Fannie Mae and Freddie Mac.

mike65

Nope not an elderly couple in Wisconsin but the names of the underwriters for 50% of US mortgages are on the verge of insolvency, they are so big they cannot be allowed to go bust, indeed it is part of the underpining legistation that created them in the 1930s thay they must be rescued by the federal government at a certain point.

That point has been reached as they have lost about 85% of thier market value and together both firms have less than 80 billion dollars in capital reserves to ensure losses on more than 5.5 trillion dollars in mortgage debt*. The minimum cost of a buy out/bail out is unknown but is likely to be several hundred billion dollars, the dollar is already a weakling and will only go one way.

The USA GDP was estimated at $13.13 trillion in 2006, the US owes 6.5 trillion
dollard to the rest of the world. If/when the government takes over Fannie and Freddie US debt will double to about 45% of GDP which is small by the standards of many countries but for the worlds economic engine its bad news for all.

I think I have that right.

Mike.

*trillion is 1000 X billion so 5,500,000,000,000 loans guaranteed by 80,000,000,000 assets.

Économiste Monétaire

Kind of the same topic: Indymac bank has officially failed. It has just been shut down by regulators. It is the 7th largest mortage originator in the U.S.

http://www.cnbc.com/id/25642869

Flamed Diving

It is my understanding that there are no such guarantees as to their being protected by Treasury, and that this is simply a fiction agreed upon. Of course I'm not suggesting that they will be allowed to fail, but I'm merely challenging the assertion that this is 'guaranteed'.

Économiste Monétaire

Paper by Mankiw on Fannie and Fred

N.G. Mankiw wrote:

By charter, the housing GSEs enjoy privileges including exemption from state and local income taxes and from Securities and Exchange Commission registration and disclosure requirements. The US Treasury is authorised to extend limited credit to them and some of their directors are appointed by the president. The direct monetary benefit from these privileges is modest but their symbolic value is significant.

The privileges feed a market perception that GSE debt is backed by the US government. This is inaccurate - the charters do not require the federal government to bail out a troubled GSE. Yet, given the perception, investors are willing to accept a lower yield on GSE debt than on that of other private companies. A recent study by Fed staff estimated that the interest rate on the debt of Fannie and Freddie averaged 40 basis points below that on comparable securities. In financial markets, such a funding advantage is enormous.

mike65

Fair enough They'll still end up bailing it out though.

Mike.

Flamed Diving

Of course, any such legislation would merely be affirming what is destined to happen anyway.

Oh, and back to the original point. This is a disaster for the American economy. I didn't think things were this bad. How were things allowed to go this far before being noticed, its like no one was monitoring these activities.

Économiste Monétaire

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation aren't supervised by regulators to the same extent as other institutions. So, nobody knew until they announced it.

Flamed Diving

Ah, thats quite a surprise actually. In fact, since this whole thing started over a year ago it has badly exposed just how little regulation there is in the financial system, stateside. It will be interesting to see the reaction to this once/if it all calms down. Regulation is one of my favourite areas in economics.

Économiste Monétaire

Well, the government will exhaust every avenue before taking them over. There'll be a mass effort to raise capital. It will be interesting to see how the market reacts on Monday morning, especially after the news of IndyMac.

But, yes market regulation is an interesting area :pac:

Clytus

The Fed has extended a line of credit to Fannie Mae and Freddie Mac.

Whats happening is truely unbelievable...If they were to fail it would,according to what Iv read,almost end the private mortgage industry in the US.

Its figured they will need to raise in the region of $7 billion over the next 2 quaters to cover write downs...yet thier market capitalization is only $8.7 billion.

I think the FED will do everything they can to keep them solvent...

silverharp

Clytus wrote: »

I think the FED will do everything they can to keep them solvent...

there is only so much lipstick you can put on a pig , the Fed risks undermining its own balance sheet by taking on this crap , if they do bail it out, it will be a transfer of wealth to Japanese and European banks that are exposed to the bonds.

Flamed Diving

Well it basically boils down to a choice: a great inflation/devaluation; or a great depression. Neither are pretty, though one is infinitely preferable.

Clytus

Well its like this....given 50% of mortgages in the US are underwritten by the 2...if they fail any banks that do issue new loans on thier mortgage books will do so at huge interest rates. It will depress and already floundering housing market and drive the States from a recession into a full blown depression.

On a side note....we hear all this talk of the new economic powerhouses in Asia...like China and India....but what proportion of thier exports end up in the US?

silverharp

Flamed Diving wrote: »

Well it basically boils down to a choice: a great inflation/devaluation; or a great depression. Neither are pretty, though one is infinitely preferable.

i assume you mean the deflationary depression, I'd agree

Flamed Diving

I mean printing* their way out of the crisis.






*Increased liquidity, not Central Bank of Zimbabwe style.

mike65

That seems to be the stock response of the Fed, not sure it would be appropriate though. The dollar will sink either way.

Mike.

Flamed Diving

Right, but if they sit back and take no action (like the Fed in 1929, well little or no action) then it will be a repeat of the great depression. Its a choice between two evils, and one is infinitely more preferable.

LouOB

Looks like Nostrodamus might be right then about the old powers rising up if US fail

Flamed Diving

LouOB wrote: »

Looks like Nostrodamus might be right then about the old powers rising up if US fail

:rolleyes:

silverharp

Flamed Diving wrote: »

Right, but if they sit back and take no action (like the Fed in 1929, well little or no action) then it will be a repeat of the great depression. Its a choice between two evils, and one is infinitely more preferable.

my main logical disagreement here is that if easy money created the problem in the first place then the solution can't be to throw more money at the problem. Japan did what you are suggesting but it didnt work. At some point the pushing on a string argument comes into play. it comes down to the basics that if assets or risk is mispriced the market must be allowed to find the correct value, central bank intervention only drags out problem.

Flamed Diving

silverharp wrote: »

my main logical disagreement here is that if easy money created the problem in the first place then the solution can't be to throw more money at the problem. Japan did what you are suggesting but it didnt work. At some point the pushing on a string argument comes into play. it comes down to the basics that if assets or risk is mispriced the market must be allowed to find the correct value, central bank intervention only drags out problem.

I agree, but the risk in allowing the market to correct itself, the Fed could be accused of standing by and allowing the country to slip into depression and for the financial system to melt down. Perhaps a policy of steering the market out of meltdown, but not providing a total bailout at the same time might be the best option. The way things have gone, and the systematic nature of these events I think it would be disasterous to simply leave it to market forces. Thats exactly what they attempted in 1929, and we all know what happened there.

silverharp

Flamed Diving wrote: »

Thats exactly what they attempted in 1929, and we all know what happened there.

The assumption here is that the market was left to itself but I'm not sure this is a correct reading of history. There was a lot of intervention in the 30's, new deal, building programs etc. and high taxes which may have dragged out the problem, it took WW2 to end the funk. I believe there is such a thing as the business cycle which even central bankers cant stop. again look at Japan, it didnt work


Some wise words unusually from a US Senator this week

Bunning Statement To The Senate Banking Committee On The Federal Reserve Monetary Policy Report.

As Prepared For Delivery:

Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.

First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.

Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.

Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.

Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.

And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?

I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?

Flamed Diving

silverharp wrote: »

The assumption here is that the market was left to itself but I'm not sure this is a correct reading of history. There was a lot of intervention in the 30's, new deal, building programs etc.

All of those programs were either post-depression or were implemented at the tail-end of it. The Fed's attitude towards the Wall Street Crash and the subsequent recession was not to increase liquidity, at all costs. They, like you, felt that the business cycle would mean the crisis would iron itself out. That, and a power struggle as to who would become the Governor of the Reserve of New York, meant that this policy of inaction continued and warnings were ignored for far longer than necessary. By the time The Fed decided it was time to act, the country was already deep in depression and it would take the programs you mentioned above to bail it out.

SoCal90046

mike65 wrote: »

Nope not an elderly couple in Wisconsin but the names of the underwriters for 50% of US mortgages are on the verge of insolvency, they are so big they cannot be allowed to go bust, indeed it is part of the underpining legistation that created them in the 1930s thay they must be rescued by the federal government at a certain point.

That point has been reached as they have lost about 85% of thier market value and together both firms have less than 80 billion dollars in capital reserves to ensure losses on more than 5.5 trillion dollars in mortgage debt*. The minimum cost of a buy out/bail out is unknown but is likely to be several hundred billion dollars, the dollar is already a weakling and will only go one way.

The USA GDP was estimated at $13.13 trillion in 2006, the US owes 6.5 trillion
dollard to the rest of the world. If/when the government takes over Fannie and Freddie US debt will double to about 45% of GDP which is small by the standards of many countries but for the worlds economic engine its bad news for all.

I think I have that right.

Mike.

*trillion is 1000 X billion so 5,500,000,000,000 loans guaranteed by 80,000,000,000 assets.

There are some inaccuracies in your post. The statement that the mortgage giants are the on the verge of insolvency is not really accurate--at least, there's no evidence to support the claim right. Both companies were adequately capitalized. The problem was what would happen if the company had to raise more capital. The stock prices were in free fall, so the equity markets--a traditional route--is unavailable. The move by the Treasury Department was an effort to shore up confidence in the banking system, particularly in the wake of what happened to IndyMac Bank. Neither Freddie nor Fannie was on the verge of insolvency when the Treasury Department acted, but there were genuine concerns that if the current climate in the financial markets continued, then both companies could be in trouble.

There is also no evidence to support the claim that the companies will need an infusion of several billion dollars. Unlike IndyMac Bank or Countrywide Financial which dealt in Alt-A and subprime mortgages respectively, the Macs deal with traditional mortgages. The future extent of the current mortgage problem is a matter for speculation; no one really knows how severe the problem could be. There will be write downs, but it remains to be seen what the ultimate extent of this problem will be.

Finally, the US national debt is about $7.5 trillion or about 36% of GDP. Only one quarter of the national debt is financed by foreign entities. The US government holds most of the debt itself: most of these holdings are for savings programs such as social security. In the US, individual investors, state and local governments, banks and insurance companies, etc. hold the rest of the debt--three quarters of the national debt is financed by Americans or US companies or other entities.

If the US government were to assume complete control over Freddie and Fannie--something which is extremely unlikely to happen--it wouldn't make any difference if the debt were officially transferred to the Treasury. There is an implicit guarantee that the government will back both entities--in essence, the government has been on the hook for the debt all the time. Unlike the current debt, the notes that the banks--Freddie and Fannie--hold are backed by hard assets. This debt is not in the same league.

mike65

So long as we have experts on board (I was busking it!) and the sky hasn't fallen in yet.

Mike.

SoCal90046

silverharp wrote: »

my main logical disagreement here is that if easy money created the problem in the first place then the solution can't be to throw more money at the problem. Japan did what you are suggesting but it didnt work. At some point the pushing on a string argument comes into play. it comes down to the basics that if assets or risk is mispriced the market must be allowed to find the correct value, central bank intervention only drags out problem.

The repricing of the housing stock has been ongoing for over a year now. One ratio that I watch carefully is price to income (average home price to average household income). For many years, this ratio has hovered around 1.89 to 1.90--it has dipped as low as 1.81 and gone as high as 1.97; however, in 2002, this ratio started to soar and peak at 2.39 in 2005--it was a clear, unambiguous indication to me that we, in the US, were in the middle of a housing bubble. Over the past fifteen to eighteen months, this ratio has rapidly adjusted back to 1.91. I suspect that it is going to fall lower. Here's why:

Housing prices are still stalling--the latest numbers signaled another decline. There is close to twelve months of inventory; the percentage of unoccupied homes is also at a multi-year high. The rent to buy ratio is still out of kilter--the ratio of the cost or renting a house to buying a house--renting still makes sense in many markets. While a lot of the excess has been wrung out of the system, there is probably still more to go: it's possible that housing prices could fall another ten to twenty percent.

I too hope that the government is circumspect in how it approaches the issue.

silverharp

SoCal90046 wrote: »

The repricing of the housing stock has been ongoing for over a year now. One ratio that I watch carefully is price to income (average home price to average household income). For many years, this ratio has hovered around 1.89 to 1.90--it has dipped as low as 1.81 and gone as high as 1.97; however, in 2002, this ratio started to soar and peak at 2.39 in 2005--it was a clear, unambiguous indication to me that we, in the US, were in the middle of a housing bubble. Over the past fifteen to eighteen months, this ratio has rapidly adjusted back to 1.91. I suspect that it is going to fall lower. Here's why:

Housing prices are still stalling--the latest numbers signaled another decline. There is close to twelve months of inventory; the percentage of unoccupied homes is also at a multi-year high. The rent to buy ratio is still out of kilter--the ratio of the cost or renting a house to buying a house--renting still makes sense in many markets. While a lot of the excess has been wrung out of the system, there is probably still more to go: it's possible that housing prices could fall another ten to twenty percent.

I too hope that the government is circumspect in how it approaches the issue.

A long way to go, from history one must remember also that bubbles don't correct to the mean, you can tack on another 10%/20% below mean. The advise I've been hearing from the smart money is to wait unit price comes down to about 100 months rent before considering buying.

as a aside watch out for MaMu over the next few months

below is a credit default swap graph of Washington Mutual, it is now above the level (mid 800's) when Bear Sterns went belly up.

http://bp2.blogger.com/_nSTO-vZpSgc/SIosrkD8whI/AAAAAAAAC-E/eI2g3BvT2Cg/s1600-h/WaMu-CDS.png

SoCal90046

silverharp wrote: »

A long way to go, from history one must remember also that bubbles don't correct to the mean, you can tack on another 10%/20% below mean. The advise I've been hearing from the smart money is to wait unit price comes down to about 100 months rent before considering buying.

as a aside watch out for MaMu over the next few months

below is a credit default swap graph of Washington Mutual, it is now above the level (mid 800's) when Bear Sterns went belly up.

http://bp2.blogger.com/_nSTO-vZpSgc/SIosrkD8whI/AAAAAAAAC-E/eI2g3BvT2Cg/s1600-h/WaMu-CDS.png

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.

silverharp

this chart is a little out of date now but can only imagine it is worse now
it is a particular WaMu Alt-A mortgage pool. The pool is known as WMALT 2007-0C1.

http://bp3.blogger.com/_nSTO-vZpSgc/R--_e0CrudI/AAAAAAAACY0/ntzjqbwl9EA/s1600-h/wamu-alt-a-March.png


January Pool Stats

* 19.3% 60 day delinquent or worse
* 13.15% Foreclosure
* 1.83% REO

February Pool Stats

* 22.69% 60 day delinquent or worse
* 11.62% Foreclosure
* 3.56% REO

March Pool Stats

* 25.3% 60 day delinquent or worse
* 13.35% Foreclosure
* 4.44% REO

Note the above progression. This cesspool from May of 2007, was 92.6% originally rated AAA, even though loans had full doc only 11% of the time. In less than one year, the pool was 25.3% 60-day delinquent or worse. Of that 25.3%, 13.35% is in foreclosure and 4.44% is bank owned real estate.

The problem should be clear. In no way shape or form, should any package of liar loans been rated AAA.


I originally shorted this company in 06 and 07, but this year have mostly been in and out of the SKF etf.

mike65

Bump(y)

Looks like the bail out happens on Monday.

Mike

silverharp

mike65 wrote: »

Bump(y)

Looks like the bail out happens on Monday.

Mike

it is very ironic that these 2 organisations were set up after the depression in the 30's and are very heavily to blame for stoking the credit bubble in the US.

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.

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!

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!

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.

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.

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?

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.

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.

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?

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.

daveirl

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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

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.

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.

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

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.

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.

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.

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.

daveirl

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