Fannie/Freddie Bailout 'Disastrous Fiasco' 45 comments
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Back in March when it was announced that Bear Stearns (BSC) was to be taken over by JP Morgan (JPM) with financial backing from the Fed, the US stock markets had a nice rally (albeit a short-lived one) as investors felt more confident of the Fed’s commitment to save the day. Today the same scenario is played out in the stock markets around the world, from Asia, Europe to the US, but this time it involves a different party - two parties instead. On Sunday, the US government announced the near nationalization of US mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM), the largest and costliest bailout ever in history by the Federal government, with the massive burden placed squarely on plebians’ shoulders (re: taxpayers like you and me). Predictably, politicians applaud the move and traders joined in the euphoria of the week.
Personally, I think this is a disaster from the start, and from the way only-in-name regulators, politicians, etc. have handled this, it is a disastrous fiasco, a large scale crime that both bystanders and participants have committed, and absurdly, a crime that doesn’t result in punishment for those involved.
Investment guru Jim Rogers has this to say about America today:
“America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said. “This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I’m not quite sure why I or anybody else should be paying for this,” he added.
Rogers also said he might short some more US investment banks, depending on how they rally over the next week, but other than that, he will just sit and watch.
While stocks have risen on this news since the open, it is a different story in the forex markets. When the Asian session first began, the US dollar got sold against the Euro, Swiss franc and the British pound, and that only lasted till the European markets opened, after which the dollar gained strength to reverse all of its earlier losses, and had even more bullish steam to rally higher.
EUR/USD fell to an 11-month low, slipping below 1.4200. In the near-term, 1.4000 may be hit as more traders dump the Euro. USD/CHF rose to an 8-month high to above 1.1300, and 1.1380 could be the next topside target. GBP/USD tumbled more than 400 pips today, dropping below 1.7600, on both USD strength and GBP weakness from the
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This article has 45 comments:
They should have had an addendum to this buyout and included GM, Ford and Chrysler while they were at it...
I disagree that the nationalization of FNM and FRE is a fiasco. If the FEDs didn't do that the whole US financial market would have collapsed and everyone would have been in trouble.. Don't believe populists such as Jim Rogers that the rich people have been bailed out . Many investors and funds lost money on their FRE FNM positions. But the end of the crisis is near..
The problem with the gold standard is that it triggers deflations that cause depressions - like about six of them between 1820 and 1941.
But in the present days this US government thinks it is important to keep up with 'cheap mortgages'.
Yet elementary economy says that when mortgages are 10% cheaper, house prices will rise 11% because people, by definition, will max out their mortgages.
For me, since I want to destroy the US military power, this could not have been more perfect. It is hard to say how costly it will be to the US tax payer but the US military has to suck from that same tax pool and this was the most perfect financial weekend in years...
I can tell you that with grace my beloved Grace!
And the financials going up big time around the world? In the first place I laugh about their sheepish reaction and in the second place we will have 'lower lows' for financials in the future.
By the way; I love it you are mad at this deal. It proofs you have brains!
out a public corporation. Can some one explain to me why the bond
holders dont have to take it on the chin before they get bailed out like
the common?
In the long run you may be right: The liabilities taken on by the government may be balanced by the "assets". Problem is, as John Maynard Keynes pointed out, in the long run we are all dead. In the meantime ask Bill Miller how well he's done by taking a medium term "value" view on these stocks.
The scary thing about this particular socialisation of losses is that it was deemed necessary despite everyone being reassured, not so long ago, that the Fed would effectively stand behind FNM and FRE debt if push came to shove.
It seems that even this wasn't good enough any more for investors - they needed the security of seeing the junk physically on Uncle Sam's balance sheet. Great vote of confidence....
The credit rating agencies should also be shot - subprime paper rated at AAA and then downgraded to junk status almost overnight.... its blatant that they have misjudged!
Can you comment on the likely affect on the dollar, mid to long term. It seems to me that the government felt it had to bailout the GSEs for two reasons. First there is the calming the financial markets/too big to fail argument. Then there are all the other central banks, mostly Asian, holding paper from the GSEs that they have been assuming was gov. backed. If we defaulted they would have been a lot less eager to continue buying bonds to finance our overconsuming/undersav... habits. If assuming responsibility for the GSEs weakens the dollar, won't the bond market at some point start demanding a higher return to make up for being repaid in a devaluing currency?
debtacid - since when has the US been a democracy? Ben Franklin was there when the Constitution was signed and quite correctly said: "Congratulations gentlemen, you now have a Republic, if you can keep it".
daytrading - Since when were the FMs public corporations? They have always been something not quite fish nor fowl.The reason is that if they didn't the problem would get much worse. Maybe it is pissing up wind into a Katrina, but to do nothing would guarantee the collapse of the US's ability to sell debt to foreign nations. That would lead to an immediate 50% haircut to the value of the dollar. Which would you rather have? This or the IMF imposing budget limits on the US Government? Yes, it could get that bad.
Why is Bill Miller Increasing His Stake in Freddie Mac?
seekingalpha.com/artic...
Fannie, Freddie: The biggest losers
money.cnn.com/2008/09/.../
Bill Miller bets on Freddie Mac
dailybriefing.blogs.fo.../
Mean Street: Losing Faith in Freddie Mac and Bill Miller
blogs.wsj.com/deals/20.../
A humbling period for Bill Miller of Legg Mason
www.iht.com/articles/2...
Legg Mason's Miller still a 'long-term optimist' despite market turmoil
www.bizjournals.com/ba...
Mass. Pension Loses Trust In Legg Mason
www.forbes.com/2008/08...
Bill Miller bets on Freddie Mac
www.silobreaker.com/Do...
Who’s Afraid of Fannie and Freddie?
dealbook.blogs.nytimes.../
It sets my heart aflutter to know that I now own a small glorious piece of granite counter tops all across america. God bless the U S of A!
My comment had nothing to do with the value of the equities. I was merely trying to point out that this should be looked as a the purchase of a distressed asset by the government, not a bailout. Who exactly was bailed out? Certainly not the the preferred or common shareholders. Perhaps the debt holders, but there was always an "implicit" government backing. Besides, we need all those foreign buyers to be protected if we want to keep the printing presses running!
As far as your quote from Jim Rogers goes, the guy has become a bit of a wacko lately, telling people he is all in china at the top of the market (down over 60% since this statement) and drivel such as you quoted.
This market has dictated that choices are being made for the lesser of 2 evils. The loss of tax revs in a protracted recession/consumer depression would be trillions, not billions. We will see more of this as more problems develop and the pros and cons are weighed.
Management repeated this lie in a conference call in August 2008.
Anyone know of a class action lawsuit commencing against the company?
The war will cost some 2 trillion $ by the time you get out of Iraq and here you are... talking about some 200 billion which will help to stabilize the worlds financial markets.
The shareholders lost 90% of the money in one day. Who was bailed out here? The management was ousted. Oh yeah it is the tax payer who'll pay for that. Come on!
When the housing market will recover Fannie and Freddie will do just fine and the Treasury will get plenty of money out of it... it is just a matter of time if it succeeds.
The idea that some obscure market force would sort this thing out by itself is radical. It cannot be done. Well it can be done if you are prepared for a 7+ year depression with a housing prices collapse of 50+% a MBS default ratio of 60 or 80% and some 50% of banks going under... oh yeah, add some skyrocketing unemployment rate of 15+ percent and a fabulous probability of terror-like deflation for the next 10 years - you know like in Japan, where no one bought anything because he asked himself the question: "Why buying now, when tomorrow everything will be cheaper?"
Study Japan and their housing collapse and you'll see what can be the consequences instead of ranting about communists. A 200 billion bill will look like a cheap penny stock for all the things that went wrong here.
Fannie and Freddie should never be the public-private cyborg in the first place, and Greenspan shouldn't have cut rates to 1%... but hey! You don't have a time machine to change that. So get over it.
When a fox gets trapped into an iron trap ... she bites her leg off, so she can survive. Paulson bit the leg off. That's it.
The US is not out of the woods yet so you should pray that the bill will be only 200 billion, because it could get into trillions. And in that case the great depression will look like a picnic compared to this mess.
In this article there's plenty of intelligence... but some serious lack of common sense.
The problem with letting Fannie and Freddie go bankrupt is that, for example, even in a company that is only 10% under water, the act of bankruptcy will usually devalue things by 50% - and the difference goes to - you guessed it - Wall Street vultures. Plus, there are not enough lawyers, paper, and time in the entire country to do such a deal.
I bought my first house in 1989 w/ 10% down, paid mortgage insurance, payment was 30% of take home, and gross income was 40% of loan amount. Fairly common, and if I went FHA, it would have been 3% down. My dad bought our families first house with even less than those ratios in 1969. Neither my dad or I had any other payments to speak of.
This current problem was not caused by down payment issues, but that the other ratios got out of wack and basically allowed people to speculate on houses, whether they meant to live in them or not.
Sound underwriting means determining whether someone can continue to pay for their obligation, not whether an investor will buy the loan. That is where all of this went wrong.
Dear Senator,
My wife and I are holders of stock in Fannie Mae.
We are utterly disappointed in the actions of our government with regard to the confiscation of our holdings in GSE stock. As a conservator, the government's first responsibility is the management of the GSE's for their "stockholders-in-absen... Becoming a part owner through Confiscation is entirely unconstitutional and violates all principles of our capitalist system. No due process has been given to the shareholders... just an at "gunpoint" meeting of the CEO's and Boards of Directors to seal up a complete transfer of operational power of the GSE's to their regulator.
This is not what the recent Housing Bill intended nor is this act keeping in good faith the convenants set forth by Congress so long ago when the Charters and spin-offs of the GSE's began.
The Government should pay out all capital to shareholders to rectify this action or tender offer for all outstanding shares at Book Value.
No amount of cost benefit analysis accounting could possibly have shown the GSE's to be defunct at this time as just one month ago OFHEO stated that the GSE's were "adequately capitalized."
Running roughshod over the shareholders is truly a unique and remarkable event in our history. I fear that never again will I be able to trust the statements and integrity of my government as I truly feel victimized by it at this time!
Please help to rectify and recompense the damages brought upon the shareholders of the GSE's by this "takings action."
Sincerely,
ME
It's obvious this was necessary. Mistakes were made in the past for letting it come to this, now this is the best course of action.
And I agree that it's quite outrages that people are not complaining about the cost of the Iraq war, but are complaining about the cost to stabilize the financial markets, which directly translates to the price of everything around you, your house, your groceries, and the rate on your credit card.
So get over it.
Besides, the tax payer is not innocent in all of this, if you really want to argue. If it was, it wouldn't have taken on mortgages it could not afford. Oh yeah, the bank was willing to give it. But a responsible tax payer wouldn't take one, because he knows he can't afford it. He took it anyway. Well.... now there's a bill to pay. Welcome to the real world. Next time think twice.
the federal government has neither done or promised anything constructive by this action. it was designed to pacify foreign investors who threatened to withold their support of our debt auctions, which was something we couldn't afford to see happen lest interest rates go through the roof...which is where they belong, by the way.
look for your tax dollars to now start buying up both subprime and prime mortages to shield financial institutions from further losses.
look for the federal reserve to further penalize savers and reward debtors by pushing interest rates even lower.
look for FNM and FRE to loosen mortgage requirements and to resume subprime lending.
look for every mismanaged corporation in america...beginning with our clueless american automobile manufacturers...to try to cash in on this new wave of republican socialism. i have no doubt some will be successful.
look for our national debt to continue increasing exponentially, making debt service requirements an ever larger part of the national budget.
look for even greater dependence on the chinese, russians and japanese to support our economy. we remain beholden to them to fund our budget because we're too cowardly to do it ourselves. those who control our economic future control our country.
I know that I sound like a conspiracy theorist, but I can't ignore the fact that this allows Paulson, Bernake, and the rest to outright save the financials by purchasing their garbage, probably at a premium (Not the 70, 80, 90% devaluations that Merril sold to whomever or that ABK settled on the insurable amount with Citigroup).
Are you a major finacial institution? Are you tired of analyists saying that your stock should be de-listed because of your "bad debt"? Are you fed up with having to go to the Middle East to put balance back into your balance sheets?
Worry no more! Call Paulson, Bernake, and FMOC CDO purchasers!! We'll make you look good!
That's right! Just call and make a significant donation to the political party of our designation and we can rid you of those pesky bad mortgages. You may even turn a profit!!
Call now! While the controlling party in Congress is still afraid of the White House!
Operators are standing by...
www.investorslive.com/.../
Evidently the institutions were vulnearable to one sided risk. according to these sources.
In fact broad market liquidation had followed allegedly due to the hedge funds liquidation-nonsense .
The Treasury steps in with the generous offer of 100 billion dollars to each agency ,but it dilutes the stake of share holders.
In turn- for the dilution the investors receive an implicit guarantee against institutional failure.In fact the share holders(at these price levels) hold a indefinite call option betting on the economic rebound -in the period ahead - extremely undervalued call option I might add..The measures taken by the Treasury are the best assurance to the investors both domestic and the foreign that the key dollar assets are safe.It is a positive and a bullish sign for investors seeking dollar assets.
The knee jerk reaction in the FOREX markets weakening the dollar is a reflection of the paranoia not the facts.
Clearly the speculators are creating volatility beneficial to their interest.
According to this speculative dogma lack of interventiion is negative for the markets .Evidently intervention is as bad .
Treasury's approach to the issue is dynamic and correct.
It wll accelerate the economic rebound and stabilize the financial sector .Dollar should rally on such a news in the period ahead.Treasury's action show that systemic failure will not be allowed.
While the volatility will continue the dollar rally is far from over.
i think the main reason of this action was to instill confidence the treasury will not default on its debt.
Does this sound like a company anyone in their right mind would invest money in? Now that the chickens have finally come home to roost. It will be interesting to see if any Fannie Mae or Freddie Mac executives are indicted and or imprisoned now that Fannie Mae and Feeedie Mac seized by the U.S. Government. Probably not because these two companies have been run by executives and boards who were politically connected and appointed.
When the average American taxpayer finds out how big this Fannie Mae and Feddie Mac financial debacle is and the fact that it got progressively worse since the OFHEO report in 2006, they will be outraged. The idea that our government is going to guarantee the bonds that were floated by Fannie Mae and Freddie Mac that back billions of dollars if not trillions of dollars of non-performing mortgages that were flipped to Fannie Mae and Freedie Mac by Wall Street is unconscionable. It is yet another example of how our government allowed Wall Street to privatised profits from public companies to its executives through bonuses, stock options, director fees etc. and now that these public companies financial schemes are collapsing our government has decided to socialize the losses to American tax payers. Privitizing profits socializing lossess. Thats the new game the U.S. Government is playing.
That's our government working for us.
it's not a new game of the US government...the iraqi oil war is pretty much based on the same business model, just a bit farther from 'homeland'
It is not the bailout per se that is bad, but, as Cheng said, it is the manner it has been formulated and then executed. Unfortunately, no one has gone to jail yet for all this mess. Perhaps, no one will have to, save some lowly broker or mortgage banker in the distant future.
Fannie was and is meeting all Capital requirements SO why was the 'takeover' initiated? I will tell you what you may be either ignorant of or blind to. The buyers of Fannie debt were becoming worried as to the soundness of Fannie becuase of the mega short interests. The short and distort gangs that have been mugging the financials -Ackman ring a bell? YES what we see in the market place is Fear & Greed. The Greedy apparently were effective enough to cause enough Fear that the US GOV felt it necessary to act when fundamentally Fannie was and remains sound. You who disagree will one day see the reality...
I don't think the "shorts" created the problems at Bear Stearns, Countrywide, Indymac, Fannie Mae, Fredde Mac or Lehman Bros. I do think that the land office creation of trillions of dollars of bundled mortgages or questionable value that were financed by the sale of bonds to both domestic and international investors is what created the current eccnomic fiasco that we find ourselves in.
Just wait till there are fair market valuations done on all these mortgage loans and/or homes that were acquired when the loan defaulted and were foreclosed. I’m pretty sure you will see that there was top to bottom fraud in funding and originating these loans so they could be flipped to investors. Even the conservative Swiss bankers were taken in by these supposedly safe investments. Swiss bank UBS will be reporting another 5 billion in write downs this quarter. U.S Banks, Investment Banks and GSE's Fannie, Mae and Freddie Mac were slow in reporting the amount of defaults in the various loan portfolio's. Some suspect this was to cover up the problem and keep share prices from tumbling. By what has recently transpired this claim of lulling investors by U.S. financial companies appears to be well founded.
I do not see how anyone can vouch for Fannie Mae or Freddie Mac being financially sound when they are publicly reported as being the holders of guarantors of over half of the existing mortgage loans in the USA Which in turn could mean that they own half of lender owned homes, "REO", that have been foreclosed on in the USA. I think these facts should give pause to any prudent investor that Auntie Fannie and Uncle Freddie may not be as financially sound as is suggested by some folks. One can only hope, for U.S. taxpayer's sake, that Fannie and Freddie assets when valued at fair market will be worth not to much less than its liabilities including contingent liabilities from their guarantees. Only time and audits will tell.
Does corporate America share its profits with the tax payers? The answer is absolutely not.
Do they share the profits with their employees? The executives are paid millions.
The US Government should bail out all corporations large and small is that right? The answer is no. If it is a viable business, they can raise the money from investors, if not, let them close shop.
If the government decides to bail them out if should be at a cost (like shares in the company) where the government will make money and have a say in running the company. Even better have a public referendum where the voters decide.
Carmakers want money from the government; the financial institutions want money - where does it stop?
It is about time corporate America should learn they have to stand on their own feet. Where is corporate America financial responsibility?
They claim the government is abusing its financial responsibility; it seems Corporate America is no better. They also go to their workers to take a pay cut, is that fair? It seems the little guys are the ones that always pay the price for corporate financial abuse and miss-management.
Other corporations in the world are not asking to be bailed out - they go out of business.
Jay Draiman
PS
The corporate barracudas have no conscience they will step on anyone, stab anyone in the back and fudge the numbers to climb up the corporate ladder and receive the hefty bonuses.
As family values have declined in the last half a century so has corporate integrity and honesty, it seems that corporate America will do almost anything for the buck ($) no holes barred.
What a shame that corporate America has sunk so low.
The government is no different, honesty and integrity is a foreign language, they only serve the special interest groups. (We all know why).
What happened to the American people who placed their trust in the government? (The public officials they voted for).
We are faced constantly with another corporate or governmental scandal of wrongdoing. When is the American public going to wake up and demand an honest government and honest corporate America? Americans wake up before it is too late.
Jay Draiman