More on the Fannie/Freddie Heist

It's alarming to think the feds can swing this big baseball bat called 'our tax dollars' so freely.  With a seemingly open checkbook, the Treasury effectively took the reins of the GSEs, guaranteeing home mortgages with US taxpayer money.  It's not as if our country could afford this.  The national debt just doubled overnight, what with the guarantee of nearly 6 trillion in home mortgages.  Now, I've heard the fear-mongering -.from Paulson, Bernanke and others - that a much more serious problem would have occurred without some intervention. 

How do they know this?  Have we been in this mess before?   I believe free markets should be left alone to settle, and if there are failures along the way, so be it.  This entire mess will not be fixed with the stroke of a pen.

More Write-offs, More Pain

Who is feeling the most pain from this deal?  Naturally, the US taxpayer will take the biggest hit.  Banks will also suffer in the short term and the long term.  You see, many banks hold large sums of Fannie (FNM) / Freddie (FRE) preferred stock on the balance sheet.  And why not?  Nice, high-yielding paper with less risk than equity. 

Well, last week the government just effectively wiped out the preferred, replacing it with senior preferred.  What does this mean?  We've been finding it out for a week now;  banks are having to write-down losses on their balance sheets of large size.  Effectively, banks are taking assets off and reducing their capital. 

But, banks have minimum capital requirements, so hence they will have to sell assets to meet those levels.  But, it's not just banks.  We learned the other day that Wellpoint (WLP), an HMO, is writing down over 200 million of Fannie preferred.  How many others are out there?

Housing Stability, Or Is Trouble Brewing?

Perhaps the government backstop of mortgages is a good thing.  After all, the implicit guarantee has been there all along, right?  I'm just not sure this is the time to be throwing money into a black hole.  There is no sign that housing prices have stabilized, and they could get worse.  More supply is out there than ever before.  Big mortgage resets are due to occur in 2009 and 2011, and if those homes are released onto the market, how will that affect prices?  Further, will banks be under more pressure to shed these homes?  It's tough to speculate on any scenario, but clearly headwinds are there.

Is It Fair?

As a homeowner, for me the American dream is a reality.  But for many, the dream has become a nightmare.  Job losses are rising, home prices are dropping, inflation and high gas prices are still in effect and the economy is weak - and that's just domestic issues. 

I'm not sure this bailout plan is good for everyone.  Sure, it helps bonds and mortgage-backs recoup some value.  Stabilizing rates are good, and may foster some demand - but there is no guarantee.  The disarray behind a failed FNM / FRE might have caused a panic.  So, we'll have to wait and see how this whole thing plays out.  

Disclosure: none

Comments

[corellian98:]

They didn't need it.......the world needed it.

2008 Sep 14 03:05 AM

[Steven Hansen:]

bob, the further the government walks out on the ledge - the more tenuous their position becomes. it will take less and less now for a fast dollar death spiral to begin.

on the other hand, the government actions have prevented the dollar death spiral for now. they are hoping they can walk the walk to prevent the devaluation of the dollar. they now must defend each weakness which appears - they have no choice.

the currency death spiral would have been bad if it started a few months ago, and it will be equally as bad if it starts tomorrow. either way we lose. i vote to try to defend the dollar as there is a chance these desperate actions will succeed.

2008 Sep 14 03:49 AM

[old fogey:]

Dollar death spiral will end the Federal Reserve banking system, causing pain to both rich and poor alike. Putting off the inevitable will just expand the tenacles of despair.

Credit and non payment therof consumes more than just the profits of a transaction; it usurps the underlieing capital.

The social welfare system will collapse as well.
People will have to work for sustenance ... COD will return to the market place .... the form of cash will change ... barter and black or underground are already beginning to flourish.
Free markets will always exist, even if they be called black.

The earth has not unlimited resources for an unlimited population.
Earth population may diminish, reducing the consumption of resources, a very bleak picture; the rebalancing act.

2008 Sep 14 11:28 AM

[Tom Lindmark:]

While I am not a big fan of the Fan/Fred bailout, I do think it is important to get the numbers right and properly analyze the risk. While Fannie and Freddie had approximately $5.3 trillion in debt and mortgage guarantees outstanding, these liabilities were offset by more than that amount of assets. The extent to which the assets do not perform will determine the ultimate loss to the Treasury. Potentially, it could be quite profitable. Here is a link to a back of the envelope analysis I did and a reader's reply that goes more in depth. blog.metro-real-estate...

2008 Sep 14 01:03 PM

[daytrading:]

First off, I love the title of this article, .....Fannie and Freddie Heist its perfect. What these people are doing is absolutely wrong. Its bad enough that the American people are supporting the whole world now this.
Not to mention the double standards, if small businesses go under its tough luck for me and you. We're going to break soon and socialism will be there to welcome us with open arms. The architects of socialism are working extra hard to impliment their plan faster than we thought.

2008 Sep 14 03:44 PM

[Did U Think...:]

"The Hand", do you really think taking private losses onto the backs of all dollar holders is a move to save the dollar? Unfortunately, this simply assures its eventual destruction. Countries overseas are now abandoning the USD in their transactions. The USD will soon be removed as the world's reserve currency because it is little better than any other bananna republic currency. The dollar has had a good run but now it is running out of gas and there is nothing anyone can do about it. The huge US debt makes this a certainty.

2008 Sep 14 06:14 PM

[Chickenpookie:]

I agree with stockpicks, this is privitization of wealth and socilization of debt. But then what should we expect when free trade is corrupt with broker-dealer (sell side) nondisclosure? How about the upstairs trading that goes on that unless you work for humungus bank & broker, you cannot participate in? Let them go bankrupt, we dont need them. I pray!

2008 Sep 14 08:13 PM