thomast2

The True Nature of Fan and Fred

Thank you all for the comments, even some of them are very harsh and unfriendly ones.

For those who don’t think F/F will cost taxpayer a dime, did Greenspan just call for “nationalized” F/F this week? What’s “nationalized” mean? If not taxpayer’s money, then whose? Yours? Maybe Greenspan meant the Japanese or Chinese central banks? Maybe it is not such a bad idea for foreign central banks to takeover F/F since they own so much of their debt anyway. How about the $25B estimate from Congress for taxpayer’s losses, even it is probably underestimated by 15-20 times as ithinkbig pointed out (I can show some calculations at the next article on this subject).

Fannie’s business is actually a simple one. It provides guaranty operations by stamping its brand and guarantee on bundles of mortgages refashioned into bonds, then earns a spread on the difference between the cost of its liabilities (US treasury equivalent bonds) and the yield on its assets (mortgages). Without its public entity status and government guarantee, how would they be able to stamp its brand and get the US treasury equivalent rating from its bonds? More importantly, without government support, how would they be able to borrow at super low rates equivalent to US treasury so that they can earn a decent spread? Not even the largest investment bank or commercial bank such as JP Morgan in this country can do either one of above. It is actually a more than Skull & Bones type of privilege.

Even it doesn’t conduct transaction directly with government (who does these days? Even foreign central banks are doing most of their transactions in open markets), the guaranty nature from US government for all its debt indirectly transfers the ownership to the government. It is as simple as if you fully guarantee all of your brother’s loans from various banks, it is the same as you implicitly borrow from the banks, your brother’s total liabilities become your liabilities, as simple as that.

Did someone commented “The GSEs couldn't do jumbos or subprime, which are the biggest messes of all.” Really? Where did you get that from? In reality, Fannie’s book has $51.2B of subprime exposure and $344.6B of Alt-A exposure. In addition, Fannie holds $25.8B of private-label Alt-A securities and $25.2B of subprime residential mortgage-backed securities (RMBS) on its balance sheet. The Alt-A RMBS are carried at 85 cents on the dollar and the subprime at 83 cents. Doesn’t sound even close to me, especially the 83 cents for subprime, maybe 25 cents is more likely.

Regarding the Skull & Bones comments, during the S&L crisis, who had protected the Lincoln S&L? The Keating Five, very few but caused public great losses. This time, who has protected the F/F to avoid stronger regulations throughout the years? The few laid out in Paul Gigot’s article.

I think this article at FT this week (linked below), by Joseph Stiglitz, 2001 recipient of the Nobel Prize for economics, expressed many similar views as mine in his article (and he may not want to spend his time to argue with you like me here). For example: the F/F private/public partnerships, in which the private sector takes the profits and the public sector bears the risk. Does that line sound familiar to you? He also said, “Taxpayers should not be asked to pony up a penny while shareholders are being protected.” I might also add “no a penny while F/F bondholders are being protected.”

I totally agree with Dr. Stiglitz, During liquidation of F/F, taxpayers should get the highest priority, fully compensated, then the F/F bondholders, then the perferrs, common shareholders being the last.

www.ft.com/cms/s/0/c69...

How High Leverage Has Brought Down the Whole Banking Industry

Thank you all for providing your wonderful comments here. I really appreciate your thoughts and your time.

Amm, book value and market cap are two different things. Market cap usually is higher than book value but not in LEH’s case here. I also used the same approach as used by the WSJ article that the potential future writeoff could wipe out both book value AND the market cap.

Helplessobserver, I also agree that S&P will fall below $1,100 which is only my intermediate target. See my previous article of seekingalpha.com/artic..., my ultimate target is actually $800, as indicated in my article.

Thanks to Bob Gary and stockguy456, those are good links, especially the video on Fed which I watched before and now watched again. It is a cartel of the banks, by the banks and for the banks.

Charlie, you can read my previous article of seekingalpha.com/artic..., which has a brief discussion on the CDS risk exposure to JP Morgan. This is also the 2nd most popular article I have written next to my 10 predictions for 2008. By the way, what is the link to the Bloomberg article you were referring to?

Pescayolas, this is a long report, let me read through it, especially the derivative portion. Thanks for the link.

Kinabalu and Charlie, what I meant was for those CDOs with AAA rating, which the recovery rate is around 50%. It is more conservative that way. I am aware that anything below AAA rating is pretty much all wiped out. But at the same time, LEH may have written some of them off already.