Fannie Mae and Freddie Mac.

Minder · 18-09-2008 12:26pm

BenjAii wrote: »

Surely what is happening at the moment is that hitherto unregarded features of our current financial system are being exposed as fundamentally flawed; namely that the interconnection and lack of opacity in institutions obligation to debt through complex financial instruments means that the market cannot place confidence in them as it cannot ascertain how at risk they are.

Is the bailout of AIG an effort to try and stop the contagion spreading to the Credit Default Swaps market - an unregulated market purported to be valued in trillions of dollars?

PWC raised questions over AIGs CDS values in February this year, stating that they believed there were material weaknesses in the valuation of AIG's CDSs

BenjAii · 18-09-2008 1:25pm

Wow, Ambrose Evans-Pritchard in The Telegraph is quoting some absolute "were all doomed!" scenarios.

Albert Edwards, global strategist at Société Générale, said Washington's serial bail-outs are the inevitable result of the credit bubble of preceding years. "This was all baked in the cake long ago. What we have seen so far is just a dress rehearsal for the deep recession that is coming. America is going to be losing 500,000 jobs a months. That is when we will see interest rates go to zero. The deficit will be covered with printed money as it was in Japan. The endgame will be helicopters full of cash dropped by Ben Bernanke," he said.

Bernard Connolly, global strategist at Banque AIG, "We fear that a virtual nationalisation of the financial system will now be necessary," he said.

Cheery stuff !

SoCal90046 · 18-09-2008 3:55pm

Minder wrote: »

Is the bailout of AIG an effort to try and stop the contagion spreading to the Credit Default Swaps market - an unregulated market purported to be valued in trillions of dollars?

PWC raised questions over AIGs CDS values in February this year, stating that they believed there were material weaknesses in the valuation of AIG's CDSs

You raise a good point. The Wall Street Journal had an article on the topic today. However, there is an author called Charles Morris who has been warning about this very problem for some time. His book is called the Trillion Dollar Meltdown. It's a good read; I'd recommend it. I'll grab a copy later today and quote on what he says on the topic.

SoCal90046 · 18-09-2008 3:59pm

BenjAii wrote: »

I don't know if it is justifiable to dismiss investors fears as "silly season".

Surely what is happening at the moment is that hitherto unregarded features of our current financial system are being exposed as fundamentally flawed; namely that the interconnection and lack of opacity in institutions obligation to debt through complex financial instruments means that the market cannot place confidence in them as it cannot ascertain how at risk they are.

Excellent points. The unwinding we're seeing is a separate issue from how investors will react as prices drop. If history is a guide in this area, we can rest assured that the majority of investors won't necessarily act in their own financial best interest if or when the market tanks.

SoCal90046 · 21-09-2008 2:33am

Here's a link to a paper which is published on the website of the Bank for International Settlements. Most of what is stated in the paper has been discussed on boards.ie; it does consolidate a lot of interesting information about the problem and is well worth reading.

SoCal90046 · 24-09-2008 4:38am

There's a case to be made that the Fed kept interest rates too low for two long, but even worse, IMHO, is the fact that the Chairman of the Fed warned Congress in 2005 that the unrestrained growth of Fannie Mae and Freddie Mac could cause problems for the financial system. Here's a link to the speech that Chairman Greenspan gave to the Senate Committee on Committee on Banking, Housing, and Urban Affairs on April 6, 2005.

Here are some excerpts:

The strong belief of investors in the implicit government backing of the GSEs does not by itself create safety and soundness problems for the GSEs, but it does create systemic risks for the U.S. financial system as the GSEs become very large. Systemic risks are difficult to address through the normal course of financial institution regulation alone and, as I will stipulate shortly, can be effectively handled in the case of the GSEs by limiting their investment portfolios funded by implicitly subsidized debt.

. . .

But the higher prices that these two GSEs pay for mortgages are only a small part of their subsidy, as evidenced by their persistent and well-above-market returns on equity capital. Their annual return on equity, often exceeding 25 percent, is far in excess of the average approximately 15 percent annual returns achievable by other large financial competitors holding substantially similar assets. Virtually none of the GSE excess return reflects higher yields on assets; it is almost wholly attributable to subsidized borrowing costs.

. . .

When these institutions were small, the potential for such risk, if any, was small. Regrettably, that is no longer the case. From now on, limiting the potential for systemic risk will require the significant strengthening of GSE regulation and the GSE regulator. Determining the suitable amount of capital for Fannie and Freddie is a difficult and technical process, and in the Federal Reserve's judgment, a GSE regulator must have as free a hand as a bank regulator in determining the minimum and risk-based capital standards for these institutions.

Beyond strengthening GSE regulation, the Congress will need to clarify the circumstances under which a GSE can become insolvent and, in particular, the resultant position--both during and after insolvency--of the investors that hold GSE debt, as well as other creditors and shareholders. This process must be unambiguous before it is needed. Current law, which contemplates conservatorship and not receivership for a troubled GSE, requires the federal government to maintain GSEs as ongoing enterprises, but other than the symbolic line of credit at the U.S. Treasury, provides no means of financing to do so. Left unresolved, such uncertainties could threaten the stability of financial markets.

. . .

On the other hand, if we fail to strengthen GSE regulation, we increase the possibility of insolvency and crisis. We at the Federal Reserve believe this dilemma would be resolved by placing limits on the GSEs' portfolios of assets, perhaps as a share of single-family home mortgages outstanding or some other variation of such a ratio. Almost all the concerns associated with systemic risks flow from the size of the balance sheets of the GSEs, not from their purchase of loans from home-mortgage originators and the subsequent securitization of these mortgages.

. . .

As I concluded last year, the GSEs need a regulator with authority on a par with banking regulators, with a free hand to set appropriate capital standards, and with a clear and credible process sanctioned by the Congress for placing a GSE in receivership, where the conditions under which debt holders take losses are made clear. However, if legislation takes only these actions and does not limit GSE portfolios, we run the risk of solidifying investors' perceptions that the GSEs are instruments of the government and that their debt is equivalent to government debt. The GSEs will have increased facility to continue to grow faster than the overall home-mortgage market; indeed since their portfolios are not constrained, by law, to exclusively home mortgages, GSEs can grow virtually without limit. Without restrictions on the size of GSE balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership.

damnyanks · 24-09-2008 8:43am

There were a variety of warnings from different people. I had numerous research reports from different banks economic departments who saw a recession coming between 2008 - 2012 all linked to low rates.

But who wants to listen to bad news while everything is going along so well. Didnt David McWilliams go off forever that we were doomed.

What goes up must come down it just seems that simple. (Whats it called ? Reverse correlation or whatever - invest in the opposite of the current boom)

eamonnm79 · 24-09-2008 11:38am

Alan Greenspan was the head of the Fed for the vast majority of the unprecidented growth in the housing bubble. Fanny and Freddie were set up to help people get affordable housing. They ended up being a massive contributor to the huge bubble. That speech by Alan greenspan was an ass covering exersize, nothing more.
He may have talked the talk that one time but as head of the fed what did he do? He had more monetary power than any member of congress.

Minder · 24-09-2008 12:45pm

damnyanks wrote: »

What goes up must come down it just seems that simple. (Whats it called ? Reverse correlation or whatever - invest in the opposite of the current boom)

Mean reversion theory

SoCal90046 · 24-09-2008 2:06pm

eamonnm79 wrote: »

Alan Greenspan was the head of the Fed for the vast majority of the unprecidented growth in the housing bubble. Fanny and Freddie were set up to help people get affordable housing. They ended up being a massive contributor to the huge bubble. That speech by Alan greenspan was an ass covering exersize, nothing more.
He may have talked the talk that one time but as head of the fed what did he do? He had more monetary power than any member of congress.

I want to challenge the conclusion that you reached. Alan Greenspan testified a number of times before members of the Senate and, in the full testimonies, asked Congress for more oversight of the two GSEs. The mandate to provide more affordable housing was imposed on the GSEs after accounting scandals in 2004. It was at that point that both entities moved towards adding Alt-A and sub-prime mortgages into their respective portfolios. There was lax regulatory oversight on both entities--significantly less than on banks. The Fed didn't have the authority to intervene, but Greenspan did warn Congress. Congress is the only body that could act to reign in Freddie and Fannie. I found Greenspan's testimony in 2005 to be both thoughtful and prophetic.

Greenspan and the Federal Reserve Board are responsible for monetary policy; the issue also involved fiscal policy which lies outside the mandate of the Federal Reserve Board.

Today, there is a lot of talk about what is perceived as a lax monetary policy on the part of the Fed. Very few members of the Federal Reserve Board of Presidents of the Federal Reserve Banks on the FOMC voted in favor of higher interest rates. They clearly believed that the money supply was on track and nothing untoward was happening. It's not clear to me anymore than monetary policy alone was the genesis of the current financial problem.

Like any accident, it's going to take time and careful investigation to determine what exactly went wrong.

SoCal90046 · 26-09-2008 4:35am

And with that Washington Mutual is no more. Finally, this crisis produced the largest bank failure in US history. What took it so long?

J. P. Morgan has been handed the prize by federal regulators; I wonder what bank they're going to give to Goldman Sachs. According the Wall Street Journal, WaMu suffered an exodus of funds since September 15; the liquidity issue one more time. WaMu has 2,300 branches in 17 states, mostly on the west coast. The bank has $300+ billion in assets; it's estimated that the failure could cost the FDIC $20 billion, but we'll have to wait and see what the real figure is.

damnyanks · 26-09-2008 10:42am

They were hashing out the details. They were meant to be buying them 2 or 3 weeks ago.

Did anyone see panarama on bbc ? Bunch of idiots!

damnyanks · 26-09-2008 8:58pm

So who will go this weekend / week ? My picks

GE,
Fortis,
B&B
irish Nationawide

SoCal90046 · 26-09-2008 9:07pm

I think the only way to top what's happened recently is for those Chinese astronauts to find and film an extraterrestrial spaceship orbiting earth.

damnyanks · 27-09-2008 10:19am

How silly of me I totally forgot about wachovia.

It appears they are off to citi

silverharp · 27-09-2008 12:45pm

damnyanks wrote: »

How silly of me I totally forgot about wachovia.

It appears they are off to citi

add to that
National City Corporation (NYSE: NCC)

silverharp · 27-09-2008 12:57pm

SoCal90046 wrote: »

It's not clear to me anymore than monetary policy alone was the genesis of the current financial problem.

Like any accident, it's going to take time and careful investigation to determine what exactly went wrong.

backing up a bit , the US current account deficit is a huge underlying cause combined with asian/opec$ central banks reclycling their surplus dollars back into US bonds , this had the effect or artifically reducing interest rates which fulled the lending boom.

from another direction the various community investmet acts that US banks had to implement basically stong armed them into subprime lending especially to minorities and low income communities.

also the whole securitisation business contributed to the mess as banks now did not really care who they lent to.

daveirl · 27-09-2008 3:53pm

This post has been deleted.

SoCal90046 · 27-09-2008 8:37pm

silverharp wrote: »

backing up a bit , the US current account deficit is a huge underlying cause combined with asian/opec$ central banks reclycling their surplus dollars back into US bonds , this had the effect or artifically reducing interest rates which fulled the lending boom.

from another direction the various community investmet acts that US banks had to implement basically stong armed them into subprime lending especially to minorities and low income communities.

also the whole securitisation business contributed to the mess as banks now did not really care who they lent to.

You're second point is the driver. The first point is the fuel, but something needed to ignite it. Poor policy decisions coupled with lax regulatory oversight and, frankly, a lack of vigilance on the part of those who bought collateralized debt were what triggered and sustained the mess. There was fuel; there was an ignition source and now there's a nice toasty fire.

damnyanks · 27-09-2008 10:02pm

daveirl wrote: »

This post has been deleted.

No one was buying 3M Sterling Paper @ 10% return. Thats a very big problem.

daveirl · 28-09-2008 6:20pm

This post has been deleted.

damnyanks · 28-09-2008 8:48pm

Not saying going bust is the only option they are too large to go bust. But they may have to start selling major assets or go under a lot of scrutinty.

Not being able raise short term debt means you will find it very difficult to keep pay your bills. What happens after that?

Also trading at Libor + 400 on such a short time frame is actually insane. Its not a steal especially given how normal it would be for someone like them. It's a true sign of how much trouble is on the horizon.

Also from what I was told this 3M paper was impossible to sell - so no one trusted a 3M @ 10% from GE.

Minder · 29-09-2008 9:14am

Interesting archive piece from the New York Times 1999

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

damnyanks · 01-10-2008 10:13pm

daveirl wrote: »

This post has been deleted.

12 billion issuance today. So hopefully should be sorted out now.

damnyanks · 03-10-2008 12:16pm

The saga continues -

wells fargo buy wachovia for 15.1 billion.

Warren Buffet is buying the world slowly but surely.

GE, GS and now Wachovia

Fannie Mae and Freddie Mac.

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