vanyali

The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout

I don't really see how swooping in to wipe out shareholders is supposed to calm markets, but what do I know?

Fannie Mae: 'Business As Usual'

Fannie & Freddie weren't broke. Citi, Merrill & Goldman all said so in August, and Paulson and Barney Frank both said so during the takeover. Paulson said thought that there was some danger that they *might* go broke in the future *if* market conditions continued to worsen *and* market participants decided to stop lending to them. This isn't a bankruptcy reorganization, it's a power grab by the feds.

Fannie and Freddie: We All Support You!

Common shareholders are always last in line in a bankruptcy, or even in normal operations. You don't get to pay a big dividend to your shareholders right before defaulting on all of your debt, for example. So Paulson didn't change anything there. What he changed for shareholders was suspending the dividend and getting rid of all shareholder governance rights. So the shares are still out there, can still trade (until they become worthless and are delisted), but they carry none of the ordinary rights of shareholders. They're zombie shares.

Fannie and Freddie: We All Support You!

The shareholders of the GSEs aren't being wiped out because of business risks gone bad, they're being wiped out because of political risk gone bad. We weren't supposed to have to worry about political risk when we invested in the United States. The Treasury has just shown us that we now do. I would expect that reality to have major long-term negative implications for investment in the United States going forward.

Fannie and Freddie: We All Support You!

The reason the GSE's owned any subprime paper was because the government was leaning on them to do more to support "affordable housing", and they figured that buying some of the more insulated traunches of offerings backed by subprime mortgages was the cheapest and safest way to do that. So, in summary, they own subprime because the government told them to buy it.