Monday, September 8, 2008

Debt Rattle, September 8 2008: Elite Laundry

National Photo Co. Elite Laundry 1924
The Elite Laundry in Washington

Ilargi: Of course the international stock markets are up today, and Wall Street will initially go through the roof. The by far largest rescue operation of an entire nation’s economy guarantees that sort of reaction.

The question is: how long will it last? After the $30 billion Bear Stearns bail-out, the answer was: a few days. The effect might last a little longer this time, but looking at the first reactions, I’d say even that is very uncertain. The rise in share prices means two things: 1/ shrewd traders are making a killing, and 2/ there are still lots of folks out there with much more money than active brain cells (there'll be far less of them this time next week).

A few more words on the Freddie and Fannie deal. It is generally accepted that this kind of government action benefits taxpayers and propective homebuyers. The former because it keeps the economy from collapsing, the latter because mortgage rates will be low(er).

It’s accepted this way, because this is after all how Paulson presented the plan. In reality, the only parties profiting are the usual suspects: banks and other financial institutions, at least those that are Hank’s friends.

US taxpayers? Get real, they are on the hook for trillions of dollars in potential losses from Fannie and Freddie, in essence for all of the rumored $9 trillion in debt they have.

There are many people who claim that most of the loans in their books are "good", but that’s not the whole story. After all, if that were the decisive factor, why did they need to be "rescued"? The more important point is that they are leveraged some 60 times, meaning they have 60 times more loans outstanding than they have capital in their accounts. If they lose on 1% of their loans, their capital is wiped out.

They are not solid institutions, they are giant hedge funds, or even simply casino’s. This level of leverage paints the picture of very heavy gambling. Which has been allowd by the US government, especially by the regulator, headed by James Lockhart, who is now in charge of the two companies. He should have been the first to be kicked out, but insted in named the boss.

Nice Lockhart quote: "they are being stabilized with the objective of returning them to normal operation" Eh, normal operation meant accumulating trillions of dollars in losses, James. Are you sure that’s what you want? No, in reality, Fannie and Freddie will be part of the government for decades, unless they’re shut down.

Prospective home-buyers? While it may seem on the surface to be benificial that mortgage rates are kept artificially low, that is a pretty blatant lie. Keeping people in the market, namely, also means that home prices are kept artificially high. So people wind up purchasing overpriced homes with their lower interest rate mortgages.

If the market would stabilize at present price levels, that would work. If not, it just draws more people underwater. In Paulson’s words: "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

Well, then let the correction take place, you would think. But no, we have to keep interest rates as low as possible, which keeps prices high, which obstructs that correction.

Who profits? The banks that write the loans, of course. The scheme simply keep rolling for a little longer, until prices sink more. And with economic problems as widespread and deep as they are now set to become, who’ll qualify for those mortgages? Don’t forget that for five years, every single burgerflipper has been able to buy a home. We’ve run out of potential buyers, at least at that scale. Hence: prices will keep falling.

One more item: the halting of dividend on preffered stocks will, according to analysts, lead to severe problems, even bankruptcy, for many smaller US banks. At the same time, continued operation at Fannie and Freddie will potentially transfer billions to the bigger banks. I say potentially, because not all will be so lucky.

This rescue is the next big step toward consolidation in the US banking system. What will be left is a small group of large banks with their greedy fingers in the F&F enabled public trough. Other big banks will fail, as will many, hundreds of them, smaller banks.

Here’s two quotes to think about:

“I can think of four large commercial banks in more tenuous positions that either Fannie or Freddie,” said one source, a hedge fund manager that asked not to be named. “Does this mean things are really even worse than we think there? Or that the government will need to step in there as well for the good of the US home owner?”

"This is not a permanent solution -- they've not saved Fannie and Freddie, what they've done is they've bought 15 months."

And last, to put this operation in its proper perspective, here’s Tim Iacono’s question:

In an apparent effort to make it look like this takeover isn't going to cost the taxpayer a tidy sum over the next couple years, the GSEs are required to pay the Treasury a 10 percent annual dividend on this preferred stock once issued. Given the way things are going these days, these dividend payments could add up over time - after all, ten percent of half the current $100 billion ceiling would be $5 billion.

Can the GSEs just sell more stock to the Treasury in order to make these payments? If so, that would be a sweet deal.

Ilargi: 2.00 PM EDT Update: Is Wamu the next whopper? In this party time mood, it’s down 17%. I'm out for most of the day, little time to respond to questions, sorry for that.

WaMu Placed on Probation Amid Management Shakeup
Government regulators have effectively placed Seattle-based Washington Mutual Inc. on probation, underscoring problems facing new Chief Executive Alan Fishman following the ouster of longtime WaMu boss Kerry Killinger.

The memorandum of understanding with the Office of Thrift Supervision forces the nation's largest savings and loan to provide the OTS with an updated, multiyear-business plan and forecasts for earnings, asset quality, capital and performance of business segments. It won't require the company to raise capital, increase liquidity or make changes to its products or services, WaMu said Monday.

Such memorandums aren't meant to imply a bank is failing but do serve as precursors to more severe enforcement actions if the bank doesn't improve. Government officials have been issuing the secret agreements to financial institutions large and small as they grapple with the nation's worst banking crisis in two decades.

On Monday, Washington Mutual's shares fell nearly 20% to $3.31 in recent trading. They have traded in a 52-week range of $3.03 to $39.25. The news of the regulatory scrutiny and the departure of Mr. Killinger reinforced the view that WaMu's financial standing is among the worst of any U.S. financial institution, according to analysts.

"The problem is very simple," said Richard Bove, banking analyst with Ladenburg Thalmann & Co. Inc. "They made a lot of bad loans and they are absorbing high levels of loan losses. The solution for their problem is to find some mechanism for reducing the bad loans. That can't be done by a new CEO."

WaMu has $53 billion in option adjustable-rate mortgages, a kind of loan where borrowers have the option of making a minimum payment that may not even cover the interest due. Some have defaulted after getting in over their heads. Of the $53 billion in option ARMs, $14 billion of these are to the riskiest segment in mortgage lending, subprime borrowers.

WaMu also has $62 billion in home-equity loans, another area suffering from high delinquencies, and it faces additional pressures in credit-card lending, analysts said. Mr. Bove predicts that WaMu will lose $40 billion over the next three years on its loan portfolio. If the economy weakens further and losses are even higher, he said, "the future of the company is questionable."

Analyst Paul Miller of FBR Capital Markets in Arlington, Va., expects WaMu to raise more capital beyond an infusion of $7 billion led by private-equity firm TPG last April. It's also possible, he added, that the company could eventually be sold. "Fishman has his work cut out for him in a big, big way," he said.

Credit Sights Inc. analyst David Hendler said in a note Monday that WaMu could face higher credit losses than predicted and that TPG could make an additional investment if the thrift faces a capital shortfall. He envisions two scenarios for the nation's largest thrift -- one being a "muddling along" period marked by possible restructuring or asset sales and the other being a "liquidity event" where the stability of WaMu's retail deposits could become "highly skittish" and regulatory intervention is required.  

But the 62-year-old Mr. Fishman said in an interview he didn't take the job to sell WaMu and he believes the thrift can remain independent and doesn't need to raise additional capital. "We've raised a lot of capital and owe it to those investors to give them value for their money and we will do that," Mr. Fishman said.

He acknowledged that the "balance sheet at WaMu clearly has some challenges" but said it lacks some of the exotic instruments, such as collaterialized debt obligations, that caused problems for commercial banks as credit dried up. "Other banks have a more diverse set of issues," he said. "WaMu's issues are more straightforward."

He lauded the WaMu brand and network, which includes 2,300 branches around the country: "I think the strategy at the highest level is really two pronged. We have to manage expenses and capital accounts and have to manage the whole balance sheet in a wholistic way and have to get people excited and continue to be motivated. That said, the WaMu franchise is so good. We have to enhance it, protect it and add to it."

"On the asset side of the balance sheet, the current environment in residential finance requires so many structural changes we have to re-imagine how we will compete in that business. WaMu has an enormous share of that business and an enormous stake in that business and we will figure all that out and that's the game plan, " he said.

History: Fannie, Freddie Seized by Federal Government
September 7 will now be remembered as the day the U.S. government took over the mortgage market. What that means for financial markets going forward has never been less certain.

This is no longer the worst mortgage crisis since the Great Depression; this is the worst mortgage crisis, period.

It’s also the end of an era. The U.S. Treasury on Sunday announced a takeover of both Fannie Mae and Freddie Mac, a move that has nearly no precedent in U.S. history. Together, the companies own or guarantee roughly $5.3 trillion in home loans, roughly half of all outstanding U.S. mortgages. The bailout will involve as much as $200 billion in capital and credit lines to both GSEs, according to documents released Sunday afternoon by the Treasury.

Treasury officials said the government will immediately purchase $1 billion in senior preferred stock from each company; the preferred stock comes with a 10 percent coupon, quarterly dividend payments and provides warrants representing an ownership stake of 79.9 percent of each GSE going forward.

All other preferred and common shares in Fannie and Freddie will see dividends halted by their new regulator, the Federal Housing Finance Agency, of FHFA — the FHFA will essentially serve as receiver for both GSEs, as both companies have been placed into conservatorship as part of the government’s plan.

Under the Treasury preferred stock purchase agreement, the government may purchase an additional $100 billion in preferred interests in each GSE if needed, although FHFA director James Lockhart suggested such a large investment likely wouldn’t be needed. But after hearing from Lockhart for weeks that the GSEs were in solid financial condition, and that the Treasury had no intention to step in, how much of whatever is said can really be believed at this point?

“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” Paulson said in a press conference on Sunday. “This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement.”

As part of the nationalization, FHFA immediately canned Fannie CEO Daniel Mudd and Freddie chairman and CEO Richard Syron, although both will stay on in transitional roles. FHFA’s Lockhart named Herb Allison, former vice chairman at Merrill Lynch & Co., to the CEO post at Fannie Mae; former US Bancorp vice chairman David Moffett will now lead Freddie Mac.

“Unfortunately, as house prices, earnings and capital have continued to deteriorate, [the GSEs] ability to fulfill their mission has deteriorated,” said Lockhart. “In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt.”

Beyond the capital injections, the federal government said it will begin purchasing unknown amounts of agency MBS on the open market, a move it said would “promote the stability of the mortgage market.” The Treasury said it will appoint two independent asset managers as financial agents of the U.S. government to manage the a government portfolio of MBS with the goal of “promoting stabiliity and protecting taxpayers.”

Which means that the U.S. government could become akin to the single largest hedge fund on the planet. Amazing to think, for anyone that has been in the mortgage market. Early sentiment suggests that the bailout may do little to quell investor’s nerves, however; the few sources we’ve talked to thus far have suggested that concern over commercial banks is likely to intensify.

“I can think of four large commercial banks in more tenuous positions that either Fannie or Freddie,” said one source, a hedge fund manager that asked not to be named. “Does this mean things are really even worse than we think there? Or that the government will need to step in there as well for the good of the US home owner?”

US banks face losses after giant mortgage bail-out
Dozens of small regional banks in the US could be plunged into financial difficulties as a result of the government bail-out of Fannie Mae and Freddie Mac. Many banks hold preferred stock in the two mortgage giants, and the suspension of preferred stock dividends was part of the small-print of yesterday's game-changing announcement by the US Treasury.

With the federal government taking a $1bn stake in the company via the issue of new superior preferred stock – which ranks above the ordinary and preferred shares already in existence – current holders last night faced uncertainty over the value of their investments.

The banking industry regulator, the FDIC, said that institutions that were adversely affected should get in touch if they feared that losses on preferred stock eroded the capital cushion required to protect depositors.

"Any negative impact will be narrowly focused only on a few smaller institutions. Regulators will be working closely with those few banks to develop capital plans to assist their recovery," the FDIC's chairwoman, Sheila Bair, said in a statement.

The FDIC takes over banks that fall into financial difficulties, and last Friday assumed control of the 11th such bank so far this year, Silver State Bank of Arizona, where the Republican presidential candidate John McCain's son Andrew served on the audit committee until July.

The suspension of dividends under Fannie Mae and Freddie Mac's new regime – which establishes a "conservatorship" under the control of the federal government – was ordered to prevent the impression that the government was bailing out existing investors, rather than acting more widely to protect the economy.

The plan, widely expected in financial markets since the Treasury promised in July to do whatever it takes to keep Fannie and Freddie afloat, was given a guarded welcome by many market participants yesterday. In particular, investors welcomed the Treasury's decision to step in as a buyer of mortgage-backed securities issued by Fannie and Freddie, thus providing direct liquidity to the mortgage markets.

Gummed-up credit markets have hurt demand for mortgage-backed securities and contributed to the cascade of losses through other kinds of mortgage derivatives. Direct government purchases should ease the burden on investment banks, whose mortgage investments have plunged in value and forced half a trillion dollars in write-downs since the credit crisis began.

Until now, the Federal Reserve, the US central bank, has been the conduit for federal intervention in the MBS market, taking these securities in as collateral for loans to investment banks.

Ben Bernanke, Fed chairman, said yesterday: "I 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-marketuncertainty."

A Treasury spokesman said it will buy $5bn of mortgage-backed securities issued by Fannie and Freddie from the open market this month, but left open the question of how much support it might ultimately provide.
That is likely to depend on conditions in the credit markets and the duration of the housing market slump, which triggered the credit crisis in the first place.

The Treasury's decision to invest directly in mortgage-backed securities and to seize control of Fannie and Freddie effectively turns it into one of America's biggest mortgage lenders – an unprecedented situation with unpredictable consequences.

Andrew Harding, director of taxable fixed income at Allegiant Asset Management in Ohio, said the move put a floor under the credit crisis. "The reality is that some action like this needed to be taken. What you will see is a tremendous rally in mortgage-backed securities, which in turn will help other credit-related spreads. This will take all credit spreads narrower. This is certainly a very, very big step to fixing the credit markets."

Few Stand to Gain on This Bailout, and Many Lose
Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.

But even after the government seized the mortgage finance companies on Sunday and dismissed their chief executives, the companies’ outgoing leaders could see big paydays — a prospect that angers many investors, particularly because ordinary stockholders could be virtually wiped out.

Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr.

Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm.

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003.

Both executives stood to make millions more from restricted stock grants and options, but those awards are now worthless because of the plunge in the companies’ share prices. Even so, their past pay — and the idea that they might receive more — irks some investors.

“This is completely outrageous,” said Richard C. Ferlauto, the director of corporate governance and investment for the American Federation of State, County and Municipal Employees, a large pension fund. “It is really a slap in the face to shareholders and homeowners whose loans are at risk and taxpayers footing the bill for a bailout.”

Whether Mr. Mudd and Mr. Syron will collect their severance package is unclear. A spokeswoman for the Federal Housing Finance Agency, the companies’ primary regulator, declined to provide details about their exit packages. F.H.F.A. officials said the compensation of their successors, Herbert M. Allison Jr. and David M. Moffett, both longtime financial industry executives, would be “significantly lower” than that of the departing chief executives.

Fannie Mae and Freddie Mac have enriched their top executives for years. Mr. Mudd’s predecessor at Fannie Mae, Franklin D. Raines, took home more than $52 million while he was chief executive from 1999 to 2004, according to Equilar data.

Mr. Raines later agreed to forfeit several million dollars’ worth of stock and options to resolve personal claims over allegations that Fannie Mae had inflated its earnings to raise executive bonuses. Even though Fannie Mae was forced to restate its earnings, Mr. Raines walked away with at least $25 million in pension benefits, as well as stock options he did not cash in — many of which are now worthless.

Mr. Syron’s predecessor at Freddie Mac, Leland C. Brendsel, took home more than $28.4 million from 1993 to 2003, the only part of his pay package that was publicly disclosed during his 13-year tenure as chief executive.

The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.

As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares.

Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment. “I am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,” said Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller.

For years, the shares of Fannie Mae, the larger of the two companies, have ranked among the most widely held stocks in America. Many ordinary investors believed that the company’s quasi-governmental status would insulate shareholders from big losses.

“People perceived they had government support of some sort,” said Byron Wien, the chief investment strategist at Pequot Capital. “The perception was they were more secure investments than they turned out to be.”
Members of the Fannie Mae and Freddie Mac rank-and-file were big shareholders, too. Stock and options could make up a fifth of employees’ total pay.

While those who bought the companies’ shares lost, short-sellers who bet against Fannie Mae and Freddie Mac won. So-called short interest in Fannie Mae and Freddie Mac stock soared in recent months as the companies’ troubles deepened.

Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to a person with direct knowledge of a recent investment letter.

Wall Street investment banks, meanwhile, are breathing a sigh of relief. Fannie Mae and Freddie Mac pay hefty fees to big Wall Street debt underwriters, and that is unlikely to change. Fannie Mae and Freddie Mac’s business was worth $1.5 billion in fees in 2007, according to a Sanford C. Bernstein report. Through the first six months of this year, that figure sank to $600 million.

Washington lobbyists, however, may be hurting. Over the last decade, Freddie Mac paid more than $94.8 million for lobbying services, in part to fend off attempts to tighten oversight, according to the Center for Responsive Politics; Fannie Mae spent about $79.5 million. The government plan will immediately eliminate that spending.

Some commercial banks and insurance companies that hold the companies’ preferred stock could suffer, too. Auditors may force those investors to mark down the value of the holdings. Sovereign Bancorp, a regional lender near Philadelphia, holds about $588 million of the securities, about 13 percent of its tangible capital, according to a research report by Keefe, Bruyette & Woods, a securities broker.

Midwest Banc Holdings, a community bank in Illinois, and Gateway Financial Holdings, which operates in Virginia and North Carolina, each have tens of millions of dollars of the preferred stock, representing more than one-third of their tangible capital, the report said. And federal banking regulators said in a joint statement that a “limited number” of smaller banks could need new financing.

The Treasury secretary, Henry M. Paulson Jr., urged those institutions to contact their regulator, which said it was “prepared to work with those institutions to develop capital-restoration plans” and other corrective action

Freddie, Fannie Bailouts Are Going to Cost Us Dearly
With parents around the nation struggling to make ends meet during tough economic times, why should they care about the federal government’s expected takeover of Fannie Mae and Freddie Mac later today?

On the surface, homeowners have reason to believe this a good thing: The Bush Administration, as well as the McCain and Obama campaigns, are all touting the takeover as a way to prevent a truly colossal meltdown of the housing and credit markets, reports The New York Times.

Is this an over dramatization? It seems not, because Freddie and Fannie are just about the only financial institutions underwriting home mortgages in large quantities. If these two companies implode, home buying in this country might come to an effective stop.
Sure, some banks and credit unions would continue to underwrite home purchases, but so many potential homebuyers would be forced to sit on the sidelines that price cutting is likely to accelerate.

The more home prices drop, the more struggling homeowners are likely to give their house to the bank – or in this case Freddie and Fannie – further swelling inventory. Can you say death spiral? Since Freddie and Fannie own or back $5.3 trillion in mortgages that might sour, the federal government realized that it would be on the hook whether it commandeers the companies over or not.

It would seem the U.S. government has no choice but to take over the two quasi-government companies. So as home buyers let out a big sigh of relief, taxpayers should be truly worried. For the takeover to work, the federal government is taking on two key roles: taxpayers will be responsible for Freddie’s and Fannie’s considerable and expected losses. The Congressional Budget Office predicted in July that a bailout could cost between $25 billion and $100 billion, reports the Los Angeles Times. The two companies lost about $14 billion last year.

But that’s just the loss side of the column. The other big taxpayer expense will be the immediate need to infuse the companies with cash so they can continue buying mortgages. Failure to do so would doom the housing market for the foreseeable future.

Should the federal government engage directly in a purely capitalistic part of the economy? While I do not harbor the “capitalism-at-all-costs” mentality, why should the U.S. government be involved in home buying instead of health care, which at least can be viewed as a social responsibility?

And no matter how you look at it, the costs of this bailout will be passed on to future generations on top of the considerable debt this nation already has incurred. I can’t help but wonder how the presidential candidates can be promising tax cuts? Factor in two ongoing wars, and the math is pretty obvious: This bailout is going to raid the American wallet in a very direct manner, either through taxes or economic pain, sooner or later.

London halts trading after shares surge on US bailout
Trading on the London Stock Exchange (LSE) was halted this morning because of a "connectivity issue" on one of the busiest days of the year following America's £100 billion bailout of Fannie Mae and Freddie Mac. The LSE suspended connection to the exchange before 9am after some customers experienced problems. The operator admitted it was unsure when trading would restart while the cause of the problem is unknown.

The shutdown came amid a day of frenzied trading as dealers responded to last night's rescue by the US Government of Fannie Mae and Freddie Mac, the loss-making mortgage groups that together control £3 trillion in home loans. Before the glitch, the FTSE 100 had climbed nearly 4 per cent, up 199.5 points, to 5,440.2, a level at which the index has remained.

Today's rally helped reverse last week's losses on the FTSE, which experienced its worst week in six years after the index of 100 blue-chip stocks closed down 7 per cent on poor US employment data and fears over the future of Freddie Mac and Fannie Mae.

It emerged last night that the US Government had taken control of both mortgage groups and promised to inject tbillions of US taxpayers' money as one of a series of measures designed to restore order to America's stricken financial system. Other measures included the ousting of the chief executives of both companies and the elimination of future dividends to shareholders.

It emerged today that Daniel Mudd, the departing head of Fannie Mae, and Richard Syron, who is to leave Freddie Mac, will share in a combined payoff of $23 million (£13 million) when they leave the groups. Mr Mudd is expected to receive $9.3 million in pay and retirement benefits under the terms of his contract, while Mr Syron could walk away with $14.1 million.

The US Government's decision to guarantee the survival of the two groups is good news for British banks and, in turn, British homeowners. British banks have invested billions of dollars in bonds insured by Freddie and Fannie and they could have translated into huge losses if either group had gone under, leaving banks with even less money to make available for mortgages.

President George Bush said the failure of Freddie or Fannie would have been "unacceptable". He added: "Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing.

"Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth." Henry Paulson, the US Treasury Secretary, said: "A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

U.S. Losses on Fannie, Freddie May Be $300 Billion, Poole Says
William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac, the mortgage giants being taken over by the Federal government.

"I would not be surprised if their total losses aggregate about 5 percent of their obligations" of about $6 trillion, Poole said today in an interview on Bloomberg Radio. "Five percent does not seem to me to be an outrageous guess."

Poole welcomed the decision to put the companies into conservatorship by the Federal Housing Finance Agency, calling it preferable to action by the Federal Reserve. He said financial fallout from Fannie and Freddie was likely to be a long-term drain on the Treasury.

"It's extremely healthy that it's now the Congress and the Treasury and not the Federal Reserve putting funds in," he said. "It's not the purpose of a central bank to put funds in to save or bail out failing companies."

Treasury Secretary Henry Paulson said today he would replace the chief executives of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac and eliminate their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth.

The Treasury said it would reduce the portfolios of both companies by 10 percent a year starting in 2010. "I think that's a good way to go, and I just hope that the government can complete that course," Poole said.

S&P slashes Fannie, Freddie preferred stock to junk
Standard & Poor's on Sunday cut the ratings on Fannie Mae and Freddie Mac preferred stock to junk status after dividends were eliminated in a takeover bu the U.S. government.

S&P boosted its outlook on the housing finance companies' "BBB-plus" subordinated debt ratings to positive from negative amid signs interest payments would not be affected.

The Treasury is taking an equity stake in the government sponsored enterprises to shore up their financial stability, and placing them under conservatorship to manage their businesses of providing money to the U.S. housing market.

The preferred stock ratings dropped to "C" from "BBB-minus," according to the S&P statement. It was the second cut by S&P in less than two weeks. S&P also affirmed the "AAA" senior debt ratings of the GSEs, and cut their risk-to-the-government ratings to "R" from "A-minus," before withdrawing that designation.

Fannie, Freddie: Feds Step In
With the nation riveted on what the next President will do, the current Administration showed on Sept. 7 that it's not ready to take its hands off the economy's steering wheel quite yet. The Bush Administration announced that it had seized control of Fannie Mae and Freddie Mac, two huge but dysfunctional companies whose financial difficulties were weighing down the U.S. housing market and threatening global financial upheaval.

It was a dramatic move for the Republican Administration. The two privately owned companies are in effect being nationalized, something that's ordinarily anathema to conservatives. Treasury Secretary Henry Paulson, who announced the action at a rare Sunday news conference, justified it by saying that Fannie and Freddie are so "large and interwoven" into the global financial system that "a failure of either would cause turmoil around the world."

The Bush Administration's hand was forced by a dramatic deterioration of the housing market, which eroded the balance sheets of Fannie and Freddie and frightened the global investors who ordinarily support them. Together, Fannie and Freddie have about $5 trillion in outstanding debt and mortgage-backed securities. Home prices are in a record swoon, falling 15% over the past year in 20 major metro areas., a real estate Web site, estimates that 29% of the homeowners who bought in the past five years owe more on their homes than they are worth. On Sept. 5, the Mortgage Bankers Assn. announced that the share of homes entering foreclosure in the second quarter reached 1.19%, the highest in the 29-year history of its survey.

Allowing either Fannie or Freddie to fail, Paulson said, would hurt families' savings, their ability to get home and auto loans, and even hamper economic growth and job creation. The government will boot out the CEOs of both Fannie and Freddie—Daniel Mudd and Richard Syron, respectively—though they will stay on in advisory roles during a transition. It will ban the companies from lobbying.

Treasury will invest up to a maximum of $100 billion in each of the companies in the form of senior preferred shares, as needed to make sure they retain a positive net worth and thus retain the confidence of investors. Treasury will also make secured loans to the two companies if needed, and plans to break precedent and buy some mortgage-backed securities itself to provide financing to housing.

Fannie and Freddie support the housing market by purchasing mortgage loans from the banks that originate them, giving the banks the cash to make more loans. They package those loans into securities and ensure repayment. They sell the securities to investors around the world, or retain them for their own portfolios.

At one point earlier this year, as the credit crunch worsened, the two companies were responsible for about 80% of all loans being originated in the U.S. But the rise of foreclosures weakened their balance sheets and raised their borrowing costs, reducing their ability to support the market. As the housing downturn worsened, the two companies came to be seen as part of the problem instead of part of the solution.

Technically, Fannie and Freddie have been placed under "conservatorship," a term that ordinarily means they are being stabilized with the objective of returning them to normal operation. In fact, that's how conservatorship was described by James Lockhart, director of their regulator, the Federal Housing Finance Agency, who joined Paulson at the Sunday press conference.

Under the government's conservatorship, Fannie will be run by Herb Allison, a former CEO of Merrill Lynch who most recently ran TIAA-CREF , the big teachers' pension and retirement fund. Freddie will be run by David Moffett, former vice-chairman of US Bancorp.

In reality, it is almost inconceivable that Fannie and Freddie will get back to business as usual. Paulson made it clear he thinks the companies were structured incorrectly from the start and had an inherent conflict of interest between their duties to shareholders and their obligations to support homeownership.

Because of Fannie and Freddie's public obligations as well as their enormous size, investors in the U.S. and around the world correctly surmised that the federal government would never let them fail. In the future, Paulson said, "government support needs to be either explicit or nonexistent."

Paulson also set a deadline for reform, which comes after the Bush team is out of office. He said that under the timeline he envisions, Fannie and Freddie will expand their operations to support the hobbled housing market by buying or insuring more and more mortgages between now and the end of 2009. Starting in 2010, though, Paulson said the two companies should begin shrinking their portfolios at a rate of 10% a year.

December 2009 is also the planned expiration date for a new secured lending facility that's available to Fannie, Freddie, and the 12 federal home loan banks. (Secured loans are ones in which the borrower must post collateral, such as mortgage-backed securities.)

It's impossible to say how much the effective takeover of Fannie and Freddie will cost taxpayers. If housing prices begin to recover and foreclosure rates don't get too high, the cost to the government could be very small or zero, because Treasury will earn a return on its preferred shares and get all its secured loans repaid.

Still, the deal is likely to draw criticism because it puts taxpayers at risk while boosting the value of Fannie and Freddie's bonds and mortgage-backed securities, which are held by banks and other investors around the world. Asian central banks, in particular, are large holders.

One group that won't be getting any kind of a bailout: Fannie and Freddie's ordinary common shareholders. They stand last in line for any money the two companies make. Share prices of both Fannie and Freddie have lost more than 90% of their value over the past year, in anticipation of a takeover. In after-market trading on Sept. 5, as word of the conservatorship plans leaked out, Fannie shares were trading around $5.50, down from $70 a year ago, while Freddie Shares were at about $4, down from $65 a year ago.

Senator Barack Obama, the Democratic Presidential candidate, released a statement on Sept. 7 saying, "Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy." He said he wasn't yet ready to say whether Treasury's solution was the right one.

The Associated Press reported that Senator John McCain, the Republican nominee, said at a rally in Albuquerque: "We need to keep people in their homes, but we can't allow this to turn into a bailout of Wall Street speculators." Doug Holtz-Eakin, McCain's top economic adviser, said that longer term, "We believe these institutions should not be making money" through government support. "They have to shrink to a point where they are not a threat, that they are not operating essentially as a big hedge fund."

Just one question on the Fannie and Freddie bailout
The financial news media is all over today's nationalization of mortgage giants Fannie Mae and Freddie Mac by the U.S. government. There's just one question that comes to mind.

One of the terms of the agreement stipulates that each GSE will receive up to $100 billion from the Treasury Department (at least, that's the ceiling for now) in return for preferred stock as needed in order for the mortgage giants to remain solvent.

In an apparent effort to make it look like this takeover isn't going to cost the taxpayer a tidy sum over the next couple years, the GSEs are required to pay the Treasury a 10 percent annual dividend on this preferred stock once issued.

Given the way things are going these days, these dividend payments could add up over time - after all, ten percent of half the current $100 billion ceiling would be $5 billion.

Can the GSEs just sell more stock to the Treasury in order to make these payments?

If so, that would be a sweet deal.

U.S. Takeover of Fannie, Freddie Offers 'Stopgap'
The U.S. Treasury's takeover of Fannie Mae and Freddie Mac is aimed at keeping the companies going into 2009, while leaving the next president and Congress to decide their long-term structure.

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed the two firms in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent.

"Some of this is a stopgap to try to prevent the mortgage market from falling apart," former Federal Reserve Bank of St. Louis President William Poole said on Bloomberg Radio. The federally chartered, shareholder-owned structure, with risks covered by taxpayers, is "an unacceptable situation," he said, projecting the Treasury may need to cover as much as $300 billion of losses.

Yesterday's action leaves open the option favored by former Federal Reserve Chairman Alan Greenspan, to split up and sell off the companies, or a full nationalization that would cement the government's role in mortgage markets. Avoiding a decision on the issue enhances the likelihood of congressional backing for the emergency steps, Democratic Senator Charles Schumer said.

"The new Congress and the next administration must decide what role government in general, and these entities in particular, should play in the housing market," Paulson said yesterday in Washington. There is a consensus now that "they cannot continue in their current form," he added.

The FHFA, which will run the conservatorship, ejected Fannie CEO Daniel Mudd, 50, and Freddie CEO Richard Syron, 64. They were replaced by Herbert Allison, 65, former CEO of TIAA-Cref, and David Moffett, 56, who was a US Bancorp vice chairman. The Treasury also said yesterday it will provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

"This is not a permanent solution -- they've not saved Fannie and Freddie, what they've done is they've bought 15 months," said Bill Ackman, founder of Pershing Square Capital Management in New York, which has sold short the two companies, or bet on declines in their securities. "It's a band aid. They haven't permanently recapitalized the companies."

Fannie fell 59 percent and Freddie dropped 56 percent in European trading today. Fannie dropped $4.06 to $2.98 at 9:56 a.m. in Frankfurt and Freddie slumped $2.86 to $2.24, according to data compiled by Bloomberg. Asian stocks rallied the most in seven months and Treasuries fell as the takeover buoyed confidence the U.S. will prevent the global credit crisis from deepening.

The takeovers bring Fannie, formed after the Great Depression and spun off in 1968, and Freddie, created in 1970, back under the government's fold. It's the biggest step yet in officials' efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns.

"This action should lead to an increased availability of mortgage financing, which will help achieve stability in housing," Bank of America Corp. Chief Executive Officer Kenneth Lewis, said in e-mailed remarks. Paulson consulted with Lewis last week, according to two people briefed on the discussions. Bank of America spokesman Scott Silvestri declined to comment on the talks.

Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake. As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.

While common stockholders of Fannie and Freddie won't be eliminated, they will be last in line for any claims, Paulson said. Preferred shareholders will be second in absorbing losses, he said. Interest and principal payments will continue to be made on the companies' subordinated debt, Lockhart said.

The government is taking an increasing role in financial markets, after the Fed six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.'s collapse. Chairman Ben S. Bernanke praised yesterday's action in a statement.

The government takeover comes almost two months after Paulson first sought emergency powers to inject capital into the beleaguered mortgage-finance companies. Congress approved the measure in legislation signed by President George W. Bush on July 30. Paulson had indicated until early last month that it was unlikely he'd use the authority, and then kept silent even as investors clamored for clarity on how a government intervention would work.

Included in yesterday's measures is a Treasury program to purchase new mortgage-backed securities from the two companies, starting with a $5 billion purchase this month. The Treasury will also hire independent asset managers to purchase and run the portfolio of mortgage-backed securities it will buy. "There is no reason to expect taxpayer losses from this program, and it could produce gains," the department said.

"Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers," Schumer of New York, who heads the congressional Joint Economic Committee, said in a statement. "This plan will be met with broad acceptance in Congress because it doesn't prejudge the ultimate fate of Fannie Mae and Freddie Mac."

In Crisis, Paulson's Stunning Use of Federal Power
Hurricane Hank swept through the nation's capital yesterday with gale-force regulatory winds and a tidal surge of federal cash, upending two of Washington's biggest enterprises and permanently changing the landscape of housing finance in America.

In wresting control of Fannie Mae and Freddie Mac, and in authorizing the Treasury to begin purchases of mortgage-backed securities, Secretary Henry M. Paulson Jr. has taken responsibility for assuring that low-interest loans will continue to flow into the country's hard-hit housing markets. Not since the early days of the Roosevelt administration, at the depth of the Great Depression, has the government taken such a direct role in the workings of the financial system.

Although the details of yesterday's takeover are complex, the rationale is quite simple: to restore some semblance of normalcy to the housing market. Paulson and other policymakers think that until that happens, neither financial markets nor the wider economy will be able to regain their footing.

Fannie and Freddie did not go gently into conservatorship. Although their access to badly needed equity capital had dried up and their borrowing costs had increased, they had hoped that they could muddle through by raising fees and demanding higher interest rates from borrowers.

But that plan was cut short when Paulson, backed by Fed Chairman Ben Bernanke and their newly empowered regulator, James Lockhart, concluded that Fannie and Freddie could no longer reconcile their sometimes-conflicting obligations to shareholders and homeowners without posing additional risks to an already shaken financial system.

Fannie and Freddie could have fought the government in court, but that wasn't much of an option for companies whose business model was based on the perception that they were backed by the government. The market would have shut them down long before the first briefs were filed.

Under the deal they could not refuse, Fannie and Freddie directors and top executives will lose their jobs. Shareholders will lose their dividends, voting rights and most of their ownership stake, while agreeing to pay dearly for the government's money and backing.

Left unharmed will be holders of trillions of dollars in Fannie and Freddie debt -- or securities backed by mortgages that Fannie and Freddie have insured against default -- who will get all their money back, with interest.

In figuring out where all this goes, it is useful to understand how we got to this point. Until this weekend, Fannie and Freddie have been unique entities -- for-profit, shareholder-owned companies that were required by government charters to provide low-cost capital to secondary mortgage markets in good times and bad.

And for most of the past 40 years, the companies have managed to balance those missions fairly successfully. Shareholders have earned a better-than-average return on their investment, while homeowners have had access to mortgages that not only have lower rates than in other countries, but rates that they can lock in for up to 30 years.

But in the mid-1990s, things began to change. Rather than being satisfied with modest growth, Fannie and then Freddie began promising Wall Street double-digit earnings growth, which required them to grow their balance sheets well beyond what was necessary to assure liquidity in the mortgage market.

Instead of just buying mortgages, insuring them and selling them in packages to investors, they bought more of them for their own portfolios, using ever-increasing amounts of borrowed money. Buying their own securities was profitable, but it left them highly exposed if anything went really wrong with the housing market, which is exactly what has happened.

By 2005, however, Fannie and Freddie found they were losing market share to private competitors offering new, highly profitable mortgage products that they had generally ignored -- variable-rate mortgages to homeowners with poor credit histories who offered little or no documentation and borrowed more than 80 percent of the estimated value of their property.

To varying degrees, Fannie and Freddie decided to jump into these markets, both by insuring and packaging these mortgages and keeping some of them on their own books. That decision, too, has now come back to haunt them.

It is fair to blame Fannie and Freddie executives for these misjudgments, although they were no more misguided than others in the industry. Some of the blame also goes to Fannie and Freddie's regulators -- both Lockhart and his predecessor -- who failed to use their limited powers to rein in the companies' growth.

And a good chunk of the responsibility should be assigned to elected politicians -- the Clinton and Bush administrations, which encouraged the jump into the subprime market by imposing more ambitious "affordable housing" goals on the companies, and Congress, which spent much of the past eight years locked in a bitter ideological battle over Fannie and Freddie rather than giving their regulator the stronger powers and mandate that it needed.

It will now take several years at least for Fannie and Freddie to dig out of their financial holes, even with the infusion of taxpayer money. But that will not resolve the long-standing question of whether a for-profit company with some sort of government backing is the best way to assure a steady flow of low-cost capital to the housing markets.

The crisis reminds us that, left on its own, the private sector will over-invest when the housing market is hot and then abandon the market when boom turns to bust. That's why Fannie and Freddie were invented, and why keeping them afloat now is crucial.

But the lesson from the recent debacle is that if we are going to rely on government to bail out private entities, then government ought to have a much stronger hand in making sure a rescue is never needed.

Treasury to buy $5 billion in Fannie, Freddie MBS
The U.S. Treasury expects to purchase $5 billion of Fannie Mae and Freddie Mac mortgage-backed securities within the next month as part of its takeover of the mortgage finance giants.

Senior government officials told reporters in a news briefing the program would be the first taxpayer cash outlays associated with the plan to put Fannie Mae and Freddie Mac into a government conservatorship. The purchases will be on the open market and will be managed by a private investment manager appointed by the Treasury.

This week, the Treasury will receive $1 billion in a new class of senior preferred stock from each of the two companies as "compensation" for signing the agreement to support the two main sources of U.S. mortgage liquidity, the officials said. This stock has a 10 percent coupon.

The Treasury also will receive warrants representing 79.9 percent ownership share of each firm, but the officials said the government has no plans to exercise those warrants, which carry a nominal exercise cost of less than $1 a share.

The officials said the Treasury has set up an automatic mechanism to inject fresh capital into Fannie Mae and Freddie Mac through senior preferred stock purchases when their liabilities exceed their assets according to their quarterly financial reports. The earliest this could start would be within 60 days of the companies' September 30 report, the officials said.

The current limit on the quarterly preferred stock purchases of $100 billion per institution was a figure chosen "to provide market stability", they added.

The officials insisted the federal takeover of the two government-sponsored enterprises was not analogous to a bank failure, in which an insolvent institution is put into receivership and its deposits shifted to other banks and its shareholder equity eliminated. They said Fannie Mae and Freddie Mac would continue as going concerns and common and existing preferred shareholders would not be wiped out.

The step was taken largely because a lack of market confidence in Fannie and Freddie impaired their ability to raise new equity capital in the face of mounting credit losses, threatening to cut off the flow of new mortgages to homebuyers and worsen the U.S. housing collapse.

Through consultations with the Federal Reserve, the new Federal Housing Finance Agency and Treasury GSE adviser Morgan Stanley, hired just a few weeks ago, Treasury officials decided they had to step in.

"It became clear ... the financial conditions of the GSEs is deteriorating. There are growing losses in their credit book and their ability raise capital in private markets were impaired throughout the summer and through the fall here," one of the officials said.

$5,5 trillion deal ‘to save the world’
The largest financial bailout in history was launched on Sunday to stop the world's economy going into a nosedive.

The US government has put billions of pounds of its taxpayers' money on the line to prop up troubled mortgage lenders Fannie Mae and Freddie Mac – which hold $3trillion worth of mortgages. It is hoped the move to nationalise the two organisations on a temporary basis will stabilise the property market on both sides of the Atlantic.

Financial analysts have welcomed the move, saying it would give relief to banks and other lenders, even if it would have little impact on homebuyers in Britain. US treasury secretary Henry Paulson said: 'Fannie Mae and Freddie Mac are so large and interwoven in our financial system that a failure of either of them would create great turmoil in financial markets here and around the globe.'

The Federal National Mortgage Assoc?iation and the Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac, own or guarantee almost half of home loans in the US – the equivalent of twice the British economy. Their obligations are 25 times bigger than those of the Northern Rock, which was nationalised earlier this year after running into difficulties.

The two companies have lost nearly £8billion this year and their stock value has fallen by more than 90 per cent. They do not lend directly to customers but buy mortgages to sell on. It means they have to payout when borrowers default. The rescue deal could cost US taxpayers £12.5billion but, if the two had failed, the cost of mortgages would have rocketed, adding to turmoil in the housing market.

George Bush said the two companies were unable to 'continue to operate safely and soundly', which posed an 'unaccep?table risk to the broader financial system and our economy'. Financial expert Allyson Stewart-Allen said the deal was 'very welcome news' for banks and other lenders in Britain.'It will give them some relief because their loan portfolio is guaranteed, effectively by the US taxpayer,' she added.

Treasury Extends Secured Credit Line to Federal Home Loan Banks
The U.S. Treasury extended a secured credit facility to the Federal Home Loan Banks, the government- chartered cooperatives, allowing them to borrow through the end of next year.

Any loans would be backed by Fannie Mae or Freddie Mac mortgage securities or loans that the banks make to their owners, Treasury Secretary Henry Paulson said in a statement in Washington today. The Federal Home Loan Banks, or FHLBs, are owned by financial institutions that also borrow from the banks.

The Treasury, which made similar credit available to Fannie and Freddie as the U.S. today took over those companies, received the authority to provide the credit in a housing law enacted in July. Like Fannie and Freddie, the nation's 12 FHLBs have been paying record yields over U.S. government notes to sell bonds in the so-called agency debt market.

The FHLBs are "very unlikely" to need to use the program, Federal Housing Finance Agency Director James Lockhart, their regulator, said at a press conference today. The FHLBs have larger capital reserves than Fannie and Freddie and all but one of the regional lenders are profitable, he said.

"We are pleased that the U.S. Treasury is creating this backstop facility to ensure stability and market access," John Fisk, chief executive officer of the system's office of finance in Reston, Virginia, said today in an e-mailed statement.

The Federal Home Loan Bank system is the largest U.S. borrower after the federal government. The FHLBs, lend money to more than 8,000 thrifts, credit unions, insurers and commercial banks at below-market rates, mainly to finance their mortgage holdings. The banks also buy and hold mortgage-related assets.

Any loans to Fannie, Freddie or the FHLBS are likely to be for less than one month but no shorter than one week, the Treasury said. Loan amounts will be based on available collateral. The target interest rate for the loans is the equivalent of the London interbank offered rate of the same term, plus 0.50 percentage point, the statement said.

The FHLBs had about $1.34 trillion of assets on June 30, mostly eligible collateral for the lending program, and $1.25 trillion of debt, according to the finance office, which manages their collective debt sales.

Key facts on plan to takeover Fannie, Freddie
The U.S. government on Sunday announced a takeover of the two mortgage giants Fannie Mae and Freddie Mac to help support the ailing U.S. housing market and economy, in what could be the largest financial bailout in the nation's history.


The two government sponsored enterprises (GSEs) are placed into conservatorship and will be managed by their current regulator, the FHFA on a temporary basis.

The new chief executive of Fannie Mae will be Herb Allison, from pension fund TIAA-Cref and Merrill Lynch, replacing Daniel Mudd. The new ceo of Freddie Mac will be David Moffett from US Bancorp. Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Both Fannie and Freddie will be allowed to grow their guarantee mortgage backed securities books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.


The U.S. Treasury has committed to buy Senior Preferred Stock in each GSE to maintain their capital and provide security for senior and subordinated GSE debt holders and to help stabilize the GSE mortgage-backed securities market.

This senior preferred stock will be senior to all other preferred stock, common stock or other capital issued by the GSEs. In order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated. Subordinated debt interest and principal payments will continue to be made.

The GSE's common stock and existing preferred shareholders will bear any losses ahead of the government.
The Treasury will initially purchase an upfront $1 billion worth of senior preferred stock in each GSE, with a 10 percent coupon and paying quarterly dividend. It will also receive warrants for the purchase of common stock representing an ownership stake of 79.9 percent in each GSE going forward, and receive a quarterly fee from the GSEs starting in 2010.

Treasury could buy up to $100 bln senior preferred stock in each GSE going forward, an amount chosen to demonstrate a strong commitment to the GSEs' creditors and mortgage backed security holders. This number is unrelated to the Treasury's analysis of the current financial conditions of the GSEs.

If the Federal Housing Finance Agency determines that a GSE's liabilities have exceeded its assets under generally accepted accounting principles, Treasury will contribute cash capital to the GSE in an amount equal to the difference between liabilities and assets.

The senior preferred stock shall not be entitled to voting rights. In a conservatorship, voting rights of all stockholders are vested in the conservator.


Treasury purchase GSE mortgage-backed securities (MBS) in the open market to broaden access to mortgage funding for current and prospective homeowners as well as to promote market stability. The U.S. Treasury expects to purchase $5 billion of mortgage backed securities from Fannie Mae and Freddie Mac within the next month. Additional purchases will be made as deemed appropriate.


A new Government Sponsored Enterprise Credit Facility (GSECF) was announced that will provide secured funding on an as needed basis by the Treasury Secretary. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are eligible to borrow under this program if needed until December 31, 2009 as mandated by Congress in July.

Funding will be provided directly by Treasury from its general fund held at the Federal Reserve Bank of New York (FRBNY).

The rate on a loan request ordinarily will be based on the daily LIBOR fix for a similar term of the loan plus 50 basis points (LIBOR +50 bp). The rate is set at the discretion of the Treasury Secretary with the objective of protecting the taxpayer, and is subject to change.

Call for the resignation of Ben Bernanke for being the idiot (or liar) who just weeks ago told Congress Fannie and Freddie would be just fine
At what point is enough enough? At what point do you completely lose trust in your elected (and unelected) officials in charge of our government and our economy? Or has that point come and gone?

At least Paulson and Bush will be gone in a few weeks. Good riddance. But Bernanke should also be shown the door.

Here's the wise Fed chairman from a few weeks back. Either the town fool and unqualified for his job, or one of the biggest liars in America. You choose.

Fannie And Freddie Are Fine, Bernanke Says

Chairman Ben Bernanke of the Federal Reserve told Congress on Wednseday that he believes Fannie Mae and Freddie Mac will make it through the storm in the U.S. housing market.

On Bernanke's second day before Congress, this time in front of Rep. Barney Frank's House Financial Services Committee, the Fed chairman said the troubled Fannie Mae and Freddie Mac were adequately capitalized, and were in no danger of failing.

Delinquencies, foreclosures rise to more than 9 percent of US home loans in second quarter
The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with bad credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.

The Mortgage Bankers Association said Friday that more than 4 million American homeowners with a mortgage -- a record 9 percent -- were either behind on their payments or in foreclosure at the end of June. "The problem that policymakers and Wall Street once assured us was 'contained' to subprime mortgages has proven to be anything but," Mike Larson, a real estate analyst with Weiss Research, said in a research note.

As the economy falters and home prices keep falling, concern is building about a second wave of mortgage defaults flooding the market through 2010. On Friday, the Labor Department said the nation's unemployment rate shot up to a five-year high of 6.1 percent in August. A drop in income -- whether through a lost job, divorce, death of a spouse, or health problems -- is the No. 1 reason people fall beyond on their mortgages and lose their homes.

But mortgage defaults and foreclosures in many areas, especially California and Florida, can also be blamed on egregious lending practices and rampant speculation by homebuilders and small investors alike. "We are unlikely to see a national turnaround until we see a turnaround in the two largest states," with the most outstanding home loans, said Jay Brinkmann, the Mortgage Bankers Association's chief economist.

The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979. The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.

New foreclosures rose from the first quarter in 35 states and Washington, D.C. The biggest increases were in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio. New foreclosures actually declined in Texas, Massachusetts and Maryland. Both Maryland and Massachusetts recently passed laws to slow the foreclosure process and give borrowers more time to catch up on their payments.

Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter. But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.

What's driving up the delinquency rate now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets. More than one out of 10 borrowers with a prime ARM is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter, and is expected to rise as more homeowners see their monthly payments spike.

Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance. Defaults on these mortgages, which earned the nickname "liar loans" because borrowers often did not document their incomes, are costing Fannie Mae and Freddie Mac billions of dollars. The Treasury Department has even pledged to bail out the mortgage finance companies if necessary.

With home prices plummeting, particularly in California, Nevada, Arizona and Florida, many borrowers with these exotic loans now owe more on their homes than they are worth. Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits -- typically around 10 to 25 percent more than the original loan.

Those resets can increase the borrower's monthly payment by more than $1,000 a month on average, Fitch Ratings said in a report this week. And nearly half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said.


EBrown said...

I and S,
I wonder if you saw this article for the NY Times (I didn't see it in the rattle) -

I think Krugman is pretty full of it with his claims that the FRE and FNM bailout is good overall, but I did wonder about his use of the term "debt deflation".

You've done a good job of hammering home how inflation and deflation are monetary phenomena, not in and of themselves price increases or decreases. I guess my question is this - is there any kind of deflation other than "debt deflation"? Perhaps government repudiation or repossession of currency could be called "currency deflation", since it would take money out of circulation. Is he trying to draw a distinction between the two, hence his use only of the term "debt deflation"?. Thanks.

EBrown said...

PS - all you Earthlings out there. Don't forget to show I and S how much all their hardwork is appreciated by hitting the tip jar up top!

Greenpa said...

Hm. So; here's my projected headline for Month 16:


It's all a plot. (ha ha) Cheney/Paulson are intending to allow Obama to win the US elections. Then, when the financial system goes totally to hell in the following months- guess whose fault it is?

Time for the military- finally - to step in and re-establish order and competence in government; headed by, of course, the Great Minds of Wall Street.

Oh, so funny. Am I joking? I wish I knew.

Greyzone said...

Yes, the only question is how long this new bubble will last. My gut says not very long, as Ilargi says, but with the irrationally exuberant species known as homo sapiens, you can be fooled into all sorts of oddball scenarios. In other words, don't bet on this. While the market may rise short term, do you think that you personally can make the call when it's going to turn tail and run south again?

On another note, September 7, 2008 will be marked in history as an important day, one that saw the last vestiges of the old republic shoved aside in favor of the global imperialism of the last several decades. It's official now - the US is trying to rescue not just Wall Street but the entire global financial system.

They will fail and the failure will be catastrophic beyond the comprehension of most even reading this blog. This economic collapse, when it is done, coupled with the limits to growth resource constraints currently facing the entire planet, coupled with climate change - well, that trio of bad boys may mark the end of industrial civilization as we have known it.

The Lizard said...

"Am I joking? I wish I knew."

Let's hope not, actually.

Yes, "waiting for the other shoe to drop" is a horrid cliche, but phrases take hold of the imagination because they are utterly apt again and again.

TIming is all: does it happen before the Inauguration or before the Election?

Anonymous said...

This stuff is all so frightening. But I am understanding the very fundamentals of it all. However, I am a Canadian and up there, particularly Calgary, if you utter the word depression/recession - people think you are doing acid. We also have a credit crisis and don't tell me our banks aren't in trouble. In Calgary, things are just starting to change, ie. more homes being listed and taking longer to sell, but no significant price drops yet. I will probably get laid off and lose my job, so even though I no longer own a home, I could be unemployed. When I talk to seniors about the dirty thirties - it sounded like a living nightmare. It seems that globally we're all heading down a similar slide again - and Canada won't be left off the slope.

Anonymous said...


Denninger wrote today :
"Thirteen ``major'' dealers of credit-default swaps agreed ``unanimously'' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said."

Comments ?


Anonymous said...


Some other comments from yesterday.

Stoneleigh, I am not sure why you adressed your remarks yesterday at 17.29 to me, but no matter, I read them with interest.

Concerning the remarks by DLowe about there being nothing left to take from taxpayers without angering them, I would bet that in times of trouble, the U.S. would be one of the countries that could successfully obtain a great deal more from the population in the name of patriotism.

That is both grand and tragic.

About the debate proposed by Freddie Freeloader, I would say that Puplova sounds very confused. "As the U.S. economy goes into a hyperinflationary depression...". One must wonder if Puplova knows what a depression is.


Anonymous said...

I saw over on the implode-o-meter site that someone was asking the question about whether the bailout was because F&F defaulted. Someone asked yesterday what the crash of the CDS market would look like, do you agree that this might be it?

Also, I am still seeing discussion that the F&F bailout was really for the benefit of foreign central bank debt holders. I referenced an iTulip piece a few weeks back that spoke about how foreign central banks were switched over to agency bonds with the assurance that they were as good as treasuries. Is this move really designed to keep the foreign banks holding the same levels of agency debt? This seems a reasonable explanation to me in that I think the government really wants to prevent a massive downgrade on US Treasury bonds and a huge high in our interest rates. Wouldn't this be worse than a F&F takeover? Or are we so far gone that there is really no way to prevent this? Are we on the verge of defaulting on our treasury debt?

Thanks for all the great information and analysis.


Anonymous said...

S&I, I have followed you for a long time and you provide an invaluable service to us here. I just have to say that the "wild card" of what this "democracy" does next is driving me crazy. Today I started my day reading every article concerning this historic event in the WSJ. Disappointed by the glossing over and taking statements at face value of Paulsen, Bernanke, etc. I couldn't wait to get here to see your more accurate analysis of this tragic state of our country/world. This truly feels like the beginning of the end. Keep up the good work.

Greyzone said...

Stoneleigh, yesterday you said "Globalized capitalism has created a debt-monster that it can no longer control, even with desperate double-or-nothing bubble-pumping measures."

I agree with that but I am not sure that it's a cut-and-dried assumption that our leaders will choose to deflate. I do not think they are actively trying to deflate but rather, I think our leaders still believe they can control this beast.

Rather, I believe that deflation will simply trump all their efforts and take it down that particular road regardless of what they believe or attempt to do.

Ilargi said...


What Stoneleigh said, and I agree with, is that deflation is not "a choice".

Other than that, I'll let her answer you question.

Ilargi said...

Actually this is Stoneleigh writing on Ilargi's laptop as we're away from home at the moment.

Greyzone wrote: I do not think they are actively trying to deflate but rather, I think our leaders still believe they can control this beast.

Rather, I believe that deflation will simply trump all their efforts and take it down that particular road regardless of what they believe or attempt to do.

I don't think they're trying to deflate either - far from it in fact. They're desperately trying to hang on to business as usual, which means pumping out credit. I fully expect their efforts to be overwhelmed by events however.

Deflation is the last thing anyone would choose, but as I said I don't think anyone is in a position to make a choice. Once a credit bubble has reached its maximum extent, it will implode no matter what anyone does. All those who fancy themselves to be in control can do is to make matters worse, which I'm confident they'll find a way (or many ways) to do.

Ilargi said...

Actually this is Stoneleigh writing on Ilargi's laptop as we're away from home at the moment.

Greyzone wrote: I do not think they are actively trying to deflate but rather, I think our leaders still believe they can control this beast.

Rather, I believe that deflation will simply trump all their efforts and take it down that particular road regardless of what they believe or attempt to do.

I don't think they're trying to deflate either - far from it in fact. They're desperately trying to hang on to business as usual, which means pumping out credit. I fully expect their efforts to be overwhelmed by events however.

Deflation is the last thing anyone would choose, but as I said I don't think anyone is in a position to make a choice. Once a credit bubble has reached its maximum extent, it will implode no matter what anyone does. All those who fancy themselves to be in control can do is to make matters worse, which I'm confident they'll find a way (or many ways) to do.

Anonymous said...

I have some people over right now and we're doing a paper review for work. The CBC business network is on TV in the background. Someone from the C.D. Howe Institute was being interviewed and was saying how Fannie Mae's bailout is a good thing that will benefit the US and Canada. Discussion here was generated that those of us that sold our homes were foolish. I don't think so, and I think things are just going to worsen, but maybe not as soon as I thought.

Anonymous said...

Its nice to see that those around me,the common steelworkers and construction types are as aware as they are about this bailout...they are hip,and they are P**edoff.Alot quiet mutters and griding of teeth.They Know they are being screwed,and who is doing the screwing...[as if it matters].

One Item that many are missing is that part of the national security directive 51 that has everyone paying attention was the part that stated "ANY" type of a emergency may be used under the "Continuation of Government" regulations to seize control permanently.
If this fix blows up too soon,those regs. may be used in ways we do not want to see...
I think this is the last bit of bailing wire they have,and they want it to last at least 3 months...Maybe..