Feds to take over Fannie and Freddie

Of course, this is not technically nationalisation, but to all intents and purposes a Fed "SIV" like Northern Rock's "Granite" vehicle.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies' new regulator.

The executives were told that, under the plan, they and their boards would be replaced and that shareholders would be virtually wiped out but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

The interesting thing is that it appears that all of the Equity would be wiped out.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

A conservatorship would operate much like a prepackaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

If this is so, it will certainly give a lot of banks a major headache since many are heavily invested in these Preference shares, because they are counted towards their base capital. So they'll be looking for more capital....

Ellen Brown had an interesting take on it here

Take a Load off Fannie

She refers to Roubini's support for nationalisation

". . . [L]et's call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place.

 . . . Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies."

but suggests that there are alternatives to nationalisation, such as the reprise of the 30's Home Owners Loan Corporation ("HOLC") referred to by Alan Binder in an article in February 2008 in the NYT...

"The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks . . . and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.

The scale of the operation was impressive.  Within two years, the HOLC granted over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending amounted to $3.5 billion. . . . (The corresponding figure today would be about $750 billion.)

As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. . . . But times were tough in the 1930s, and nearly 20 percent of the HOLC's borrowers defaulted anyway.  So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

Today's lift would be far lighter. . . . Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year."

She goes on to point out that it is equally valid for governments - like Pennsylvania in the 18th Century - to create the necessary credit directly.

Why do we need debt anyway?

I recommend a different approach - reinvent "Equity".

Rather than using debt either conventional or unconventional, I recommend a new approach to "Equity" - through the use of partnership and trust frameworks - and a Debt/Equity swap on a grand scale.

All secured borrowers - whether "distressed" or defaulted - would be offered the chance to refinance their secured borrowing by transferring their property to the Custodianship of a Land/Property Pool.

All secured debt would be exchanged for a new class of redeemable Equity in a massive, "pooled" network of "REIT's" with a common "Custodian".

There would be no debt obligation, but a reasonable - index-linked - "rental" would be charged for the use of the Capital invested ie the value of the land and buildings.

Occupier "Co-owners" may acquire equity in their homes simply by acquiring redeemable Units from the Pool at the market price.

I reckon this would bring the cost of financing down to maybe 1 to 2% pa on the "Investment" necessary.

It can be this low, because it is:

(a) a "Real" return - because the rentalflow unitised is index-linked - note that investors are currently accepting a negative real return on "risk-free" Treasuries;

(b) virtually risk free - because it is based on land ownership in the Pool, and the affordability of the rental makes payment more certain.

The outcome would essentially be a  "land-based" money consisting of Units redeemable against land/property rentals.  John Law proposed a not dissimilar "land-backed" (credit secured against land) currency for Scotland in 1705 - here

Money & Trade Consider'd....

I think that the time has come to update that proposal for the 21st Century.