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Freddie Mac/Fannie Mae bailout: guess who wins

by Jerome a Paris Mon Sep 8th, 2008 at 05:33:24 AM EST

The bailout of Freddie and Fannie has just been announced by Hank Paulson, with supporting words from Bernanke. What's interesting in what's proposed, as usual, is what's unsaid. This would seem to be an incredibly ambitious gambit: a nationalisation, an attempted bailout of ALL the banks, and an open-ended commitment of taxpayer money to save the financial world.


Treasury Lays Out Fan-Fred Plan

WASHINGTON -- U.S. federal regulators outlined their bailout for Fannie Mae and Freddie Mac Sunday morning, including a takeover 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.

Front-paged by afew



The Treasury said its senior preferred stock purchase agreement includes and 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.

That's the nationalisation bit: it's a slow motion version: there's a small upfront commitment of funds ($1 billion is small change for these companies: even if it represents roughly 10% of their combined market value today, it's less than 1% of their announced equity), but the main part is the warrants, which are rights to buy shares exercisable in the future. This is consistent with the announcement that public funds would be injected over time, as needs arise. But no amounts are given there yet. [Update: it will be up to $100 billion]

What seems apparent is that this is good news for the other owners of preferred shares, which are regional US banks and a lot of foreign governments (which used these shares as a proxy for US Treasuries, with somewhat better remuneration) - they are not going to be wiped out. The preferred shares not being wiped out allows to avoid bankruptcy risk for the banks owning them, and to avoid pissing off a lot of foreign creditors, so it's a reasonable thing to do.


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 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 expected, as the government takes over, the normal shareholders are wiped out, something that will allow the Bush administration to claim that they are being tough and not bailing out investors, but we'll see that this claim is fundamentally false.

This whole side of the package will allow the government to claim that the bailout has a minimal cost: $1 billion only for now, a highly disingenuous claim (the warrants will most likely need to be exercised - but only next year, and there is the rest...)


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.

This is huge. This is the federal government taking over the "toxic waste" in a way that will have an impact not just on Freddie and Fannie, but on the whole market. By "buying" mortgage-backed securities instrad of taking them as collateral, the Treasury does two things at the same time:

  • it takes off the assets and liabilities off the balance sheet of the two companies in a definitive way (rather than temporarily) and assumes, for sure, the associated risk;

  • it sets a price on these securities. This has been the biggest problem to solve the credit crisis: nobody has been willing to set a price on these assets, because of the uncertainty on the real value of the underlying assets (or because everybody could see that they were falling by the day). By setting such a price, thegovernment creates a highly significant precedent - and, in all likelihood, provides a floor to these prices, ie an implicit commitment (or at least the expectation of a commitment) to buy more such securities.

In doing this, the government is boldly trying to call the end of the financial crisis, set a total price to it, and agree to pay the difference if the cost is higher in the end. This, to me, looks like a full governmental guarantee to the whole banking sector. Of course, a lot will depend on where the price is set to purchase these mortgage-backed assets, but this is still a take-over of the toxic waste by taxpayers, at aprice that may or may not (and, frankly, is highly unlikely to) be right.

But it's even worse than that: by providing an additional lending facility on top of that, the government is saying: we're putting our money (well, yours) where our mouth is - providing further liquidity to the companies and, I presume, expecting them, once the toxic waste has been cleared from their books (which can happen now that there is a floor price), to lend to the mortagage markets again.

It's the usual solution of the Greenspan bubble: as soon as one bursts, we blow another one to cover it up and keep the party going a little longer.

Of course, the goal here is simply to create a boost that lasts until November, and given the kind of weaons used, it's likely to succeed in that short term goal. Saving the US economy is another thing, given that its fundamental problem is spending beyond incomes - more debt does not cure that, rather the opposite. The twin movements of growing spending and stagnant incomes have to be brought back together. Boosting spending via debt cannot work this time; incomes have to be raised - and for the right people.

This plan is not about this, it's about bailing out the financiers that played and lost with other people's money, and give them a chance to try again. Par for the course, of course.

Display:
http://www.dailykos.com/storyonly/2008/9/7/112435/2773/960/589911

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Sep 7th, 2008 at 12:02:53 PM EST
Capitalism!

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Sep 7th, 2008 at 11:13:32 PM EST
[ Parent ]
Of the crony persuasion.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 08:02:14 AM EST
[ Parent ]
SHHHHHHHHHH!

The home ownership rate is now 100%.

Huzzah!

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 8th, 2008 at 08:46:37 AM EST
[ Parent ]
Soros has bad thigs to insinuate about Bush's "Ownership Society".

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 08:49:25 AM EST
[ Parent ]
Bloomberg adds that the warrants on preferred stock will amount to up to $100 billion:


The FHFA will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating 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. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Also, I should add that the new preferred stock will be senior to the existing one, which will not have much of an impact in the first year, but will do so as warrants are exercised - yet another hot potato dumped on the lap of the next administration, as it threatens to wipe out the regional banks that have a lot of capital tied up in there, and the foreign centrla banks that help such securities as Trasury proxies.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Sep 7th, 2008 at 12:50:05 PM EST
isn't that $200 billion, it says $100 billion in each.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Sep 8th, 2008 at 09:17:10 AM EST
[ Parent ]
So it's official then, and they've

Taken the Load off Fannie

As with the UK's Northern Rock nationalisation, this is only the beginning.

As you identify, the key point is that the US Treasury is proposing to buy the fake Rolexes, rather than take them as a pledge against a revolving loan.

This means that as US property prices continue to collapse - which they will, as recession hits the productive economy and "second order effects" kick in - then the Treasury will become an unwilling landlord in a very big way.  

This - without the modern innovation of "jingle mail", because in those days people bought houses to live in, not to "flip" - is exactly what happened in the 30's when the Home Owners Loan Corporation refinanced millions of US mortgages, but were nevertheless stuck with 20% of the properties, which they didn't finally get rid of 'til 1944.

Don't forget that even though this move may stop the attrition of bank capital:

(a) the loans they do make will be at lower income multiples and with sizable deposits; and

(b) the investors to whom they "outsourced" much of the risk - through securitisation, credit derivatives and credit insurance - are no longer there.

The outcome can only be a level of property prices way below the levels to which they have already fallen.

This is going to run and run, and it will constitute a massive political turd sitting on the next President's desk.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Sep 7th, 2008 at 01:04:56 PM EST
I fully agree. The jingle mail is indeed going to make this plan an "interesting" one...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Sep 7th, 2008 at 01:07:39 PM EST
[ Parent ]
...because we are already seeing many of the worst affected municipalities' property tax take falling precipitously as a result of foreclosures, and a series of municipal bankruptcies has already started.

The US Treasury-as-landlord will be on the hook for this, too....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Sep 7th, 2008 at 01:15:38 PM EST
[ Parent ]
There's some debate as to whether 'jingle mail' exists on any sort of significant scale. That is, how many people are giving up who could genuinely afford the payments. The folks over at Calculated Risk have been pretty skeptical.
by MarekNYC on Sun Sep 7th, 2008 at 01:33:50 PM EST
[ Parent ]
I agree that "people who can genuinely afford the payments" tend to keep making them.

I think that the point is that in the UK you make mortgage payments first and only then most other payments, because not only will you be out on your arse, but the lender can, and probably will, come after you for any balance.

In the US the order of payment priorities is not the same - because typically the lender can't come after you for the balance - and the calculation therefore often has a different result.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Sep 7th, 2008 at 02:12:18 PM EST
[ Parent ]
Very important point, Chris. The attitude to taking on debt is conditioned by the forecasted results of default. For governments to take on taxation is a debt. Taxation weighed against the services that must be provided.

Anyone would take on debt if there were no consequences for default. Rape and pillage is maybe the seemingly ultimate no-risk investment. But of course, such debt decisions are only viewed in the scale of a human lifetime. No slaver ever thought that the result of 'borrowing the human resources of West Africa' would ever have to be repaid. But here we are in 2008 in a USA election with debts waiting to be collected.

You can't be me, I'm taken

by Sven Triloqvist on Sun Sep 7th, 2008 at 03:38:06 PM EST
[ Parent ]
Glad I am here int ime to lear fromt he amsters. GHreat diary Jerome..

But I ahve questions that nobody answers..

Is it reallya bail-out forced by foreign investors?

Is it true,a s Krugman says, that the number of bad loans is really limited, so the future tax-payer is nto going to end up so badly?

Will the US Treasury sell the houses of those which default? or can they keep it without selling it? I guessed that was half the purpose of the deprivatization: save the foreign investment witha guarantee and get the houses in excahnge that you keep waiting better times.

And finally.. what do you mean by saying that those whom they "outsorced" are no longer there? Who where they? what does it mean they are not there?
And why this is inked to the possibility that more peple will default and more houses will be put on sales depressing prices even more?

I am so glad I get in tiem for this...

A pleasure


I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Sep 8th, 2008 at 03:07:08 PM EST
[ Parent ]
You need to switch on the spellcheck, kcurie...;-)

kcurie:

Is it really a bail-out forced by foreign investors?

I think it is, yes.

The amount of foreign money in Fannie and Freddie was and is massive.

eg 6% of the entire value of Norwegian's oil fund was in there at the end of last year, and though they've reduced it since, they're still on the hook for about $9 billion, apparently.

This pales into insignificance compared to the Chinese and Far Eastern money in there, who appear to have thought that Fannie and Freddie were a better value proposition than US Treasuries.

kcurie:

Is it true,as Krugman says, that the number of bad loans is really limited, so the future tax-payer isn't going to end up so badly?

Will the US Treasury sell the houses of those which default? or can they keep it without selling it? I guessed that was half the purpose of the deprivatization: save the foreign investment with a guarantee and get the houses in exchange that you keep waiting better times.

Interesting question. The Home Owners Loan Corporation ("HOLC") which refinanced millions of Depression era mortgage loans got landed with maybe 20% of the properties, and didn't get rid of the last 'til 1944. But they still ended up with a small profit...

When a secured loan goes bad, the mortgage holding lender usually forecloses, and thereby becomes the owner of the property.

The question is, what is the value of the foreclosed property in a forced sale?

That can be little or nothing in a country like the US where in many regions there is no shortage of land; and maybe even less than zero, if the costs of "ownership" and attempted sale by the reluctant owner are taken into account.

...as you imply, might it in fact not be better to let the defaulter continue to stay there, paying a rental he CAN afford?

Which is what I advocate....through the use of partnership law-based frameworks to "unitise" rentals and thereby create new forms of "Public Equity" based on "Co-ownership" of land between the Treasury annd the Occupier.

kcurie:

And finally.. what do you mean by saying that those whom they "outsourced" are no longer there? Who where they? what does it mean they are not there?

What I am talking about there is the fact that it was not just the capital of Banks which has been underpinning the inverted pyramid of debt which inflated the property bubble.

Investors committed enormous amounts of Capital to take on credit risk (which was therefore essentially "out-sourced" by the banks):

(a) totally - by actually buying securitised debt orginated by Banks;

(b) temporarily - by receiving a payment for entering into a time limited guarantee, also known as a "credit derivative" in respect of Bank-originated debt;

(c) partially - by investing in "monoline" credit insurance companies like AMBAC; or

(d) a toxic cocktail of the above.

These investors are licking their wounds, and there is no way most will be back in the market in the short or even medium terms, if ever.

So the amount of Capital holding up the credit pyramid (and hence the price level of properties)is reduced both by the reduction in "gearing" by Banks, and the absence of other investors' capital.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Sep 8th, 2008 at 05:12:17 PM EST
[ Parent ]
It is so good to have you here  .... :=)

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Sep 8th, 2008 at 06:35:02 PM EST
[ Parent ]
And why this is inked to the possibility that more peple will default and more houses will be put on sales depressing prices even more?

It appears that the criterion for purchase and guarantee of a loan by Fanny or Freddie was the credit rating of the borrower, not the soundness of the loan.  Perhaps this change came after Greenspan complained around the end of 2004 that the mortgage industry was not being sufficiently creative.  As a result, negative amortization adjustable rate mortgages came to qualify for purchase by F&F, if the borrower had good credit. The initial payments on these loans were so low that the value of the loan increased.  This could only work if: 1) the market kept going up; or 2) everyone with such a loan cashed out or re-financed with a loan they could afford before the market crashed.   It did.  They didn't.  

A bunch of these negative amortization loans are due to reset in the next year or two.  Probably a majority of the mortgagees can not even afford the payments on a fixed loan at 5%, while the best rate is above 6%.  They have more house than they could afford.  Hope they enjoyed the ride.  Even more unsold, foreclosed homes further depresses prices, making it still more difficult for people to exit without default.  Add in increasing unemployment and inflation and you have a  classic death spiral.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 9th, 2008 at 01:48:50 AM EST
[ Parent ]



In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Sep 7th, 2008 at 01:36:46 PM EST
I'm probably the last person who should be pointing this sort of stuff out but you might want to clean this up.

but the main part if the warrants, which are rights to buy shares exercisable in the future

by MarekNYC on Sun Sep 7th, 2008 at 01:37:54 PM EST
'if' turned to 'is'

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Sep 7th, 2008 at 02:42:42 PM EST
[ Parent ]
And then there's the usual, common-or-garden-variety book-cooking (which the conservatorship announcement seems to have obscured altogether):

Mortgage Giant Overstated the Size of Its Capital Base - NYTimes.com

Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac's capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies' capital resources and financial stability.

Indeed, one person briefed on the company's finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.

[...]

The accounting issues that brought so much urgency to the bailout appear to center on Freddie Mac's capital cushion, the assets that regulators require them to keep on hand to cover losses.

The methods used to bolster that cushion have caused serious concerns among the companies' regulator, outside auditors and some investors. For example, while Freddie Mac's portfolio contains many securities backed by subprime loans, made to the riskiest borrowers, and alt-A loans, one step up on the risk ladder, the company has not written down the value of many of those loans to reflect current market prices.

Executives have said that they intend to hold the loans to maturity, meaning they will be worth more, and they need not write down their value. But other financial institutions have written down similar securities, to comply with "mark-to-market" accounting rules. Freddie Mac holds roughly twice as many of those securities as Fannie Mae.

Freddie Mac and Fannie Mae have also inflated their financial positions by relying on deferred-tax assets -- credits accumulated over the years that can be used to offset future profits. Fannie maintains that its worth is increased by $36 billion through such credits, and Freddie argues that it has a $28 billion benefit.

But such credits have no value unless the companies generate profits. They have failed to do so over the last four quarters and seem increasingly unlikely to the next year. [...]



The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Sun Sep 7th, 2008 at 02:01:14 PM EST
U.S. home foreclosures hit record level

The Mortgage Bankers Assn. said Friday that the one-two punch of declining home prices and resetting adjustable-rate loans in California and Florida is largely responsible for unprecedented national foreclosure numbers.

"The worst states are continuing to get much worse," the MBA's chief economist, Jay Brinkmann, said during a conference call discussing the group's second-quarter report on mortgage delinquencies.

With a combined 18% of the population, "California and Florida accounted for 39% of all the foreclosures started in the country," Brinkmann said.

-Skip-

Tricky pay-option adjustable-rate mortgages, which allow borrowers to pay so little that their loan balances rise, were more common in California and Florida, the MBA said. These "option ARMs" show up in MBA data as prime mortgages because they were made to borrowers with decent credit scores.

When these loans "recast" and require full payments, three to five years after they were made, borrowers are finding themselves with sharply higher payments on higher loan balances than they started with, at a time when their home values are sharply lower.

Seriously delinquent loans -- those with payments at least 90 days in arrears -- totaled 7.73% of all adjustable-rate prime loans in California in the second quarter. The Oregon percentage was 3.04% and in Washington state it was 2.41%, the MBA said.

     (My bold)

Now, if prices hada just kept goin' up, like they otta..

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 7th, 2008 at 02:27:07 PM EST

This would seem to be an incredibly ambitious gambit: a nationalisation, an attempted bailout of ALL the banks, and an open-ended commitment of taxpayer money to save the financial world.


Of course, the goal here is simply to create a boost that lasts until November ...


... it's about bailing out the financiers that played and lost with other people's money, and give them a chance to try again.

I'm a non-financial type BUT I CAN SEE WHAT'S COMING DOWN THE ROAD!  So, since McCain will ignore the situation (his crowd helped create it), will/should Obama blow the whistle on it or ALSO IGNORE IT?

Weigh in, you financial mavens.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Sun Sep 7th, 2008 at 02:55:50 PM EST
Obama will operate within exactly the same orthodoxy as McCain.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Sep 7th, 2008 at 03:12:38 PM EST
[ Parent ]
I've been waiting and waiting for the democrats to make some serious statements about the state of the economy, but they are either too dim witted or too complicit.  My guess is the latter.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Sun Sep 7th, 2008 at 03:25:19 PM EST
[ Parent ]
he's already talking about leaving the Bush tax cuts alone for now, due to the recession. As Chris points out, the CW is inter-party at the top - which is where Obama is now. Simply put, his advisers include the likes of Robert Rubin. Egad.

My hope for substantial change under Obama was never great, and it is dwindling. His failures will be epic for us USians.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sun Sep 7th, 2008 at 03:20:10 PM EST
[ Parent ]
The best hope is that things will get so bad that he will have to deal realistically with the fiasco.  

"The hardest thing
sometimes can be
the easy way out"  --Wendy Waldman

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 7th, 2008 at 03:46:36 PM EST
[ Parent ]
It's probably the mosy bizarre belief of all - that lawyers and accountants make good leaders.

Obama may be a constitutional scholar, but I doubt he has any understanding of real world (as opposed to CW woo woo) economics, and he certainly doesn't have much of a clue about foreign policy.

Biden may be better informed. Possibly.

And on the other side, we have a time serving septuagenarian loser and a killer kook in a reinder sweater.

This is unlikely to end happily, however it plays out.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Sep 7th, 2008 at 04:05:14 PM EST
[ Parent ]
One of my long term communication structures is the idea that engineers are better for society than lawyers. It came to me that the society that I know quite well and love, Finland, is demonstrably run  by engineers. Maybe 70% of CEOs in companies in Finland with a turnover of more than 10 million have an engineering background.

What are engineers taught? Physics. The inevitability of the results of the transfer of energy, and the statistical inevitability of structural failure within a cone of possibilities. In the House of Cards, what is need to support the house in the face of any possible condition.

What are lawyers taught? Statistics also. In the House of Cards, how many cards can be removed before it collapses.

Like sculpture, there is the building up on an armature, or the chipping away from the block of stone. Building up or taking away. Both are valid methods of building structures.

Both can end in catastrophe. The overloaded armature can collapse through overweight. The intact stone may break and collapse with an inappropriate application of chisel force.

But I am always with the engineers. Adding is better than taking away.

You can't be me, I'm taken

by Sven Triloqvist on Sun Sep 7th, 2008 at 04:40:59 PM EST
[ Parent ]
We have had two presidents with engineering backgrounds: Herbert Hoover and Jimmy Carter.  One kept saying what everyone wanted to hear but couldn't believe: "Recovery is just around the corner."  The other told people what they didn't want to hear and exercised great forbearance in the face of great provocation.  Both were denied a second term.  So are we batting 50/50 or 0%?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 7th, 2008 at 06:18:02 PM EST
[ Parent ]
Explain that to me, please. I don't see how restructuring obligations precludes FNM and FRE repurchase agreements, especially when Lockhart expressly stated the strategy from Q1 2010 is to retire (book) portfolio by 10% annually.

"National" --government proceeds and borrowing-- investment socializes risk and socializes profits.

MSM analysts may call this deal "nationalizing" private equity in order to hedge investor hysteria. But it looks like a page from the RFC's "bail out" history --pure backstop by preferred, no returns aside from political IRR. And that would be institutional investors' profiles.

Diversity is the key to economic and political evolution.

by Cat on Sun Sep 7th, 2008 at 05:24:18 PM EST
it looks like a nationalisation but it isn't really one.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Sep 8th, 2008 at 04:09:25 AM EST
[ Parent ]
M of A - Tha Largest Bailout Ever

inner city press: Subcrime Questions As Freddie Mac Handed to Moffett of Carlyle and US Bancorp

NEW YORK, September 7 -- U.S. Treasury Secretary Hank Paulson's announcement today that he is unilaterally appointing Carlyle Group advisor David Moffett to replace Richard Syron as chief executive of Freddie Mac is more than a little ironic, and troubling. The Carlyle Group invested in and lost on subprime mortgage, it admitted earlier this year. In fact, Carlyle invested in bonds issued by Freddie Mac, as well as Fannie Mae.

In March 2008, the Carlyle Group's mortgage-bond fund, having received more than $400 million in margin calls since earlier in the month, said it couldn't reach an agreement with it lenders, who would "promptly'' take over all of its remaining assets. Through March 12, the company had defaulted on over $16.6 billion of debt. On the news, the dollar fell to the weakest since 1995 against the yen and a record low versus the Euro. How then, sources are asking Inner City Press, can Moffett be put in charge of Freddie Mac?



'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Mon Sep 8th, 2008 at 06:31:01 AM EST
[ Parent ]
Socialism in action, comrade.

Crap. They're not even trying to pretend this isn't another rape.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 8th, 2008 at 07:34:00 AM EST
[ Parent ]
Project USSA.

Are they determined to see, how spectacular an economic crash can be?

by das monde on Mon Sep 8th, 2008 at 07:49:18 AM EST
[ Parent ]
i think they're testing their timing skills at running for the exit at the last minute...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Mon Sep 8th, 2008 at 08:13:48 AM EST
[ Parent ]
Perhaps it is an "ambulance" appointment--made so that the appointee can be taken to the hospital and made well.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 8th, 2008 at 09:55:58 AM EST
[ Parent ]
let us know where to send flowers-

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Mon Sep 8th, 2008 at 04:31:17 PM EST
[ Parent ]
What do you mean by "USSA"

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Mon Sep 8th, 2008 at 11:16:45 AM EST
[ Parent ]
United Soviet States of America

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 11:17:19 AM EST
[ Parent ]
The last time I saw USSA written somewhere, the SS were drawn like the SS of Waffen-SS.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Mon Sep 8th, 2008 at 01:35:14 PM EST
[ Parent ]
Rather United Socialist States of America :-)
by das monde on Tue Sep 9th, 2008 at 12:07:25 AM EST
[ Parent ]
It was just a immediate reaction, btw. No bad insinuation intended.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
by UnEstranAvecVueSurMer (holopherne ahem gmail) on Mon Sep 8th, 2008 at 09:32:46 PM EST
[ Parent ]
is that the two will now be forbiddeen from lobbying the government and Congress.

Thier lobbying was feared, and led to blocking several common sense reforms, so this is a good thing. but to think that it took meltdown to get there...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Sep 8th, 2008 at 04:10:39 AM EST
Well, lobbying in general should be outlawed. It's not just their lobying that blocked many a sensible reform...

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Mon Sep 8th, 2008 at 04:26:09 AM EST
[ Parent ]
b-b-but we're friends...

we waterhole together....nothing wrong with friends doing each other favours!

what are friends for if not making the right laws?

sheesh, what kind of world do you live in?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Sep 8th, 2008 at 06:37:56 AM EST
[ Parent ]
I doubt that that restriction is even "tinfoil clad."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 8th, 2008 at 09:57:36 AM EST
[ Parent ]
Russia has its gas, Saudi Arabia the oil, and the rest of the world their sovereign wealth funds.

The US has banks.

Adam Smith must be rolling over in his grave, poor bloke.

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire

by papicek (papi_cek_at_hotmail_dot_com) on Mon Sep 8th, 2008 at 07:57:29 AM EST
_Of course, the goal here is simply to create a boost that lasts until November, and given the kind of weaons used, it's likely to succeed in that short term goal.
And earlier you said...
This whole side of the package will allow the government to claim that the bailout has a minimal cost: $1 billion only for now, a highly disingenuous claim (the warrants will most likely need to be exercised - but only next year, and there is the rest...)
If I were Obama I would go public with the statement that the Buhs administration is committing the next administration to spend maybe 100 times more than they are spending now on exercising those warrants, making it look like the next administration has very expensively botched what Bush "succeeded" in fixing cheaply.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 07:59:43 AM EST
making it look like the next administration has very expensively botched what Bush "succeeded" in fixing cheaply.

That shouldn't be too difficult, should it?

"deprivatization" I wish people wouldn't say that Fannie and Freddie have been "nationalized." ...[I]t's more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

(putz)

"In a Word ..." [T]he claim that $5.4 trillion in mortgages represent net liabilities of Fannie and Freddie, instead of assets, and that these are now liabilities of the taxpayers, is going to become one of those things that a lot of people "know" and quite possibly the only thing they "know" about this subject. Eradicating that "knowledge" is going to be tough.

(UberNerd)

Now, who's going to tackle the so-called tax implications of the deal? This transaction is an off-budget, inflation event... preceding official changes to FBR discounts, if any.

Diversity is the key to economic and political evolution.

by Cat on Mon Sep 8th, 2008 at 12:16:09 PM EST
[ Parent ]
Jerome has quoted from the WSJ. The blogger you quote is quoting from USA Today. Here's the FT... US takes control of Fannie and Freddie
The US government on Sunday seized control of the troubled Fannie Mae and Freddie Mac mortgage groups in what could become the world's biggest financial bail-out.

The government's move, its most dramatic since the start of the credit crisis, is aimed at ensuring the two groups' woes do not cripple the country's housing market or worsen to the point that they fail and send shockwaves through global markets.

While the Bush administration stopped short of using the word "nationalisation", analysts said the moves amounted to a de facto government control. Fannie and Freddie have $5,400bn in outstanding liabilities and guarantee three-quarters of all new US mortgages.

This answers
[T]he claim that $5.4 trillion in mortgages represent net liabilities of Fannie and Freddie, instead of assets, and that these are now liabilities of the taxpayers, is going to become one of those things that a lot of people "know" and quite possibly the only thing they "know" about this subject. Eradicating that "knowledge" is going to be tough.
in the following way: Fannie and Freddie's liabilities amount to $5.4 trillion. The Mortgages are, indeed, assets as the blogger points out. But the problem is that nobody knows how much these assets are worth (as the market for Mortgage-backed securities isn't clearing) and it very likely is much less than $5.4 trillion.

The mistake that USA Today makes is when they conflate "$5.4 in liabilities" with "mortgages that Fannie and Freddie own or guarantee"

Freddie Mac and Fannie Mae combined own or guarantee $5.4 trillion in outstanding mortgage debt.
which is, indeed, incorrect according to the FT wording bolded above.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 12:33:35 PM EST
[ Parent ]
Why am I reminded of Northern Rock and the gazillions of "taxpayers' money" at risk.......

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Sep 8th, 2008 at 02:43:50 PM EST
[ Parent ]
This will end in inflation...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 8th, 2008 at 02:48:10 PM EST
[ Parent ]
Yes, USD inflation and consumer price competition (deflation).

Diversity is the key to economic and political evolution.
by Cat on Mon Sep 8th, 2008 at 09:56:28 PM EST
[ Parent ]
Yes, the USAToday piece is misleading! Speaking for myself, Tanta's stab at demogoguery is amusing. Yes, USAToday conflates the two firms' liabilities. The trillion dollar figures are unrealized. They refer to cumulative maximum exposure of guarantees distributed over the next 40 years. Sure, that period roughly corresponds to the life-time disposition of a conventional, fixed-rate mortgage. It also includes that of "exotic" loans, originated during the past 5 years or so, which constitute a large portion of near-term YoY foreclosures. The value of those mortgages --FNM, FRE current liabilities-- is far less than the trillions.

MSM is looking very far into the future to represent FNM, FRE asset and liability as "taxpayer" debt subject to tax increases!!! except both candidates are committed to tax cuts!!! meanwhile Treasury dilutes small shareholders' retirement accounts.

Let's see if I've got this correct.

FNM 10Q
Balance Sheet items of (intellectual) interest:  Reserve for guarantee losses  ($7.450B), AFS securities, Guaranty assets and buy-ups, Derivatives position, fn. 6 -- furnishes an explanation as to why Lockhart recommends quarterly-adjusted combination of cash and securities purchases by the agencies.

6.   Financial Guarantees
We generate revenue by absorbing the credit risk of mortgage loans and mortgage-related securities backing our Fannie Mae MBS in exchange for a guaranty fee. We primarily issue single-class and multi-class Fannie Mae MBS and guarantee to the respective MBS trusts that we will supplement amounts received by the MBS trust as required to permit timely payment of principal and interest on the related Fannie Mae MBS, irrespective of the cash flows received from borrowers. We also provide credit enhancements on taxable or tax-exempt mortgage revenue bonds issued by state and local governmental entities to finance multifamily
[...]
We record a guaranty obligation for (i) guarantees on lender swap transactions issued or modified on or after January 1, 2003, pursuant to FIN 45, (ii) guarantees on portfolio securitization transactions, (iii) credit enhancements on mortgage revenue bonds, and (iv) our obligation to absorb losses under long-term standby commitments. Our guaranty obligation represents our estimated obligation to stand ready to perform on these guarantees. Our guaranty obligation is recorded at fair value at inception. The carrying amount of the guaranty obligation, excluding deferred profit, was $12.7 billion and $11.1 billion as of June 30, 2008 and December 31, 2007, respectively. We also record an estimate of incurred credit losses on these guarantees in "Reserve for guaranty losses" in our condensed consolidated balance sheets.

These guarantees expose us to credit losses on the mortgage loans or, in the case of mortgage-related securities, the underlying mortgage loans of the related securities. The contractual terms of our guarantees range from 30 days to 40 years.

Cumulative liability --loan principal claims plus RMBS payments, $4.4T-- over a period of 40 years.

However, the actual term of each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the related mortgage loans. For those guarantees recorded in our condensed consolidated balance sheets, our maximum potential exposure under these guarantees is primarily comprised of the unpaid principal balance of the underlying mortgage loans, which totaled $2.3 trillion and $2.1 trillion as of June 30, 2008 and December 31, 2007, respectively. In addition, we had exposure of $180.5 billion and $206.5 billion for other guarantees not recorded in our condensed consolidated balance sheets as of June 30, 2008 and December 31, 2007, respectively. The maximum number of interest payments we would make with respect to each delinquent mortgage loan pursuant to these guarantees is typically 24 because generally we are contractually required to purchase a loan from an MBS trust when the loan is 24 months past due. Further, we expect that the number of interest payments that we would be required to make would be less than 24 to the extent that loans are either purchased earlier than the mandatory purchase date or are foreclosed upon prior to 24 months of delinquency.
     
Happily, it appears settlement of notional derivatives outstanding (potential losses) over the same period -- 5 to 40 years-- is an insignificant amount for both firms.

FRE 8-K, uh oh. P&L Statement: net earnings retained was a $1B loss, attibutable primarily to investment losses ($3.327B); Provision for credit losses ($2.537B); Balance sheet: Total assets  $879,043B, Total liabilities $879,043B, of which $326.3B of senior debt due by June 2009.

10-Q (unaudited)  At June 30, 2008 and December 31, 2007, we had $1,823.8 billion [or $1.8238T maximum exposure, $14.02B recognized liability] and $1,738.8 billion [or $1.7388T maximum exposure, $13.742B recognized liability] of issued PCs [Participation Certificates] and Structured Securities and such other mortgage guarantees, respectively, of which $413.9 billion and $357.0 billion were held in our retained portfolio. When we purchase Freddie Mac PCs or Structured Securities for our retained portfolio, we do not derecognize any components of the guarantee asset, guarantee obligation, reserve for guarantee losses, or any other outstanding recorded amounts associated with the guarantee transaction because our contractual guarantee obligation to the unconsolidated PC trust remains in force until the trust is liquidated, unless the trust is consolidated. Whether we own the security or not, our guarantee obligation and related credit exposure do not change.
[...]
Our guarantee obligation represents the recognized liability associated with our guarantee of PCs and Structured Securities net of cumulative amortization. Upon adoption of SFAS 157 [re: restatement of asset and liability valuations, unrealized mark-to-market gain or loss] on January 1, 2008, we began measuring the fair value of our newly-issued guarantee obligations at their inception using the practical expedient provided by FIN 45, as amended by SFAS 157. Using the practical expedient, the initial guarantee obligation is recorded at an amount equal to the fair value of compensation received in the related securitization transaction. As a result, we no longer record estimates of deferred gains or immediate, "day one", losses on most guarantees. However, all unamortized amounts recorded prior to January 1, 2008 will continue to be deferred and amortized using existing amortization methods. Valuation of the guarantee obligation subsequent to initial recognition will use current pricing assumptions and related inputs.

This is the story MSM gives short shrift.

Diversity is the key to economic and political evolution.

by Cat on Mon Sep 8th, 2008 at 04:36:53 PM EST
[ Parent ]
Hey you guys, we don't have time for this.

We are having an election over here, and this is way too complicated to deal with in sound bites, which is the common currency, even the only legal tender for the sort of transcations we are engaged in.

Besides, it's way too scary to understand.

My fear is that Obama may understand enough of it to attempt to explain it to the electorate, which would be elitist and a disaster.

Amurricans have serious problems to worry about, like the price of gas, and will elect the guy who can best reassure us he will take care of it.

We're voters, not policy wonks.

by greatferm (greatferm-at-email.com) on Mon Sep 8th, 2008 at 02:02:46 PM EST
great leader, fill our tanks, not our brains!

political philosophy don't get you jack at the pump-

or as occult wisdom has it:

'you can't pay the taxi driver with the pentacle of solomon!'

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Sep 8th, 2008 at 06:16:18 PM EST
[ Parent ]


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