Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

Take the Load off Fannie....

by ChrisCook Sat Sep 6th, 2008 at 06:05:36 AM EST

Well, according to the San Francisco Chronicle and others it seems like the inevitable is happening this week-end...

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.

How does what is going to happen, going to favor the wealthy and screw everybody else?  I've gotten so used to this being the way things operate, since Reagan, that I just expect it now.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Sep 6th, 2008 at 07:42:02 AM EST
You are playing my song!!!  Well, not exactly mine I should say since y'all don't know me, but my sig song.

I think some intrepid reporter should be looking at stock sales within the last couple months/weeks to see if any pattern of insider trading can be discerned.  Problem is that you wouldn't have to be too far inside to see the mess.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson

by NearlyNormal on Sat Sep 6th, 2008 at 09:15:03 AM EST
[ Parent ]
I'm not sure that they could think of a way to do that....they would if they could, but they are up against an Irresistible Force in the shsape of the mathematics of compound interest, and they are not an Immovable Object.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Sep 6th, 2008 at 09:16:58 AM EST
[ Parent ]
So your answer is that:

  1. Everyone is screwed,

  2. No one is screwed,

  3. What?

Again, I can't believe the ultrawealthy will forfeit anything unless they see a "Frankenstein/peasants outside of their castles with torches" scene brewing, which, naturally, I favor.  Although I am a guillotine kind of guy.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Sep 6th, 2008 at 09:22:24 AM EST
[ Parent ]
important cogs in the financial machine, they are also emblematic. If you are the rulers of the U.S., you cannot let such symbols fall.

Moreover, they are printing money for the same corporations who will 'lose' under this prescription, so it is just shifting the pea under the shells.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Sep 6th, 2008 at 11:19:04 AM EST
[ Parent ]
So the answer to my question is 1,2, or I'm asking the wrong question, or what?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Sep 6th, 2008 at 11:25:00 AM EST
[ Parent ]
the vast majority of us by promoting price inflation.

Long run - hopefully - it's one of them 'contradictions of capitalism' that you hear so much about. So neither 1) or 2) - final result depends on marketing our message.

Chris is consistently marketing his approach - with which I generally agree. Whether it can be seen by sufficient potential participants as 'win-win' is the essential question that will determine whether the climax is transition/evolution or pitchforks/guns.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Sep 6th, 2008 at 11:44:38 AM EST
[ Parent ]
If you change your monetary system, all the Arabs, Chinese and, yes, some Europeans, will end up with huge losses, because they hold lots of then less worth paper.
Can the Arabs get their oil back, when you devalue their green paper?

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Sat Sep 6th, 2008 at 11:48:46 AM EST
[ Parent ]
Hey, if you're stupid enough to accept dollars from a country obviously in quicksand, and not Euros, screw you.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Sat Sep 6th, 2008 at 03:35:17 PM EST
[ Parent ]
In the long run the holders of dollar-denominated securities will be better off by this action.  True, the paper will be worth less than the purchase price in the coming years but that is the risk they took when the bought the silly things, at a silly price.  

This situation stems from idiots who overextended their finances and the idiots who lent to those idiots and, thus, fueled the fire.

The English Language has a word that should have been used more often: "No."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Sep 6th, 2008 at 04:45:46 PM EST
[ Parent ]
Were the "serious people," aka "the ultrawealthy" to be primarily invested in Freddie and Fannie bonds and were the bond holders not asked to take a haircut, then they would not be hurt and would still get their returns on the bonds.

If federally chartered banks are holding Freddie and Fanny stock as part of their 10% reserve requirements and  those stocks then go to zero, they could end up being taken over by the FDIC.  If those banks have used their performing loans as collateral for "covered bonds" then that collateral will go to the bond holders, likely to be "serious people" or their representatives.  They get all of the assets, the FDIC and the taxpayers get all of the losses.

The reason we don't know is that the "serious people" are the source of much of the campaign financing in the USA so no elected representative dares to offend them.  The typical dumb fuck citizen thinks he is getting a bargain by letting these self interested wealthy finance the elections.  IT IS THE WORST BARGAIN IN HISTORY.  

Overwhelming federal support for all federal elections for all candidates would cost the individual taxpayer around $10.00/year.  The inflation that will be engendered by printing enough money to pay off Freddie, Fanny and FDIC will dilute the wealth of every US citizen by anywhere from 10%-100%.  That is what the phrase "getting soaked" means.  My bets are that it will be in the 30% to 70% range.  But if you own tangible assets, such as land, houses, etc. and don't have to service debt on those assets it won't matter as much to you.  That will be the position of the "serious people."

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Sep 6th, 2008 at 05:59:44 PM EST
[ Parent ]
They're not wiping them out.  The preferred is getting protection, the common gets diluted, per the WaPo.

The GSEs are insolvent.

But, hey, now the homeownership rate is 100%.  The McCain ads write themselves.

Somehow I don't feel wealthier.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Sep 6th, 2008 at 11:49:20 PM EST
Paulson, 7 Sept 2008, and Lockhart statements (Fact Sheet pdfs available):

Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

Lockhart, formerly head of OFHEO which congress dissolved in July housing bill, opposed Bush-Bernanke FHA conforming loan changes Aug 2007 which introduced and intensified exposure of insurers Fannie Mae and Freddie Mac to variable rate and jumbo LTV loans and RMBS. Provisions of H.R. 3221 established Federal Housing Finance Agency, an investment bank, whose sole purpose, apparently, is to underwrite MBS issued by old and new GSEs.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs - including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.
Their statutory capital requirements are thin and poorly defined as compared to other institutions.

Well, duh, a buttload of non-performing assets and increasing insurance claims -> income -> 0 -> defaulting bond coverage.

[LOCKHART:] I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.
To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
First [sic], Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. ...This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations.
The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS.

Basically, fed agencies (Treasury, excutive) and the FRB will continue to absorb toxic waste in exchange for T-bills --new issues and FRB reserves, already ~45% less than the year prior-- since ROW central banks are tapped and "the market" will demand higher yields than Fannies can afford. The free risk rate is officially FUBAR.


Obama, McCain tax "reform" cement cost-shifting to private sector, HH income and philanthropy

AP - Democrat Barack Obama says he would delay rescinding President Bush's tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession, suggesting such an increase would further hurt the economy.

Nevertheless, Obama has no plans to extend the Bush tax cuts beyond their expiration date, as Republican John McCain advocates. Instead, Obama wants to push for his promised tax cuts for the middle class, he said in a broadcast interview aired Sunday.
"I think we've got to take a look and see where the economy is. I mean, the economy is weak right now," Obama said on "This Week" on ABC. "The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we're fragile."

Neither candidate will bring US closer to traditional fiscal policy --transfers and market regulation-- than YOYO with an AmeriCorp all-volunteer twist. Ever. Done deal.

Diversity is the key to economic and political evolution.

by Cat on Sun Sep 7th, 2008 at 03:11:04 PM EST
Federal Home Loan Bank "system" is a trade association --"cooperative" or "pool"-- whose governance is directed by the Federal Housing Finance Board. 8,104 association members include commercial banks, savings institutions, credit unions and insurance companies. Members are affiliated with one of twelve "district" banks not unlike  the FRB organizes its members by regional banks. The district FHLBs are government sponsored entities insofar as their board of directs assume regulatory authority and supervisory oversight of members' fiduciary responsibilities, stipulated by Congress. Four board members are appointed by the president for seven-year terms, and the fifth member is the Secretary of the Department of Housing and Urban Development (HUD, currently Steven Preston, formerly SBA), or the secretary's designee.

The FHFB website does not maintain a public listing of members alphabetically, by district, or by FDIC identifer. This means (i) qualified depositors and analysts must apply specifically for the information; (ii) financial statements of members are strictly controlled; and (iii) the data does not preclude the possibility FHLB members are also "affiliates" or subsidiaries of FRB-regulated holding companies. NB:  insurance firms --effectively securities intermediaries-- are regulated by each state in which they operate. Each state also regulates securities brokerage. The agency SEC primarily enforces federal statutes --national licensees-- while maintaining investigative offices in each state.

financial institution may become a member by meeting certain statutory requirements:

  • be duly organized under the laws of any state of the United States [at least state charter, distinct from national charter bank or holding company, i.e. FRB member];

  • be subject to inspection and regulation under the banking laws, or similar state or federal laws [e.g. Community Reinvestment Act];
  • make long-term home mortgage loans;

  • have at least 10 percent of its total assets in residential mortgage loans, if it is a federally insured depository institution (community financial institutions which are exempt from this requirement);

  • have a financial condition that allows FHLBank advances (loans) to be made safely;

  • have character of management and a home financing policy consistent with sound and economical home financing.

Each member of the FHLBank is required to maintain a minimum investment in the stock of the FHLBank.  The minimum investment is established by each FHLBank, and the sum of the stock investment by all members must be sufficient for the FHLBank to meet its own minimum capital requirement.

H.R. 3221 provisions award audit and disposition of FHLB members' business to the newly created Housing Finance Agency. Note also, the express goals in "Blueprint for a Modernized Regulatory Structure" to standardize innovative financial products and consolidate primary market financial services firms. The Housing Finance Agency is designed to cull state regulated firms.

Diversity is the key to economic and political evolution.

by Cat on Sun Sep 7th, 2008 at 04:23:23 PM EST
[ Parent ]
Watching failure of small-cap, state chartered, FDIC-insured and CRA-exempt financials: Gramm-Leach-Bliley Act (GLB Act) repealed Glass-Stegall antitrust provisions. Here are a few limits to national (charter) bank and bank holding company asset acquisitions.

12 US § 24a. Financial subsidiaries of national banks

A national bank may control a financial subsidiary, or hold an interest in a financial subsidiary, only if--

(B) the activities engaged in by the financial subsidiary as a principal do not include--
(i) insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death (except to the extent permitted under section 302 or 303(c) of the Gramm-Leach-Bliley Act 15 U.S.C. 6712 or 6713(c)) [e.g. insurance products exempted] or providing or issuing annuities the income of which is subject to tax treatment under section 72 of title 26 [e.g. managed funds like 401(*) exempted];
(ii) real estate development or real estate investment activities, unless otherwise expressly authorized by law; or
(iii) any activity permitted in subparagraph (H) or (I) of section 1843 (k)(4) of this title, except activities described in section 1843 (k)(4)(H) of this title that may be permitted in accordance with section 122 of the Gramm-Leach-Bliley Act;

(C) the national bank and each depository institution affiliate of the national bank are well capitalized and well managed;
(D) the aggregate consolidated total assets of all financial subsidiaries of the national bank do not exceed the lesser of--
(i) 45 percent of the consolidated total assets of the parent bank; or
(ii) $50,000,000,000;
(E) except as provided in paragraph (4), the national bank meets any applicable rating or other requirement set forth in paragraph (3); and
(F) the national bank has received the approval of the Comptroller of the Currency [OCC, elected to restructured PWG] for the financial subsidiary to engage in such activities, which approval shall be based solely upon the factors set forth in this section. [...]

(3)(A) In general
A national bank meets the requirements of this paragraph if--
(i) the bank is 1 of the 50 largest insured banks and has not fewer than 1 issue of outstanding eligible debt that is currently rated within the 3 highest investment grade rating categories by a nationally recognized statistical rating organization; or

(ii) the bank is 1 of the second 50 largest insured banks [a/k/a "core bank"] and meets the criteria set forth in clause (i) or such other criteria as the Secretary of the Treasury and the Board of Governors of the Federal Reserve System ["the Board"] may jointly establish by regulation and determine to be comparable to and consistent with the purposes of the rating required in clause (i).[...]

(A) In general
An activity shall be financial in nature or incidental to such financial activity only if-- ...

(i)(II) Board view The Secretary of the Treasury shall not determine that any activity is financial in nature or incidental to a financial activity under this section if the Board notifies the Secretary in writing, not later than 30 days after the date of receipt of the notice described in subclause (I) (or such longer period as the Secretary determines to be appropriate under the circumstances) that the Board believes that the activity is not financial in nature or incidental to a financial activity or is not otherwise permissible under this section.[...]

(2)  Factors to be considered
In determining whether an activity is financial in nature or incidental to a financial activity, the Secretary shall take into account--
(A) the purposes of this Act [1] and the Gramm-Leach-Bliley Act;
(B) changes or reasonably expected changes in the marketplace in which banks compete;
(C) changes or reasonably expected changes in the technology for delivering financial services; and
(D) whether such activity is necessary or appropriate to allow a bank and the subsidiaries of a bank to--
(i) compete effectively with any company seeking to provide financial services in the United States;

(ii) efficiently deliver information and services that are financial in nature through the use of technological means, including any application necessary to protect the security or efficacy of systems for the transmission of data or financial transactions; and

(iii) offer customers any available or emerging technological means for using financial services or for the document imaging of data.

Pardon me. This not is general reference.

Diversity is the key to economic and political evolution.

by Cat on Sun Sep 7th, 2008 at 07:38:12 PM EST
[ Parent ]

Go to: [ European Tribune Homepage : Top of page : Top of comments ]