Let me interrupt the election year snark
to note a new development in the ongoing mortgage/housing crisis. According to the Washington Post the federal government will be taking over control of Fannie Mae and Freddie Mac.
The lead in paragraph
The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.
This probably isn't as much fun as all the sniping about Palin but it's pretty big news. Might be a wild day for the market on Monday.
Update from the New York Times.
Loan Giant Overstated the Size of Its Capital Base
Looks like some questionable bookeeping. Could lawsuits against the executives be coming?
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References -
....I'll have to back off. The article pushes the idea that there will be a massive dilution of the common, and that the preferred and bondholders will be kept whole. This basically means that Treasury is going to buy a bunch of newly minted stock. In theory, that's bad news for current holders of common, who would suddenly see their 100% of common equity turned into 10% or something. In point of fact, though, the common already trades at a rather hefty discount to the book value of the assets. Basically, anybody currently holding the stuff is already assuming it was going to be diluted, or had a non-negligible probability of being wiped out in a bankruptcy-like event. So you may, depending on the details of this proposed "conservatorship", get your buying opportunity after all, Trav.
YMMV, I am not offering investment advice, you'd have to be retarded to listen to it even if I were, etc, etc.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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)because many banks use it as core capital, therefore if it went to 0 a lot of banks would have to raise capital in a hostile market. I've also read that several overseas creditors (like China) hold a bunch of the preferred stock and they made some, uh, rather strong requests that it not go to 0.
What a gigantic clusterf&^k.
--I blame it all on the Internet
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| parent )...on the planet is holding GSE preferreds. PIMCO, too. I'd say this is small change, though. Maybe 20 billion up front. The actual clusterf&^k would have been if they wiped out the preferred holders. You'd have massive bank failures, post haste.
The surprise is that they aren't wiping out the common. It's the cheapest way to end the "moral hazard" talk.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )the Chinese just have to mention staying away from a few Treasury auctions to get the Feds attention.
--I blame it all on the Internet
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| parent )...are slowing down quickly enough that they're talking about a stimulus package themselves. They obviously can't afford to let the yuan appreciate, which means that they'll be buying dollars up regardless, and those need to be parked somewhere.
I'll freely admit that they're yet another pressure group that wouldn't want to get killed on this, but the obvious and direct motivator here is the domestic banking sector.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )the root of the whole problem is bad paper everywhere and no one willing to be the first to call it the crap it is and write it down sufficiently. That's why the credit market will stay tight and we'll keep having bank failures and buy-outs, buy-backs, capital infusions, etc.
--I blame it all on the Internet
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| parent )When someone finally appeared on the buy side of the pit, it was like the second coming of Christ in power and glory.
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| parent )and a bit quieter reaction to actions by our overseas bankers. This is what happens when you deregulate and let the inmates take over the asylum.
Oh, and this isn't the end to the mortgage crisis, the poisonous bad paper has spread too far into the markets at this point.
--I blame it all on the Internet
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)Fannie and Freddie guarantee trillions in mortgage securities.
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| parent )at least a few hundred billion, plus $5 trillion moved onto the government's books. Another shining example of the success of the free market.
--I blame it all on the Internet
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| parent )...in equity in there, especially not at one go. Also, given the defacto guarantee extended to those buying GSE-guaranteed RMBS, that paper was always on the government's books from the moment it was originated. Unless you're a big believer in off balance sheet instruments. :^)
Keep in mind that we're talking about two different debts, here. The GSEs guarantee bonds backed by mortgages, most of which (yes, even in the current environment) will not default. They basically make money off the spread between what the bonds pay and what they had to pay to finance purchasing the things. The trick here was that the GSE "guarantee" always let them finance cheaply. They pay low to gather capital to buy higher-yielding mortgages. The debt being spoken about right now is the direct debt the GSEs have put out there to gather capital to build their internal portfolios. Held-for-investment rather than held-for-sale.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )....you didn't create to very large players by giving them a quasi-governmental guarantee and letting them use it to dominate the market. Stupid government.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent ).
--Before you criticize someone, you should walk a mile in their shoes. That way when you criticize them, you're a mile away and you have their shoes. -JH
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| parent )....half-measures usually suck. Hank's callin' the whole thing off! :^)
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )partial privatization or full nationalization?
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| parent )I've never been entirely enthusiastic about the idea that the government should actually be encouraging you to buy a home. I like being an owner, but there are doubtless negatives associated with it (such as decreasing labor mobility) that mean that the government shouldn't be pushing it as the preferred alternative. And even if you feel it should, the mortgage interest deduction seems like a more direct way of doing so.
The thing is, if you create a financial economic entity that has full government backing, it will tend to win. It's got access to cheaper money than anybody else almost by definition. There's a strong argument to be made that we're seeing the effects of that. The plain-vanilla prime mortgage market came to be dominated by the GSEs because of that guarantee and the cheaper costs it brings to them. That resulted in
A) a bunch of other non-GSE companies fighting over the dregs...
-and-
B) a few GSEs that are so big that you (meaning Hank) can't let them fail.
I'd rather see a bunch of smaller private ones that pay full no-guarantee-in-sight market rates for their capital and stay small enough, via anti-trust, that a couple of them going down the tubes won't kill everything else.
If you insist on having the government back home ownership, though, you probably need to go all the way and have the government run the thing top to bottom. The semi-government variety will inevitably use its connection with the government to dominate, which means that the formula it uses will also come to dominate the market. Monocultures are dangerous.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )Sometimes I wonder whether the US's partial privatization model is any better or worse than full nationalization or full privatization, both of which also have their drawbacks.
Thanks for providing food for thought that partial privatization tends towards monolopy.
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| parent )They tax the hell out of you, but invest the money. When you need it for college or a home or retirement, you can get at it, then.
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| parent )actually, the above comment is spot on.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )if you redefine "taxpayer money" to be a part of the free market, you are correct. It really is pretty simple.
--Over here on E Street, we're proud to support Obama for President. - Bruce Springsteen
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| parent )...Mortgagees's....how is the the even remotely the working of the Free Market?
The bankruptcy of Freddie and Fannie would be the free market, yes?
Not what's happening.
Why is this not just out and out WELFARE to the monied class?
Tell us!
Why should we not think that the Republicans love WELFARE for Corporations, but not so much for the people that created the wealth of America?
Just a bunch of thieves.
Traveller
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| parent )I believe (from what I read) the equity holders will take a hit, preferred share and bond holders won't.
Freddie and Fannie were never fully free mkt institutions, they were U.S. Agencies financed by private debt and equity.
You mention mortgagee, exactly what are you referencing?
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )From their prospectus
So who are preferred stock holders?
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| parent )and thank goodness I didn't say the agencies carried the full faith and credit of the Federal Gov't but rather are agencies implicitly backed by the taxpayer. That would be implicit rather than explicit.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )what other publicly traded companies have it? All of them? Or only the ones where a failure will domino into much worse circumstances?
Finally, what part of the above is a shining example of the success of the free market?
--Over here on E Street, we're proud to support Obama for President. - Bruce Springsteen
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| parent )It's just these guys, because they were chartered with a government-designed mission beyond just making money. The failure here would appear to be neither the market nor government, exactly, but the oddity of having the government decide which player in the market will win. Government guarantee = lower costs, if you see what I'm saying.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )Fannie and Freddie were established to facilitate home ownerhip. They have been successsful.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )we are arguing about two totally different things or you are attempting some sort of misdirection.
--Over here on E Street, we're proud to support Obama for President. - Bruce Springsteen
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| parent )you got two answers. the math is simple
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )You didn't mention anything about the free market. Any anyways, since when is government facilitation of home ownership a free market solution?
--Over here on E Street, we're proud to support Obama for President. - Bruce Springsteen
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| parent )I blame it all on the Internet
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| parent )it keeps my spirits up.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )I blame it all on the Internet
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| parent )nt
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )...but all the blather about respecting the Free Market should be acknowledged for what it is...Fiction.
As in TR's time, Capital Markets function best with Government Regulation and Oversight.
Traveller
*********
We're passing ourselves in our posts...but you may be right, what benefit are Mortgagees receiving?
Gotta go to diner.
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| parent )Traveller, please stop talking about something you apparently no nothing about.
I would suggest that reading about the "Panic of 1907" is in order.
After J.P. Morgan saved the country, the Congress became a bit upset because J.P. and his banking friends made a little money. Ultimately, the Federal Reserve System was established. Other Agencies such as Fannie Mae were started by FDR but ultimately sold to the public (late 60s, early 70s) to raise monies.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )Here:
http://en.wikipedia.org/wiki/Theodore_Roosevelt#Square_Deal_and_regulati...
Traveller
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| parent )nor did we have a "central bank".
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )but a govt. loan guarantee (not really, but you know what I mean) isn't really free market, is it? More like a subsidy of a financial sector, or risk assumption by the US govt.
--In the land of the blind, the one-eyed man is king.
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| parent )that there are assets that have a currently assumed book value that may or may not accurately reflect their true value. The US government is now 100% on the hook for whatever that difference is. With $5 trillion in mortgages involved, guess at what percentage will need to be made good on (btw, each percentage point is $50 billion).
--I blame it all on the Internet
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| parent )has made for a very long time; Freddie and Fannie are U.S. Gov't Agencies. While Freddie and Fannie don't carry the full faith and credit of the U.S. Government, Gov't suppport has been anticipated.
Freddie and Frannie private equity holders will take a hit. Congress should investigate Sr. Mgmt but given Sr. Mgmt political ties, that probably won't happen.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )nt
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )instead of playing these stupid f^%king games in every thread.
--I blame it all on the Internet
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| parent )he has delusions of being Alan Greenspan :)
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| parent )knows what he is talking about.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )Like those ARM's he was telling folks they should move into a couple of years ago -- Oh wait that didn't work out so well now did it?
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| parent )Somebody who got into a plain-vanilla arm has seen a mild increase in monthly payment on a fully-amortizing loan; no balloon, no neg-am, no nothing.
Somebody with no steady income or assets and a crappy FICO who bought a neg-am OA in southern California, not so hot. :^)
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )just giving you the opportunity to revise and amend.
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )I'm sitting all in cash and...I wonder if Fannie and Freddie might be a buy on Monday?
Hummmmmm
Traveller
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)...Floater's comments imply that Hank is gonna wipe out the common equity (surprisingly enough, though it's probably the right way to go about things.) There is no good buy there, just good bye.
--The ultimate result of shielding man from the effects of folly is to people the world with fools. -Herbert Spencer
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| parent )great sentence!
There is no good buy there, just good bye.
--This place is my vacation.
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| parent )nt
--"Making sure your tires are properly inflated, simple thing, but we could save all the oil that they're talking about getting off drilling, if everybody was just inflating their tires and getting regular tune-ups. You could actually save just as much." Ob
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| parent )