arrive at the conclusion that house prices could decline over 50% of the top prices from mid 2006.
In order to ensure that the beloved FED, lender of last resort, simply had no clue what was going on in 2006, at the end of 2006 FED chairman Bernanke stated that 'house prices are just a reflection of a strong US economy'. This implies they did not understand the historical relation between median income and median house prices was broken for a long time.
Just read some old minutes from the FED from a few years back, it is very refreshing stuff to read: they muzzle around completely irrelevant details and the big stuff is never mentioned.
How in the world is the Fed/Treasury going to accomplish this?
The bond market was not amused.
See: market-ticker.denninge...
"Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.
"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole, 71, who left the Fed in March, said in an interview."
I guess we'll find out tomorrow.
Neither the stockholders or bond holders should be bailed out. The bonds have no guarantee. And if it is "implied", it shouldn't be.
The very best thing for the mortgage market is to let the buyers of the bonds feel the pain of taking on risky mortgage backed securities. Thisis the only way to prevent this rapant "risk free" speculation in the future. Letting the bond holders earn a return in line with the return that the actual mortgages produce will cause future mortgages and mortgage bonds to be priced appropriately by the market.
Otherwise, we will end up right back in another bubble where the robber barrons rape the taxpayer by taking ridiculous risks to line their pocket books knowing they can pawn off any losses to the masses.
This is exactly what is wrong with American crony capitalisim. Alas, my idea will never happen. We are doomed to a future of pillaging and will eventually end up as a Banana Republic. Oil, gold and commodities are proving to be a much more reliable currency and store of value than the buck. They aren't making any more oil or gold. On the other hand, their is an unlimitled supply of Bernanke bucks.
Perhaps you should get out of your ivory tower and see what's happening in the streets.
The American middle class is being destroyed while the country is looted from within by corporate crooks and corrupted politicians.
1982 will seem like a picnic in the park compared to what's coming.
>Bernanke and Paulson have asked for additional regulatory authority:
>They should get it.
Oh, I think they will be getting some "additional regulatory authority" sooner or later--from the only regulatory authority this country has ever had since its somewhat messy inception. I think they're going to learn what "regulatory authority" actually means.
Perhaps you've not heard of the term 'socialism'?
All that is being done now, on an ever widening scope, is socialising the losses of these imprudent companies (BSC and all the IBs now being supported by the Federal Reserve balance sheet). Does anyone not see clearly that this is a pillaging of the American people - the profits were never socialised. These were PRIVATE profits. Now the losses are being charged to the PUBLIC.
Saturday, July 12. 2008
Posted by Karl Denninger at 14:14
Fannie, Freddie, Banks and Government Debt
Ok folks, its time for a long sit-down type of Ticker - the sort that I usually don't write.
Let's start with Fannie and Freddie.
As anyone who has been reading The Ticker knows, I have been saying for quite some time that Fannie and Freddie are in fact "short to zero" candidates for the common stock. This is simply due to the mathematics of their financial situation - they are levered up anywhere from 60 to more than 200:1, depending on what you include and exclude from "capital" and "credit book."
I use the worst-case set of numbers, because in a bad market, that's what you wind up with - therefore, I include all of their credit guarantees, and exclude all intangibles such as "good will" and "tax loss carryforwards", with the latter being particularly important in this case because Fannie, for example, has some $13 billion in deferred tax assets.
That's not money, its an offset against future taxes. But to pay taxes you must first make a profit, and in a bad market, those are worth a big fat zero.
So here we sit with two firms that are running with leverage ratios that make a Hedge Fund look like a convocation of the Girl Scouts.
The Federal Government continues to claim that they are "well-capitalized." Uh huh. And I'm the Easter Bunny. Nobody running with a leverage ratio of 60:1 is "well-capitalized", say much less someone running with a leverage ratio of 200:1.
How did this happen? Quite simple - our government allowed it and in fact prodded these firms into doing it.
Fannie and Freddie began as firms that existed to provide liquidity to the conforming marketplace for mortgages, defined as 80/20 full-doc 30 year and 15 year loans. That is, you put down 20% of the purchase price of the house in cash, limiting your leverage ratio to 5:1, and in addition the typical "back end ratio", or total debt to income, was limited to 36%.
These loans are extremely safe because they have a fixed interest rate, your leverage is limited, and even in a severely-down housing market if you find yourself unable to pay the losses taken by the noteholder are limited or non-existent (you may be wiped out, but the note holder is likely to get most or all of their money back at foreclosure.)
As the 1990s and especially 2000 passed, however, Fannie and Freddie began to loosen standards. They put in place "automated approvals" that were, for the most part, essentially driven by FICO scores - that is, whether you pay your credit cards on time. In addition Congress prodded them to be the "standard bearer" for what was and is a horrible mis-allocation of capital - that is, to push the "American Dream" of homeownership to the maximum possible extent, and to glorify not owning a small bungalow in which you had enough room to sleep and raise a kid or two, but rather the "McMansion" philosophy of building on every square inch of farmland within 100 miles of a population center.
This is a misallocation of capital for a simple reason - a house does not generate GDP. It has utility value as shelter but, unlike a machine, it generates no new GDP by being in existence.
You cannot base an economy on housing for this reason.
Normally a private company could not pursue their end of the "bargain" in this sort of non-GDP-growing enterprise because as they continued to drop credit standards and increase leverage by issuing more and more debt the market would impose discipline. That is, as your gearing ratio went up so would the coupon - or interest rate - that you'd have to pay to issue that debt. The free market works quite well in this regard, and severely punishes those who buy debt that doesn't pay enough to cover their risk - its called "bankruptcy" and tends to result in big capital losses for the bondholders.
But Fannie and Freddie were seen to be "government backed", even though every one of their prospectuses for their debt clearly says it is not. That is, the market has perceived that they would not be allowed to fail irrespective of the amount of risk they took on! Thus, as we went through the 2000s, literally $5 trillion worth of credit was issued and sold off to people - but at a spread to Treasuries - that is, at an implied level of risk that was not equivalent to US sovereign obligations.
But was this marketing reasonable? No. In truth hundreds of billions of dollars worth of mortgages were sold into Fannie and Freddie using automated underwriting systems from firms like Countrywide, many of them refinances, that literally verified almost nothing more than the applicant's credit score! Debt-to-income and even in some cases property appraisals were either done by "automated" (meaning - nobody actually LOOKED at the property) means or not done at all! The former stodgy - and reasonably safe - 80/20 mortgage in fact represented only a fraction of the total "buy" of mortgages during the 2000s.
Even worse, Fannie and Freddie, who guarantee their own bond issues, started buying their own paper. That is, they are writing insurance on a hurricane when they are both the writer of the insurance and the loss payee. This looks brilliant in that the "expense" of providing that insurance effectively disappears, thereby making the entirety of the spread they get from their source-of-funds to their paper issue theirs to keep, but that's the wrong way to look at it.
In fact that paper is uninsured, because the money comes from one hand goes to the other, attached to the same body.
Where were the regulators? Congress? Intentionally asleep. Remember that back in 2003 and 2004 both firms were found to have improperly accounted for their results. This should have led to an immediate clampdown and forced deleveraging to no more than 10:1 on an audited basis.
It did not, and in fact neither firm timely filed accounting statements until last year, more than three years after the "errors" were discovered.
But for Congress, The Fed and OFHEO looking the other way on purpose most of the Housing Bubble could not have happened, as the money necessary to fuel it simply would not have been available.
Now we are faced with the reality - Fannie and Freddie, under fair value accounting rules, are insolvent (if you listen to Bill Poole.) What does that mean? It means that if Fannie and Freddie were to sell their assets and net it out today, you'd wind up with a negative number. That is, its assets are less than its liabilities.
The question now comes down to "what do we do about this?"
There are several choices, all of which will have bad side effects. It is critical, however, that we understand those side effects and choose the path forward that represents the least risk to the broader economy and to the government, not just the most expedient or the one that the people who would lose will scream most loudly about.
Here are the options:
The Fed "decides" to "open the discount window." This is a non-starter, right up front. Fannie and Freddie need longer-term - years in length - money. Repos for 28 or even 90 days don't do them a damn bit of good and in fact destabilize them further as the rate and thus cost of that money makes hedging their portfolio against interest risk extremely difficult. Forget this one.
The Fed "decides" to essentially backstop Fannie and Freddie by exchanging what's left of their balance sheet (longer-term bonds and notes) with GSE paper. Down this road lies the immediate implosion of the Treasury market. If they attempt this the dollar will instantaneously implode as The Fed will have converted the "backing" of our currency to houses declining in value while people's jobs and thus incomes necessary to pay the mortgages on same are being lost! If Bernanke is stupid enough to do this (and note that from Friday's Ticker, Ben said he will do whatever he wants unless Congress explicitly passes a law to stop him) you are very likely to need steel and lead, not gold or dollars, as this would almost certainly provoke an immediate currency and treasury market crisis.
The Federal Government steps in and decides to "formally" guarantee Fannie and Freddie's debt. This is an unmitigated disaster as it does nothing about the risk management policies and procedures in these firms. In fact, The Senate has just passed a bill that will increase, rather than decrease, the risk on Fannie and Freddie's book via their funding of the "mortgage bailout bill." The threat of this possibility is why, on Friday, the risk of default on US Government Debt doubled! In my years in the market I have never seen this kind of bond market dislocation - the spread moved from 9 to 20 basis points in one day. Further, the 10 year bond moved 15 basis points higher on yield on a day when people were scared to death and should have been demanding Treasuries, not selling them. "Risk free" was partially removed from the description of Treasuries and if this path is taken much more damage will accrue to US Government debt. ALL debt costs will rocket higher if this happens as everything is referenced, with a spread, off US Treasuries.
The government could attempt to prop them up without actually formally assuming control, by, for instance, forcing them to issue preferred stock which the government then buys. This would also impact treasury funding costs but not as severely as (1-3) above, and it also likely does little or nothing to stop the problem, because deleveraging to reasonable levels (e.g. 10:1) would require a literal $500 billion worth of capital! It would also destroy equity holders (stockholders) of their shares immediately by diluting them to an insane degree.
The government can decide to do nothing. If Fannie and Freddie are unable to fund, they go under. Period. This would produce a monstrous dislocation in the housing market, but it would not cut off all mortgages. It would, however, have a fairly dramatic impact on funding costs, probably adding 300 basis points to the cost of a mortgage - in other words, 30 year money would immediately go to about 9%. However, other forms of credit would be largely unaffected, including and most importantly, US Government debt.
OFHEO could step in and declare Fannie and Freddie "severely undercapitalized" and put them into "conservatorship." The next obvious step would be to place them into runoff, where they slowly divest their bond portfolio as it matures over the next 30 years. This would have the same impact on mortgage money as (5) above, but current bondholders would see different amounts of damage depending on exactly where they are in the capital structure and what and when they bought. Those who bought "trash paper" backed by what amount to no-doc loans would get creamed, while those who bought paper backed by 80/20 loans would likely lose nothing.
The only sane path forward, folks, is option #6.
Here's why.
#1 through #4 simply transfer the risk of loss, all of which was taken by Fannie and Freddie as private companies, to the taxpayer, in either whole or part. It potentially doubles the Federal Public Debt from $5 trillion to $10 trillion (there is another $4 trillion in Federal Debt that is "not publicly held".) Depending on which path and what combination of "pieces" are done, the impact would change, but none of this actually addresses the issue, which is that the credit book is too-highly leveraged and needs to be cut back.
#5 is a bad choice as well. Doing nothing will lead to these firms destruction. They are incapable of publicly offering equity at these stock prices and with this volatility - nobody in their right mind is going to buy, and the amount of equity they need is insane. Trying to raise $500 billion is simply not going to happen, but its what needs to happen in order to restore their leverage ratios to sane levels (e.g. 10:1)
So this leaves one with #6, conservatorship and forced runoff.
Where does that leave us as an economy?
A return to sound mortgage standards. 30 year fixed money on an 80/20 basis (you put up 20% of actual cash as a down payment) will likely blow out by 100-200 basis points from where it is now - that is, 1-2% higher. 8% rates with 20% down will become the norm, with somewhat-lower rates, say, 7%ish, for those who are very well capitalized and can prove it.
Low-doc, higher ratio loans will remain available but they will be extremely expensive, as they should be.
House prices will contract immediately to where the average American will be able to afford the average house in a given area under a 30/fixed, 80/20 loan at 8%. For many parts of this country this means a further huge decrease in home "values" - back to actual historical norms of 2.5-3x incomes.
The people who bought those Fannie and Freddie bonds thinking they were "risk free", while getting a premium over Treasuries, will take some losses. We cannot allow those losses not to be suffered, as that will, in effect, have allowed $50 billion per year to have been siphoned off by the buyers of these bonds, or nearly a half-trillion dollars over the last decade!
By the way, rumor is that Treasury is going to try to step in for $15 billion of preferred stock and access to the discount window. The latter means nothing and the former is like trying to take a leak on a forest fire to put it out - at best it buys them a small cushion against losses for a quarter or two.
The market already gave you its opinion of any such "recapitalization" on the back of The American taxpayer. Default swap spreads on GOVERNMENT debt doubled Friday. That has never happened before. Clearly there is a LOT of nervousness about the impact on the fiscal stability of The United States (as a whole!) should this attempt be made.
Now let's talk about IndyMac. You have to have been in a cave not to know that they were seized yesterday.
The good news is that the FDIC covers you up to $100,000.
The bad news is that the FDIC took a huge charge on this one, somewhere between 10-20% of their total balance sheet - they think. Unfortunately the damage will only stop there if people don't show up Monday to take all their money out, and if it does not spread to the other similarly-situated banks that also wrote scads of Option ARMs in California.
Both of these beliefs are, if the public has one lick of sense, the sort of magical thinking we should not tolerate from lawmakers and regulators.
Who else is on the list? As I said before, pick any bank with substantial real estate exposure in California and/or Florida that offered Option ARMs - that is, negative amortization loans.
Most of them are already near zero in their stock prices; here's a partial (very partial!) list - Downey, First Federal, Wachovia and Washington Mutual.
Not all of these are "modest regional" banks. Washington Mutual, in particular, is one institution that I highlighted last spring when their 10Q showed they were effectively paying dividends out of capitalized interest (that is, money they hadn't received yet as it was "increase" in loan value on Option ARMs.) I predicted then that this would end badly for them.
OTS was out complaining about Chuck Schumer "causing" IMB to fail by inciting a bank run.
OTS, you're wrong - you are the reason that IMB failed, and you, Congress, The Fed and OCC are the reason that all other institutions similarly situated are likely to fail as well!
OTS and OCC (not to mention The Fed or Congress) could have stepped in last spring when that 10Q from WaMu was released and started going through all of these banks, hitting every one of them with enforcement orders demanding that they stop that crap and divest themselves of that paper immediately.
They did not.
In fact, Wachovia didn't stop offering PayOption Mortgages (albeit "fixed rate" ones) until just a week or so ago, and Downey announced they were going to stop doing so just this last week!
So OTS, I think you need to shut up. While Mr. Schumer and I could probably count the things we agree on using the fingers of one hand, the fact remains that in this he was absolutely right, and you were absolutely wrong.
Your job is to guarantee the safety and soundness of our thrifts. That means paying attention to what they're doing and the embedded risk of loss and default in each of those scenarios and programs. You seem to think this is some sort of game, where you can simply "hope and pray", while fostering whatever sort of bubble economy the banks wish to dream up, and it will all be ok.
That of course is pure nonsense.
As for The Fed, OTS and OCC generally, you put the banks into an impaired capital position in the first place by allowing them to play games with sweeps and such, thereby destroying the usual 10% reserve requirements. This degradation of reserves means that much smaller problems destroy the bank than would otherwise be the case.
This too is intentional; The Fed could have hiked reserve requirements going into this mess and in fact could have done so when the property markets started to overheat. It did not and you did not raise any warnings about this, nor have you been out there pounding the drum for raising more capital and taking down leverage.
I have no sympathy - at all - for your position at this time. Zero. This is a crisis of your own manufacture and you deserve what you get.
CNN is reporting that there are ninety other banks on the "troubled" list. Yoo hoo - do 'ya think the $50 billion the FDIC has will be enough?
That's what I think too.
Again, to Americans, I say:
If you have more than $100,000 in a bank, get under the FDIC limits immediately. Like Monday. How many times do you need to hear this before you figure it out? While nearly $200 million was cleared out of IMB before it blew up the fact remains that nearly a billion dollars of uninsured deposits remained, and those people are very likely to lose at least some of their money, perhaps as much as half.
Consider getting all your liquid cash over immediate expenses into Treasury Direct and buying T-bills with it. If the government goes down you will need steel, lead and brass, not money.
Get away from a reliance on debt. Immediately, if not sooner. You simply cannot afford to be in debt in this environment. Period. The odds are very high that any callable line will be called as stress continues to increase, or interest rates, if adjustable, will be ramped significantly.
Look folks, OTS and OCC are not doing their jobs and haven't been since 2003 when the housing bubble began. IndyMac bank was spun off by Countrywide to take paper that they couldn't sell to Fannie and Freddie!
This very same bank has been offering way-above-market CDs in an attempt to attract deposits. How were they intend to pay the coupon on those CDs? Isn't this like doubling down every time you lose at Blackjack? Do you know what the Pit Boss in Vegas calls someone who does that? BROKE. Again - the regulators saw all this as it was advertised - where were they and why didn't they stop it?
The Fed has sat on its hands as well through all of this, and in fact instead of forcing people to deleverage they have made more liquidity available since August, just like, as I've noted, giving heroin to an addict instead of forcing him or her to detox and suffer withdrawals.
Finally, Congress has refused to step in. In fact, their latest "Housing Bill", which The Senate passed last night and which a whole bunch of Senators didn't even have the gonads to vote on, attempts to continue the party for the drug addicts by further increasing the leverage in the FHA and pouring yet more liquidity - dope - into the addicts veins!
Unfortunately at this point the addict is about to suffer heart failure and can't survive another hit. In fact, he may not survive the hits he's already taken!
How much more of a warning do you need folks?
I have been saying that the clock is about to expire for over a year.
The alarm just rung.
Wake up.
Every American who reads this needs to understand that you must choose now whether you are going to sit idly by while Congress and the regulatory agencies put their fingers in their ears and allow the blasts to continue to occur at ever-increasing rates and sizes, including those that engulf and destroy you financially, or whether you are going to, right now, get every one of your neighbors and friends together and organize to shut down your local city and/or Washington DC in peaceful protest until Congress, OCC, OTS and The Fed cut this crap out.
Believe me folks, the French know how to do this. Spontaneously, 5,000 people will appear and literally block the streets, effectively closing them until their complaints are heard.
We as Americans either act now or you are giving consent.
Do you need a bigger warning than the possible implosion of the mortgage agencies that hold more than half of all outstanding mortgages today? Does not the failure of a large regional bank in California - the second largest failure in FDIC history - wake you up?
If not, you're beyond hope.
If so, its time to act.
NOW.
Fannie and Freddie are A-OK. The crash of their stock prices must be some kind of anomaly. Also, the falling dollar, skying commodities, crashing banking stocks, bankrupt mortgage companies, plummeting housing prices, etc. all seem to point to a bright future. We certainly seem to be winnning this "keep-the-economy-near full employment game". The Minisirty of Truth also says we are winning the inflation game. Phew. Happy times ahead.
It appears that you have several individuals challenging your thesis with hard economic and financial facts, yet I see no rebuttal from you. Does that imply that perhaps you're pondering how to argue against logic?
What makes this 'event' different is that the corrupt finance industry is in direct competition for solvency for 'trust' funds such as Social Security, improvements to infrastructure and other 'worthy' social endeavors. The question is, who wins, corrupt banking industries or taxpayers?
I'm talking about alienation: the recognition by large groups of citizens that they are no longer stakeholders in anything the government is doing "on behalf of the people". Many of us already feel disconnected from America; our wealth is not in Treasuries and shares of GM or the local grain elevator but in gold held physically or in foreign vaults. Our political sensibilities are appalled by everything we have seen from Messrs. Bush and Cheney and just as much so by Messrs. McCain and Obama. We feel no common cause with the hundreds of millions of fat, lazy, overleveraged, and undisciplined American suburbanites more concerned with last night's American Idol than with the health of their country. Now you tell us you intend raising our taxes to bail out these deadbeats and the fools who lent to them. This plays both sides against a vanishing and beleaguered middle. What incentive does it give anyone to work hard, save, and invest wisely (the traditional values that built the nation)? What incentive does it give anyone to remain an American at all? We are being squeezed from both sides and the populist government is turning its guns on us to forcibly extract what little we have left! Those of us who feel this way will respond as our wealth permits: those with the most capital will remove it from harm's way and leave the country for good; those with less will move to the mountains, stop paying taxes, and load up on weapons. This is the unraveling of America. If the policymakers really believe their task is to balance moral hazard with financial collapse, they are delusional: the greatest risk is alienation. Freddie and Fannie MUST be allowed to fail if that is what the market dictates. No more bailouts for billionaire bankers and foreign central banks. They chose to buy our garbage paper; we didn't force it on them. No more subsidies for deadbeat wannabes with 3 cents to their names and the deed to an underwater McMansion. They chose to live far beyond their means; now they can cram their Precious and Cody into a dingy 1-bedroom and teach them what it takes to survive in a world where everything must be earned. Assuming they even know. "Blood in the streets" is not just an expression. Continue this process of alienation and you'll get an up close and personal reminder of that.
Thanks, its good to know the problem is 'contained'. I really hope your idea of a FRE/FNM bailout continues since I am short Gov debt up to my eyeballs from 3.80%. Please please please keep posting this type of logic since I am commited not to cover until USA debt is no longer AAA.
Your fan :-)
Who/what is this "Government" you speak of...? Last I checked, they are the tax-payers of the U.S.....and they are tapped-out....
Oh, more debt...skyrocketing rates on FEDGOV debt... Brilliant! How much are you paid for this advice...
I don't know what kind of world you are living in but I respectfully have to tell you that your thesis is flawed. The Government can NOT artifically keep prices inflated so as to keep the losses from growing any further. Your thoughts and mindset on this subject is what got this country in the mess in the first place. Your throry would only create a much larger and more systemic problem.
Wake up and smell the burnings assets.
Exactly how many times do we have to not teach this lesson? Seems when we don't teach it, it doesn't get learned, and the losses keep piling up for the innocent, while the perpetrators largely live on to commit the same fraud again. Yes, it would destroy a lot of things right now, but it needs to be done. We need to find the way to impose the largest possible cost on the perpetrators so that they know they wont be allowed to skate free when they f-up the system again. It seems we've decided to create a perpetual moral hazard machine that grows bigger with each new innovative fleecing. In the end, you keep this up, and you end up eventually with the same thing you've been trying to avoid - losses for everyone. I say let's get it over with and stop this BS once and for all.
You state that "[Fannie and Freddie] are not even in liquidity trouble", but then in the next paragraph you state that they "will need some form of government support in the next month".
If they are not in liquidity trouble they don't need government support. The same goes for the statements released last week that they are adequately capitalized. If they are adequately capitalized then they don't need access to emergency loans at the discount window.
You also state that "[t]heir government guarantee is itself a very valuable asset" when in fact they do not have an implicit government guarantee. You even acknowledge that by saying a possible solution is "Having the government formally guarantee GSE debt."
I submit that we are looking at a recession/depression at least as great as 1982 if not worse. In your article you state that "all bets are off" in that case. You imply that they are in very big trouble if that's the case and I believe you are correct.
In the end I believe that the only suitable solution that you proposed is for them to be placed into a conservatorship. It makes the best of a bad situation by protecting government debt costs.
If F&F need support then let's say to the taxpayers: Yes, the GSEs needed support and the taxpayers will foot the bill to whatever degree.
The rumors about trying to line up money through backroom deals simply reinforce the market's sense of dishonesty that is becoming persuasive. We had the monoline farce going on for months. The U.S. reputation as a pillar of financial openness has been seriously punctured. The financial community now expects the key players to lie which can only do harm to still functioning markets as it undermines the value of information. Whatever the short term consequences, we need to find our way back to openness (highly unlikely) otherwise we run the risk of a much more serious dislocation because once rumors are considered more likely to be the truth than what is peddled as fact by insiders and policy makers, the risk of a market crash becomes quite pronounced.
This article was comparable in quality and content, to something one might have found cheering on GosPlan in Pravda in the 1970's.
Having privatized the profits during the great housing boom-- greatest misallocation of investment away from productivity enhancing factors the world has ever seen--we will socialize the losses and bail out the wealthy on the way down.
That's right, let's call a "spade a bloody shovel." Step right out of the red closet Brad. That's it, one foot at a time. You can do it. Keep holding that bag.
I saw your post before this became a MarketTicker forum. I think you and Ben are trying to do the right thing.... You're probably right that F&F won't actually show losses over a long enough time horizon, if they're allowed to get there. And that is the question.
Making the choice to bring Fannie and Freddie back on the government books after years of profit and credit spread makes people upset. Not as upset as the Chinese would be to take another 5% hit on their bonds in a workout to get the GSEs actually solvent, but hey they're already eating the currency losses so what?
However, this really does bring up systemic risk. If we let F&F work this out on their own... with mostly private losses, then some people lose a bit of money and mortgages are slightly higher (and lending tighter, but it doesn't mean an end to F&F. On the other hand, if this pushes treasuries lower and interest rates higher (and god forbid there is a rush to the door) then it may be for naught. The MBS will track the 10year treasury up, and we will have gained little or nothing. If there is a rush... we will have blown up the Treasury system, and only Grover Norquist will be happy.
I'm just glad to see Nothing post something,
joe
"I guess we'll find out tomorrow."
Hmmm
Looks like they are testing the waters first....
www.reuters.com/articl...
....before they swan dive into an empty pool.
That job is for the U.S. Congress, and those rules are laid out in the U.S. Constitution. Congress must vote on appropriations FIRST if the Secretary of the Treasury spends money. Hank doesn't make this decision, by law and by statute.
If I were you I'd have waited until after Monday's Auction before I wasted my PhD on this kind of speculation.
Ask your representative if he was consulted on the $30B bailout of Bear Sterns.
These criminals must be stopped.
Just where the hell IS Franklin Raines?
Nobody in their right mind with these credentials would be making calls like this. All one has to do is look at their balance sheets and leverage and realize they became insolvent a while ago. The only thing keeping them on life support is not having to sell assets and mark to market.
This statement is my favorite "The interest payments they have coming in are greater than the interest payments they have going out."
You can't collect interest on a default nor do you see even close to 100% of the capital return. That's a double whammy against interest collected or expected.
You gave kudos to Paulson, Bernanke, Dodd and Frank. Are you serious? Dodd and Frank are nothing but puppets for the Wall Street elite. Bernanke and Paulson have done a fantastic job at making things worse. Instead of recognizing the systemic problems and taking the needed medicine they have made countless attempts to defer the inevitable which will only serve to make the end result that much worse. I must also point out the ridiculous statements made by Paulson and Bernanke who have repeatedly downplayed this entire mess. Bernanke was stating subprime was not a big deal and contained two years ago while Paulson has called a bottom in housing at least 14 times (that I have documented in articles) beginning in early 2006.
You wouldn't by chance have any conflicts of interest when it comes to this matter?
Really? SO what was Bear Stearns and CFC? A belch in the night? A mysterious black hand? The Mafia investing in "America's Future?" Your thesis is so flawed, so hollow and so easy to shoot full of holes, it is not even funny. Your assumptions are based on dated and inane predictive formulas that assume that real estate can not experience a 40% plus decline in the current economy. Get for real.
So if the government elects to bail out Fannie and Freddie with an endless taxpayer commitment far beyond that of oh, say Indymac, does this mean all of the hedge funds who played with matches and gasoline get a guarantee of rescue also? Do we bail out everyone who took out the deadliest CDS to save a bankster or Congresscritter's friend in the near future also? Perhaps the monolines need just one more visit before you assume that the property taxes will be paid BY BANKRUPT PEOPLE and that everything will go Mayberry, RFD again in your world.
Even though most of the hedge funds are managed in the offices of the same investment banks that helped exacerbate the problem to date, and the hedgies are quite nicely located in convenient PO Boxes in the Caymans, are we going to get honest about the amount of agency paper and Treasury paper they purchased to bolster and prevent realistic yields for that garbage to finally occur? Or are you going to insist that we continue to bail out anything and everything with reproductive capacity that happens to have the ability to pay taxes to the US Government?
At some point, something has to go to ZERO and die. Perhaps you should analyze your portfolio or better yet, post it up for independent evaluation (grin) and lets us see if a government bailout is justifiable in your future.
In the mean time, share what you are smoking. TO even hint that our government officials, quasi-government officials, regulators or politicians are doing are doing a good job is like complementing the Polish Calvary in 1939 for doing such a good job to "stem the tide."
But have you pondered the effect on future housing lending? It is empirically proven that it can't continue in such highly leveraged form, so future lending has to be more conservative. That will efectively ruin the collateral on the existing loans and will hit the housing market even further.
It looks like rapid deflation of the dollar is the most sensible solution so prices are 'supported' a-la-weimar republic style. But where will this send treasuries? Most likely in the sink. And what will happen to the Government if it can't borrow anymore in its own currency? I just dont want to continue as this seems to have no end.
And Brad,
Did you teach W at Harvard? I see your signature in his deeds.
"They are not even in liquidity trouble--unless they begin to have problems rolling over their discount notes..."
and then you wrote :
"The situation could require a lot of government-provided liquidity at any moment"
ever considered a career in politics?
You are the enemy to every hard working honest American you want to bend over and take it for the corrupt fraudulent bankers that made bad bets and now want to be made whole so they can keep their 3 vacation homes and yachts while the rest of the country sinks into a deep recession and foots the bill. No more guaranteeing bad trades. This is capatilism right? You make a bad bet you take your loss and move on. Don't push it off onto the unwashed masses you obviously don't give two shits about.
If they did, we wouldn't be in this mess...putting a band-aid approach just delays the problems, not solving it.
I'm sure most of you own financial puts (as do I) and the GSE's have certainly been foolish, but as the author points out, it is the government's job to prevent the American economy from collapsing and costing millions of innocent people their jobs.
It is unfortunate when a side-effect of that action benefits incompetent managers but don't let your greed overwhelm your common sense. The GSE's will likely be penny stocks in time but letting them collapse is NOT in your best interest as an American even if you think it would be good for your short-term portfolio...
repeat after me:
I will no longer base my thesis on information culled from the Yahoo boards.
I will no longer base my thesis on information culled from the Yahoo boards.
I will no longer base my thesis on information culled from the Yahoo boards.
100 times.
Screen movie of Ayn Rand's "Atlas Shrugged"
Those in their ivory towers, will never get it. The common sense, rational
part's of their brains have been cemented off.
Check out the Fed's latest numbers on Maiden Lane LLC:
www.federalreserve.gov.../
You mean just like the chances of the Federal Reserve losing money on the $30 billion it got from Bear Stearns?
bloomberg: "The Federal Reserve said the portfolio of Bear Stearns Cos. assets it accepted as part of the firm's takeover by JPMorgan Chase & Co. is now worth $28.9 billion, down from the $30 billion estimated in March.
The central bank cut the ``fair value'' of the assets as of June 26, the Fed said today in Washington."
interesting how Maiden Lane's holdings is down only $1.1 billion when JP Morgan is coincidentally going to absorb the first $1.15 billion in losses.
hmmm. maybe this allows the government to say that "see, the taxpayer isnt on the hook for anything."
after seeing how much banks have lost on similar assets, any rational, honest, objective person will tell you its highly doubtful similar proportional losses haven't occurred.
you say:
"# They are not even in liquidity trouble--unless they begin to have problems rolling over their discount notes...
# As long as it is generally understood that they are too big to fail, they should not even have liquidity problems--absent a depression that bankrupts many currently-solvent homeowners, that is."
unless they begin to have problems rolling over their discount notes.............. absent a depression...............
despite how remote any optimistic person may consider those probabilities, havent the chances of that happening gone up?
just the fact that the chances have gone up, and are looking more and more likely every month, doesnt bode well for your arguments.
Your opinion is fully of so much HOPE that it's surely a sign the four horsemen are riding on the US financial/housing markets.... If ifs and but were candies and nuts, we'd all have a Merry Christmas!
Read "The Creature from Jeckyll Island"...tptb have to keep this charade going as long as possible in order to do the most damage to the middle class....the ultimate goal.
you were up at 4a.m. but couldn't take the time to to list not one item that was nonsense?
for shame.
It's obvious the havoc that would be created if f&f were "allowed" to fail. But they raped America's working class and are being pardoned. Has, so far, the punishment fit the crime?
I think not.
Dick Bove said months ago that the financials were a generational buy, quite possibly hoping no ones read about the Great Depression and how the same thing was said then.
Pull up a ten year chart of the Dow or S&P and look what took less than 1 year to take off. How about 1 month!
These event's don't happen because "everythings okay".
Todays rally will indeed be short lived, the carnage in the markets yet to come will be financed by those that believed the hype and bought into it.
It could last for weeks, perhaps months (doubtful), but there's no way to stop what's coming. As someone spoke recently, we see the light at the end of the tunnel, unfortunately it's a train.
You could lead and set the example on this by getting your checkbook out and making out a check for 100K and sending it to the Treasury. Maybe you could could convince all of your friends to follow your example. I think it would be only fair if you revealed your oil, bonds and other investments. "Free" Federal money does not occur in a vacuum. there are very serious consequences for taking the course of action you advocate, so please show us all the "free" check you sent to the Treasury this morning. Remind us all, what was the amount again? Maybe they'll pass out pencils, paper, and calculators on the shortbus one day.