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Fannie Mae and Freddie Mac.

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  • Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Here's what the WSJ had to say an hour ago:
    By MICHAEL R. CRITTENDEN
    September 7, 2008 11:56 a.m.

    WASHINGTON -- U.S. federal regulators outlined their takeover of Fannie Mae and Freddie Mac Sunday morning, including control of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock.

    The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.

    Treasury Secretary Henry Paulson said the two firms are "critical to turning the corner on housing" and that the plan should promote stability in the secondary mortgage market and lower the cost of funding.

    "Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible," Mr. Paulson said.

    Mr. Paulson acknowledged that the radical proposal does pose risks for U.S. taxpayers, giving the U.S. government a "large stake in the future value of these entities."


    "In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward," Mr. Paulson said. "To that end, the steps we have taken ... will together improve the housing market, the U.S. economy, and the GSEs' business outlook."

    Federal Reserve Chairman Ben Bernanke, who was included in frantic discussions held by policymakers over recent days to finalize terms of the arrangement, lauded the moves.

    "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Mr. Bernanke said in a statement. "I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."

    The FHFA, which regulates the two government-sponsored enterprises, will act as conservator of the two firms, taking control of the companies' day-to-day operations. The agency said in a press release that there is "no exact time frame" for when the conservatorship may end, and that the powers of the firms' stockholders will be suspended until the conservatorship is terminated.

    As conservator, the agency said it would be able to take "all actions necessary and appropriate to (1) put the company in a sound and solvent condition, and (2) carry on the company's business and preserve and conserve the assets and property of the company."

    "Conservatorship will give the enterprises time to restore the balances between safety and soundness and provide affordable housing and stability and liquidity to the mortgage markets," FHFA Director James Lockhart said.
    As part of the takeover, Lockhart said the dividends on Fannie and Freddie's common and preferred stock will be eliminated, but that the common and preferred shares will remain outstanding. Additionally, subordinated debt interest and principal payments will continue to be made.

    Other changes include an immediate suspension of the two firms' political activities -- including all lobbying.

    Importantly, Mr. Paulson said Fannie and Freddie will be allowed to modestly increase their mortgage-backed securities portfolios through the end of 2009. Beginning in 2010, however, the portfolios would be gradually reduced at the rate of 10% annually, largely through a run off of the portfolios, "eventually stabilizing at a lower, less risky size."


    The takeover also includes the departure of Fannie Chief Executive Daniel Mudd and Freddie Chairman and Chief Executive Richard Syron. The FHFA said TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie, while U.S. Bancorp Chief Executive David Moffett will be CEO at Freddie. Messrs. Mudd and Syron have consented to stay on and help with the transition, and Paulson said he hopes that "the vast majority" of key Fannie and Freddie employees remain will with the firms.

    The Treasury said its senior preferred stock purchase agreement includes an upfront $1 billion issuance of senior preferred stock with a 10% coupon from each GSE, quarterly dividend payments, warrants representing an ownership stake of 79.9% in each firm going forward, and a quarterly fee starting in 2010.

    The two firms own or guarantee more than $5 trillion of U.S. home loans, about half the total outstanding loans in the country.

    The move was made as the companies continue to suffer from the ongoing collapse of the U.S. housing market. The firms have run up combined losses of around $14 billion over the past four quarters and face heavy additional losses as foreclosures are expected to continue to set records.

    The longer-run future of the companies will be up to Congress, which created both of them to support the housing market, as well as the next administration.

    Treasury Secretary Henry Paulson briefed Sen. Barack Obama, the Democratic presidential nominee, on Friday and spoke on Saturday with Sen. John McCain, the Republican nominee.

    In a statement Saturday, Sen. Obama called the situation "extremely serious" and said it affects "our entire economy." He added: "Any action we take must be focused not on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but on whether it will strengthen our economy and help struggling homeowners."

    Sen. Obama said the rescue also "must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac."
    Alaska Governor Sarah Palin, the Republican nominee for vice president, said during a rally Saturday afternoon in Colorado Springs, Colo., that Fannie and Freddie have "gotten too big and too expensive to the taxpayers." She added: "A McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."
    The plan will also likely face immediate scrutiny from Congress as it returns from a lengthy recess next week.

    House Financial Services Committee Chairman Barney Frank (D., Mass.) said he was "pleased" after a conversation he had late Friday with Mr. Paulson about Treasury's "strong reaffirmation that the vital roles these institutions play in our nation's housing markets must continue."
    Mr. Frank said he would evaluate any plan by how it protects taxpayers, restores stability to financial markets and ensures the availability of affordable housing.

    Speaker of the House Nancy Pelosi (D., Calif.) said she would work "in a bipartisan manner" with Mr. Paulson, other Bush administration officials and congressional leaders to review the plan "to ensure that the interests of taxpayers and the broader economy are protected."
    --Laura Meckler, Deborah Solomon, James R. Hagerty and Damian Paletta contributed to this article.
    © Wall street journal
    Source.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    mike65 wrote: »
    Bump(y)

    Looks like the bail out happens on Monday.

    Mike

    The problem that the two companies had was capitalization. Even a a month or two ago, liquidity wasn't the issue it is today, but things deteriorated quickly. Like many banks, they have notes maturing at the end of this calendar year. I think that there's between $80 to $100 billion in bank issued bonds which are going to mature at the end of the year. The company doesn't have cash to honor their obligations and remain comfortably liquid; the capital markets aren't a friendly place to try and refinance. That appears to be the problem.

    I think it's a fair question to ask why the government didn't terminate these two entities months ago. They're really anathema to everything to which people in the US purport to believe. From a policy perspective, I can see a reason for these GSEs and, if they work well, they should lower costs, but for me at least, the whole GSE concept doesn't fit well in a private market system.

    Now that I have looked at the banking system in some more detail, there are definitely more banks to follow. I subscribe to feeds form the FDIC, so I can watch the banks fall! I think that Washington Mutual [NYSE:WM] will fail. At least, without an infusion of cash, I don't see how it can escape a liquidity crisis. Interestingly, FDIC doesn't have enough agents for all its branches; if and when the seizure happens, it's going to be an interesting, multi-agency operation to close all branches for a weekend and open it the following Monday without further damaging confidence in the banking system.

    The big surprise in all this mess is why are people surprised? In literature it's called foreshadowing, but it was clearly signaled in the dot.com debacle. At least there, people lost their hopes; in this crisis, they've lost their homes!


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    SoCal90046 wrote: »
    Yep, it's what I said. It's impossible to know where the bottom of any market lies; we just know we're closer every time the stock drops.

    I am actually watching WaMu (NYSE:WM) very closely. I bought the company over a week ago and sold it a few days later--the dip that it took on July 14 wasn't rational, nor was the recovery later that week: the stock essentially doubled in value in four days; that's just nuts. Management at WM claims that their liquidity is fine, which is what one would expect them to say. I am still waiting for things to settle down--in fact, I am waiting for the fourth quarter write downs before I make a major commitment.

    WM will likely have liquidity issues; it can't go to the equity markets to raise cash right now--at least, not on favorable terms. However, WM doesn't have the same exposure to sub-prime or Alt-A mortgages as did Countrywide Financial and IndyMac Bank. In this sense, WM is in a better position than either of those two companies. Finally, IndyMac suffered its travails in no small part thanks to the words of Chuck Schumer, a US senator, who made public some scathing comments on the stability of that institution. It triggered something akin to a run on the bank which drained it of liquidity and forced the FDIC to act. No one can say what would have happened had Schumer said nothing. The bank was in trouble, but it may not have needed action by the FDIC.

    WM is attractive to me for a number of reasons: (i) it has a huge chorus of critics; (ii) it has exposure to real estate markets on the west coast of the US where there are real problems and (iii) the stock price is volatile. There is, clearly, a lot of uncertainty out there about the stability of this institution. The exposure in California is probably a good thing. Unlike other states, in California owners in default are handled pretty quickly. There isn't a long, drawn-out process of change of control of an asset. Chances are that the housing market in California will stabilize and perhaps start to recover faster than in other parts of the US. Having said that, in Los Angeles County, housing prices are still 25 to 30% higher than they would have been had there never been a bubble. There is some downside. I haven't bought WM yet; just traded it. I don't trade very often--I am a long-term investor--but what happened to WM was just too irresistible.

    I have spoken to the investor relations department of WM and asked a few questions--I haven't gotten answers yet, but I am told they're researching the questions. I want to know the percentage of loans that are in trouble, quarter-by-quarter, for the past year. I want to know the default rate on mortgages, quarter-by-quarter for twelve months. I want to know the percentage of conforming (loans that could easily be sold on) loans to non-conforming, I asked about the exposure to synthetic CDOs and finally, I want to know the average equity that borrowers have. (It's about 50% for the Fannie Mac/May; if it's higher than 80% for WM, I'd probably start to be concerned.)

    Here's a link to a radio program broadcast in the US this weekend. It's non-commercial radio, so it's probably appropriate for this forum. It's a nice synopsis of how the mortgage problem occurred.

    I think banks in the US, Ireland and Spain look very attractive. I believe that any bank--with a sold, long-term history and a good balance sheet--with exposure to this mortgage mess is a potential candidate for purchase. I am waiting for the dust to settle.

    by the last 9 months standard it is perfectly rational!

    Spain is in the crapper it was property based like Ireland. (Which is also screwed).

    I still think some of the larger financial institues have some real bogies to announce.

    Earning season starts next week (Morgan Stanley, Goldman Sachs, Lehman Brothers)

    Will be interesting to see how they move. GS will announce more record profits with a * at the end to signify a couple of trillion assets held in off balance sheet structures!


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    SoCal90046 wrote: »
    The problem that the two companies had was capitalization. Even a a month or two ago, liquidity wasn't the issue it is today, but things deteriorated quickly. Like many banks, they have notes maturing at the end of this calendar year. I think that there's between $80 to $100 billion in bank issued bonds which are going to mature at the end of the year. The company doesn't have cash to honor their obligations and remain comfortably liquid; the capital markets aren't a friendly place to try and refinance. That appears to be the problem.

    I think it's a fair question to ask why the government didn't terminate these two entities months ago. They're really anathema to everything to which people in the US purport to believe. From a policy perspective, I can see a reason for these GSEs and, if they work well, they should lower costs, but for me at least, the whole GSE concept doesn't fit well in a private market system.

    Now that I have looked at the banking system in some more detail, there are definitely more banks to follow. I subscribe to feeds form the FDIC, so I can watch the banks fall! I think that Washington Mutual [NYSE:WM] will fail. At least, without an infusion of cash, I don't see how it can escape a liquidity crisis. Interestingly, FDIC doesn't have enough agents for all its branches; if and when the seizure happens, it's going to be an interesting, multi-agency operation to close all branches for a weekend and open it the following Monday without further damaging confidence in the banking system.

    The big surprise in all this mess is why are people surprised? In literature it's called foreshadowing, but it was clearly signaled in the dot.com debacle. At least there, people lost their hopes; in this crisis, they've lost their homes!

    Lehman Brothers are going to fail (Huge underwriter)

    About Fannie and Fredide - dont be surprised to see a big bank step in and underwrite their up and coming obligations. It's back by the government after all. Great money earner little risk.


  • Closed Accounts Posts: 3,807 ✭✭✭chump


    damnyanks wrote: »
    Lehman Brothers are going to fail (Huge underwriter)

    About Fannie and Fredide - dont be surprised to see a big bank step in and underwrite their up and coming obligations. It's back by the government after all. Great money earner little risk.


    The markets rebound, the $ get's stronger.

    Surely there is some ramifications for the US for making this move?

    Can someone explain to me how this action is right, because in my head it just seems all wrong.


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  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    chump wrote: »
    The markets rebound, the $ get's stronger.

    Surely there is some ramifications for the US for making this move?

    Can someone explain to me how this action is right, because in my head it just seems all wrong.

    combined they are meant to own over 50% of the countries mortgages. So what happens if they go bust?

    Thats why this is the right action to take (Maybe right is the wrong word to use - perhaps it should be "The only action to take")

    Global economies are very much interlinked as I'm sure you are aware. What happens if the biggest market in the world explodes?


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    damnyanks wrote: »
    Lehman Brothers are going to fail (Huge underwriter)

    About Fannie and Fredide - dont be surprised to see a big bank step in and underwrite their up and coming obligations. It's back by the government after all. Great money earner little risk.

    I don't know how that would work; all banks have liquidity issues right now. It's more likely that the Fannie and Freddie will be carved up into small entities, then packaged off. What has to happen before any action on the GSEs occurs is to rebuild confidence in the housing market. I think people are going to have to sit tight for another 12 months while the pricing issue resolves itself; there's no point in the government getting involved in that process.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    damnyanks wrote: »
    by the last 9 months standard it is perfectly rational!

    Spain is in the crapper it was property based like Ireland. (Which is also screwed).

    I still think some of the larger financial institues have some real bogies to announce.

    Earning season starts next week (Morgan Stanley, Goldman Sachs, Lehman Brothers)

    Will be interesting to see how they move. GS will announce more record profits with a * at the end to signify a couple of trillion assets held in off balance sheet structures!

    Almost all of the larger banks have liquidity issues. I don't know where you get the figure of trillions of dollars in off balance sheet assets. Some companies hold CDOs and synthetic CDOs. I haven't seen figures involving trillions of dollars. The entire mortgage bubble will probably hit a nice round figure of one trillion: it's getting closer every day.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    chump wrote: »
    The markets rebound, the $ get's stronger.

    Surely there is some ramifications for the US for making this move?

    Can someone explain to me how this action is right, because in my head it just seems all wrong.

    When you refer to "this action" are you talking about the recent move by the government to essentially assume Fannie Mae and Freddie Mac?


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    damnyanks wrote: »
    combined they are meant to own over 50% of the countries mortgages. So what happens if they go bust?

    Thats why this is the right action to take (Maybe right is the wrong word to use - perhaps it should be "The only action to take")

    Global economies are very much interlinked as I'm sure you are aware. What happens if the biggest market in the world explodes?

    Fannie and Freddie are "bust." When you dig into their assets, most of the loans they own are performing well. For all the problems that companies had, they were relatively conservative. They don't have the potential problems that, say, a Washington Mutual Bank has. The big problem was liquidity and its the problem that's probably going to start hitting other banks in the next few weeks.

    The other big issue is that quite a chuck of debt in the GSEs was owned by foreigners. If the US doesn't signal stability--these two entities are really poster children--then there could be even wider ramifications, not only in the US but in foreign markets too.

    Finally, the other issue that is lingering--and I can't get my arms round his issue--are the synthetic CDOs that involve default risk and credit swaps. These entities have the power to be a more global contagion. These entities seem to be held by many money-centered banks.


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  • Closed Accounts Posts: 14,483 ✭✭✭✭daveirl


    This post has been deleted.


  • Registered Users Posts: 27,645 ✭✭✭✭nesf


    Economist article sums it up as not ideal but probably the best that could be hoped for at the moment given the upcoming change of administration etc: http://www.economist.com/daily/news/displaystory.cfm?story_id=12078933&fsrc=nwl


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    SoCal90046 wrote: »
    Almost all of the larger banks have liquidity issues. I don't know where you get the figure of trillions of dollars in off balance sheet assets. Some companies hold CDOs and synthetic CDOs. I haven't seen figures involving trillions of dollars. The entire mortgage bubble will probably hit a nice round figure of one trillion: it's getting closer every day.

    Trillions was an exaggeration. Really what my main point is that the companies who aren't reporting big losses are gaming the books.


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    SoCal90046 wrote: »
    I don't know how that would work; all banks have liquidity issues right now. It's more likely that the Fannie and Freddie will be carved up into small entities, then packaged off. What has to happen before any action on the GSEs occurs is to rebuild confidence in the housing market. I think people are going to have to sit tight for another 12 months while the pricing issue resolves itself; there's no point in the government getting involved in that process.

    Liquidity issues are gone. Between Sept 07 - Marc 08 banks were folding simply on margin calls because they couldnt secure short term debt. Everyone has taken note and moved to more secure cash deposits (Government insured - look at Germany for instance) or secured long term debt.

    Fannie and Freddie wont be hacked up. It will stay as one institute - the potential to earn a bucket load of cash is there for any bank willing to get into bed with the fed.

    HBOS had a rights issue in the last few months underwritten by morgan stanley which highlighted exactly whats happening.

    The new issuance only sold something like 25% of the allocated equity. Morgan Stanley had to keep the rest on their books but sold it over a period of weeks at a massive profit.

    Indymac was given to Lehman Brothers to restructure (They made a good chunk of cash from that transaction). the Governments around the world have gotten involved by extending lines of credit and accepting ****ty assets in return. It's whats needed and its why many other banks havent folded.


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    SoCal90046 wrote: »
    I subscribe to feeds form the FDIC, so I can watch the banks fall! I think that Washington Mutual [NYSE:WM] will fail. At least, without an infusion of cash, I don't see how it can escape a liquidity crisis.

    the swaps seem to think so

    http://2.bp.blogspot.com/_nSTO-vZpSgc/SMXkCtZI8SI/AAAAAAAADRM/I_nmcDVYkhg/s1600-h/WaMu-CDS.png

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



  • Closed Accounts Posts: 192 ✭✭SoCal90046


    damnyanks wrote: »
    Trillions was an exaggeration. Really what my main point is that the companies who aren't reporting big losses are gaming the books.

    I am not sure if the implication of the statement about is that accurate. Financial reporting for banks is different than in other industries. There is a lot buried in the footnotes and needs to be examined carefully, but I certainly wouldn't call it gaming the books. Every bank that I have looked at that has exposure to the mortgage market, particularly subprime and Alt-A, has taken writedowns. For those banks whose fiscal and calendar years are identical, I expect more writedowns in the fouth quarter--the quarter that's audited.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    damnyanks wrote: »
    Liquidity issues are gone. Between Sept 07 - Marc 08 banks were folding simply on margin calls because they couldnt secure short term debt. Everyone has taken note and moved to more secure cash deposits (Government insured - look at Germany for instance) or secured long term debt.

    Fannie and Freddie wont be hacked up. It will stay as one institute - the potential to earn a bucket load of cash is there for any bank willing to get into bed with the fed.

    HBOS had a rights issue in the last few months underwritten by morgan stanley which highlighted exactly whats happening.

    The new issuance only sold something like 25% of the allocated equity. Morgan Stanley had to keep the rest on their books but sold it over a period of weeks at a massive profit.

    Indymac was given to Lehman Brothers to restructure (They made a good chunk of cash from that transaction). the Governments around the world have gotten involved by extending lines of credit and accepting ****ty assets in return. It's whats needed and its why many other banks havent folded.

    There are most definitely still liquidity concerns. The inability to raise funds is what felled Freddie and Fannie. It's the retreat away from commercial to government paper that is causing problems for banks.

    I think your assessment of Freddie Mac and Fannie Mae isn't accurate. I don't see them being combined or even surviving as is. I do see the FHFA getting more involved the fate of these two entities. I also see the government severing the umbilical and either selling assets to existing banks or creating many new, smaller entities to function on their own.

    I don't follow you train of thought on Morgan Stanley.

    Let me make a correction to the statement on Lehman Brothers. IndyMac wasn't given to Lehman Brothers. Lehman Brothers Holdings was hired by the FDIC in July to come up with a strategy to sell the assets of IndyMac Bank. Lehman is advising the FDIC on the value of the assets owned by IndyMac. IndyMac is now in liquidation. The assets have not yet been sold.


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    I'll give a better explanation later - long story short. Look beyond whats in the press and think about the industry as a whole and which CEO is on which monetary policy board etc. etc.

    Indymac was a gift to help lehmans (As I said they will blow up because they havent protection from the government)

    They are now at $9 !!! I've made a frigging killing!! Sold at 16

    The world is failing and unless government protection kicks in all sorts of unpredicted problems will arise.


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    Gah I lost my response - summarised

    Fannie and Freddie are the witch doctors of the markets at the moment. They go up the market goes up, they go down the market goes down (At least financials). They will not be allowed to collapse. The government will take them on. The government has provided extra facilities with their extension on the discount window after the run on Bear. (this is my view and thats fine if I'm wrong)

    Lehmans will probably face a run as well. I've heard (this is pure rumour) they fired a lot of their prime group today (A good source for short term debt - its where Bear allegedly held a lot of their funding) so that will be interesting. These guys can go bust. KKR have been circling them for the last 8 weeks - they smell blood. Now everyone has pulled out of their asset management group ouch.

    Liquidity isnt a primary concern anymore. The credit crunch is 13 months old anyone who is still dependent on short term debt will go bust.(This happened 6 - 12 months ago when smaller firms couldnt raise the required capital to operate day to day). It's just far more difficult to originate debt - if you have a half assed chance of a full subscription banks are willing to do the deal at a loss since deal flow is **** (People want their jobs)

    Balance sheets can be manipulated but moving assets into a SPV is more then manipulating. If it goes bust it has to be pulled back in. That will cause an explosion.

    Can't remmeber exact details - Goldmans moved a few billion in assets from their balance sheet to a SPV (Around Q2 earning)

    Lehmans sold a few billion to a hedge fund (R3) after Q2 annoucements. R3 was based in the same building and everyone working at it was considered a lehman employee.


  • Closed Accounts Posts: 14,483 ✭✭✭✭daveirl


    This post has been deleted.


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  • Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Mankiw has an interesting piece on his blog that made me chuckle.

    Link.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    Thanks for the link on to Greg Mankiw's blog; it's interesting reading.

    It looks like the carve up of WaM is about to begin. It would be tough to seize an entity with 2300+ branches. It makes more sense to sell of performing assets, then place the rest in Chapter 11


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    daveirl wrote: »
    This post has been deleted.

    The interesting thing about this takeover is that, de facto, the US national debt has grown substantially. In reality, nothing has really changed; the government was always viewed as being the ultimate guarantor of both Freddie and Fannie. In fact, one credit rating agency stated as such when explaining why both entities had such a favorable rating despite the low level of capital when compared to other banks. Now, however, it's pretty clear that the debt--and assets--of Freddie and Fannie are part of the overall national debt of the United States. While only a relatively small portion this loan is non-performing, it's probably not a big deal.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    SoCal90046 wrote: »
    The interesting thing about this takeover is that, de facto, the US national debt has grown substantially. In reality, nothing has really changed; the government was always viewed as being the ultimate guarantor of both Freddie and Fannie. In fact, one credit rating agency stated as such when explaining why both entities had such a favorable rating despite the low level of capital when compared to other banks. Now, however, it's pretty clear that the debt--and assets--of Freddie and Fannie are part of the overall national debt of the United States. While only a relatively small portion this loan is non-performing, it's probably not a big deal.


    I found an answer to my own question; here's a link to an article in the September 13 edition of the Wall Street Journal. The financials from the two institutions won't be included on the government books for now. The Budget Director said that things could change. Apparently, the Congressional Budget Office holds the opposite view, which should be fun. I am sure that parallels to Enron will be drawn.


  • Registered Users Posts: 4,276 ✭✭✭damnyanks


    daveirl wrote: »
    This post has been deleted.

    Yes - and now I've been itching watching what will happen with wamu and lehman

    Is anyone else finding this all very exciting?


  • Closed Accounts Posts: 545 ✭✭✭BenjAii


    SoCal90046 wrote: »
    While only a relatively small portion this loan is non-performing, it's probably not a big deal.

    9% of Americans with mortgages are currently anywhere from more than one month in arrears to the foreclosure stage and I think most people agree things are going to get worse before they get better.

    I'm surprised to have seen no mention of this effecting Moodys/S&P rating of US Gov debt. If any other country had wholesale bought out a huge chunk of its consumers personal debt, surely that would be the case, were there a precedent for anything so extraordinary.


  • Closed Accounts Posts: 14,483 ✭✭✭✭daveirl


    This post has been deleted.


  • Closed Accounts Posts: 192 ✭✭SoCal90046


    BenjAii wrote: »
    9% of Americans with mortgages are currently anywhere from more than one month in arrears to the foreclosure stage and I think most people agree things are going to get worse before they get better.

    I'm surprised to have seen no mention of this effecting Moodys/S&P rating of US Gov debt. If any other country had wholesale bought out a huge chunk of its consumers personal debt, surely that would be the case, were there a precedent for anything so extraordinary.

    I read that mortgage payment statistic recently, but it remains to be seen exactly what the statistic means. There have always been people in arrears and the fraction has gone higher.

    Placing the two GSEs in conservatorship shouldn't have a major impact on the debt rating. There are a couple of reasons why it could be an nonissue. Right now, the entities aren't accounted for in government accounts. They're regarded as two independent corporations. It could be argued that since taxpayers appear to be the lender of last resort, the two entities should be rolled onto the federal accounts; however, federal accounting standards are pretty arcane and for now, at least, the Treasury seems content to regard them as independent corporations. An argument between the Congressional Budget Office and the Administration is likely to begin soon. Personally, I don't understand how the two entities could be considered off budget; however, I had meetings with some EY people on Friday and, when the topic came up, they gave a somewhat detailed explanation of why the items should be kept off budget.

    On a more practical note, despite all the criticism and concerns of Freddie and Fannie, these two entities had a very strong portfolio of performing loans. Only 1.7% of loans were in arrears, well behind the national average. Over half of the loans were more than 50% paid. The problem that the two entities faced was liquidity. Each had capital requirements that fell well below the average for US banks. S&P, in justifying the strong bond rating, claimed that they were content with this situation because, ultimately, the Federal Government was the lender of last resort. In fact, the government had no legal obligation to rescue the two entities. The challenge that each faced was the trend in delinquencies: not necessarily a bad thing, but in a market where raising new funds or rolling over bonds is challenging, the two giants faced problems. With lower capital requirements, a small change can have a big impact. The discount window was always available to them; however, to borrow from the Federal Reserve (for short term liquidity issues), an entity has to be a going concern. It was getting clear that, with looming liquidity problems, neither Freddie nor Fannie was a going concern. Their portfolios are still sound. So even if the liabilities were added to the national debt, there are solid, performing assets in the real estate portfolio to offset them. The one thing that the Federal Government and Federal Reserve have to avoid is a scenario similar to what happened in Japan in the 1990s. If real estate values nationwide fall by more than another 20 to 30%, then the US has just assumed an additional $2 to $3 trillion in debt. If real estate languishes and recovers in a manner similar to what's happened in the past sixty or so years, then all is well.

    Just one more thing--and I don't mean to be a prophet of doom and gloom--however, in the US at least when we're not hearing about belipsticked ungulates and hurricanes in Texas, there are news reports about how foreclosures are way down! Don't believe it. Many of the states with the most severe real estate problems have enacted legislation which has temporarily stalled the ability of banks to foreclose on property. I expect that in the fourth quarter, we'll see the rate of foreclosures surge again.


  • Registered Users Posts: 17,825 ✭✭✭✭silverharp


    SoCal90046 wrote: »
    there are news reports about how foreclosures are way down! Don't believe it. Many of the states with the most severe real estate problems have enacted legislation which has temporarily stalled the ability of banks to foreclose on property. I expect that in the fourth quarter, we'll see the rate of foreclosures surge again.

    This is a slow train crash , there are going to waves of resets going into 09, its going to be some feat to keep real borrowing rates down so that people paying their mortgages now aren't blown out of water.

    A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer



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  • Closed Accounts Posts: 192 ✭✭SoCal90046


    silverharp wrote: »
    This is a slow train crash , there are going to waves of resets going into 09, its going to be some feat to keep real borrowing rates down so that people paying their mortgages now aren't blown out of water.

    Agreed, but it's not that slow. Things are moving fast. It's kind of perverse, but I now look forward to Sunday to see what the latest fiscal horror story. We're living through a once-in-a-lifetime event; it's quite breathtaking. I have been hoarding cash for just over two years getting ready to buy banks. I frankly didn't really foresee that a disaster was looming ahead.

    In the US, the majority of mortgages are fixed rate--either 15 or 30 years--so while interest rate resets are going to cause problems, it won't be as problematic as it would in other countries where consumers seem to favor variable rate products. In any event, the people who are getting caught in this mess are those that couldn't really afford to buy housing in the first place; they are the people holding variable rate mortgages with three year teaser rates.

    The story is definitely not over yet. I had hoped things would stabilize in in Q1 of next year, but it looks like it could be longer.

    Here's a link to a program called This Week on the US network ABC. The segment is an interview with Alan Greenspan about the current problems.


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