"To support growth and further restore market liquidity," i.e. to allow the investment banks to swap garbage for cash to further game the stock market and keep the sheeple in check.
i assume there are rules that specify what kinds of mortgages and rmbs that these gses can securitize.
if you know what they are, to what degree is this going to matter, in other words, if they can only securitize the stuff that's not at risk or if new loans, not likely to be at risk, as opposed to the ninja stuff, then does this help much?
who sets the price they pay, is it by private negotiation, in which case what other than their fiduciary duties (cough) to their stockholders constrains them from buying at way high prices as a closet mechanism to nationalize the mbs, then if they blow up to holler for bailout?
I'm not sure I really understand what's happening and what this means.
The way I read it:
in the past Fannie/Freddie had to keep 30% capital reserves due to them being naughty in the past.
If they held up their part of the agreement, then this would be dropped.
Fannie has met their part of the bargain, but Freddie hasn't yet (they need to separate chairman/CEO)
Thus, they may now go to 20% capital reserves, freeing up more money they can lend.
Is this where the $200 Billion figure comes in? Does dropping from 30% to 20% give them $200 billion extra they can lend?
and through that lending of $20 Billion it turns into $2 Trillion through the magic of Fractional Reserve system?
Lastly:
does this line: This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.
mean that they are ONLY supposed to direct their extra money here, where it is needed most? or only that it will allow them if they want to direct the money there?
"And the thing which is chiefly recommended as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis." - von Mises 1924
Maybe I'm ignorant, but I would assume the danger here isn't buying mortgages, where perhaps they can examine the quality, but buying mortgage-based securities, where no one seems to know the quality.
They will buy whatever they are told to buy. MBS, toxic junk, rotten bananas, etc. - whatever it takes to keep the shell game going. Then, the taxpayers eat the losses while the experts dance around saying, "Who coodadnode?" when everything blows up.
I still say we're only 1 step away from taxpayer funded, government sponsered toxic loans for the masses to "keep families in their homes" - more precisely, to keep housing unaffordable and the sheeple chained to their debt. Not sure if it will work at reinflating the Bubble, but they WILL try everything. The only other option is crooks going out of business and Americans being able to afford to live here again, and they don't want that - not at any cost!
The problem is not on the supply side, it is on the demand side. FNM and FRE can offer to underwrite MBSs all they want (writing insurance policies is a very profitable business; paying out insurance policies, not so much), but what if no one wants to buy?
The same is true of housing at the lowest level; the GSEs can offer to make mortgages all they want, but if no one wants to buy a home due to fear of falling prices, nothing will move.
to me this plan is predicated on the idea that $200b lending can turn into $2T through fractional reserve
I think the 200 billion is the amount of new lending made possible by dropping their capital requirements. The 2 trillion is, I think, what there new projected total capacity is - including their existing capacity plus the new amount freed up by the lowering of capital requirements.
so if I understand you correctly:
they currently have 1.8T in capacity. after dropping their capital reserve requirement by 10% it frees up 200b, so 1.8T plus 200b = 2 T
Burnside: no citation needed - I admit that I am just guessing about the GSE's being told to buy whatever it takes to keep the game going. But it is quite possible: Very few people in charge have done anything other than play dumb and/or line their own pockets with loot as this huge scam unfolded over the years, and sticking the taxpayers with the bill has been a tradition for a long time now (LTCM, Savings and Loan bailout, etc.) Why should this time be any different?
Probert: They can buy their own paper, but their capacity to do so is limited by their immediate liquidity. The huge expansion being envisioned will have to be driven either by debt--massive issuance of new MBSs or CP--or by equity--massive issuance of preferred stock--because the GSEs simply don't have $2T sitting around on their balance sheets.
What I was saying about demand is that if the GSEs go into the market and no one will buy their new offerings, whether MBSs or CP or preferred stock, there won't be any rescue of the sector happening any time soon. If all they have to work with is the money in their bank account, any attempt to hold up the markets will be short-lived.
gotcha.
I think you've got a good point because at this juncture we don't know if this is a public/private company. The GSEs' fiduciary duty is not clear.
A better solution would be to create a new entity as Volcker hinted yesterday, use it to buy GSE paper and issue government paper off of that entity, backed by full faith of US gov
All this posturing is, without a doubt, preamble to a bailout by the taxpayer notwithstanding the Paulson's BS. They are trying very hard to pull wool over the ignorant people's eys!
Do I understand correctly that Fannie Mae and Freddie Mac have an exposure of about $ 2 trillion? If this is market to market, would it be correct to say that a 1% drop in market value would mean a loss of $ 20 billion? Is the capital "freed up" about 1/3 of $ 53 billion, i.e. about $ 20 billion? If U.S. house prices drop by 1%, wouldn't that wipe out most of that amount?
I'm actually not that bothered by the decrease in the reserves that they're required to have against losses. I just don't know enough to have a meaningful opinion as to what level of reserves are adequate. But investing that in mortgages and MBSs? Isn't this like investing your 401 money in the company that you work for? One of the main lessons we've learned so far is that mortgage defaults are much more correlated that they were thought to be. Shouldn't you strive to invest your reserves in something that is un-or even negatively correlated to the losses they are supposed to protect against? Especially if they buy MBSs made from crappier mortgages than those that they will buy directly. This allows them to secretly buy at the back door crap that they'd never buy publicly through the front door.
It's probably a good idea for Fannie and Freddie to crank up originations. Prices have already fallen about halfway back to the bottom in the bubbly areas like CA and FL. In combination with the new more-reasonable down payment requirements, mortgages made now won't be toxic anymore.
The question is how much loss have Fannie and Freddie already committed to?
Theory question RE: "OFHEO, Fannie Mae and Freddie Mac today announced a major initiative to increase liquidity in support of the U.S. mortgage market."
Is it possible to increase liquidity in said market without moving mortgage interest rates downward?
Given the right asking price, anything will sell. Uncertainty is a part of price equation...and it has an inverse relationship with price. So make with the price reductions and interest rate increases and let's all get on with our lives.
Fair Economist writes: It's probably a good idea for Fannie and Freddie to crank up originations.
Correct me if I'm wrong, but doesn't the genesis of this debacle/crisis lie at the feet at previous attempts to crank up originations? Loosened lending terms and artificially low lending rates were used specifically to crank up originations. Look where that has left us.
Is there really a shortage of supply of dollars to be borrowed for home purchases? I would argue that the problem is not lack of supply but that the supply curve has shifted back, up and left that is, to its historical and proper place. The market is trying to get back to some sort of equilibrium. Why do so many supposed economists want to keep manipulating the market? It will only lengthen and exacerbate the temporary negative effects of this rebalancing.
Thank god, anything to help out that stock market.
Nothing like extending the speculation game for the bankers. Whooo-hooo!
"To support growth and further restore market liquidity," i.e. to allow the investment banks to swap garbage for cash to further game the stock market and keep the sheeple in check.
tanta
i assume there are rules that specify what kinds of mortgages and rmbs that these gses can securitize.
if you know what they are, to what degree is this going to matter, in other words, if they can only securitize the stuff that's not at risk or if new loans, not likely to be at risk, as opposed to the ninja stuff, then does this help much?
who sets the price they pay, is it by private negotiation, in which case what other than their fiduciary duties (cough) to their stockholders constrains them from buying at way high prices as a closet mechanism to nationalize the mbs, then if they blow up to holler for bailout?
Some of us sheeple rely on a decent economy to feed our families. Have a little mercy.
I don't think the capital levels of FNM and FRE were the proximate cause for the loss of confidence in mortgage-backed securities.
Nice try though.
What you want to do with a junkie is to not interrupt his supply of dope.
Somebody sold a lot of gold today?
Tanta:
can you tant-ify this post for me please?
I'm not sure I really understand what's happening and what this means.
The way I read it:
in the past Fannie/Freddie had to keep 30% capital reserves due to them being naughty in the past.
If they held up their part of the agreement, then this would be dropped.
Fannie has met their part of the bargain, but Freddie hasn't yet (they need to separate chairman/CEO)
Thus, they may now go to 20% capital reserves, freeing up more money they can lend.
Is this where the $200 Billion figure comes in? Does dropping from 30% to 20% give them $200 billion extra they can lend?
and through that lending of $20 Billion it turns into $2 Trillion through the magic of Fractional Reserve system?
Lastly:
does this line:
This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas.
mean that they are ONLY supposed to direct their extra money here, where it is needed most? or only that it will allow them if they want to direct the money there?
"And the thing which is chiefly recommended as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis." - von Mises 1924
also:
to me this plan is predicated on the idea that $200b lending can turn into $2T through fractional reserve.
how is that kept in the housing sector? how do they keep it from bleeding into gold or commodities or whatever?
how do they get the lenders to loan this money? or will they do it because it's pseudo-govt guaranteed?
Somebody sold a lot of gold today?
Hedge Fund margin calls?
Maybe I'm ignorant, but I would assume the danger here isn't buying mortgages, where perhaps they can examine the quality, but buying mortgage-based securities, where no one seems to know the quality.
tanta
what happened to the dec 05 2007 ofheo proposed rules on tightening severity computations, which would have raised capital requirements $5B to $10B?
is that out the window now?
we all look the other way?
Is this as big an announcement as it sounds?
As a key part of this initiative, both companies announced that they will begin the process to raise significant capital.
This is a big change. As of yesterday they opposed raising more capital. I think they are already starting to implement Volcker's recs.
They will buy whatever they are told to buy. MBS, toxic junk, rotten bananas, etc. - whatever it takes to keep the shell game going. Then, the taxpayers eat the losses while the experts dance around saying, "Who coodadnode?" when everything blows up.
I still say we're only 1 step away from taxpayer funded, government sponsered toxic loans for the masses to "keep families in their homes" - more precisely, to keep housing unaffordable and the sheeple chained to their debt. Not sure if it will work at reinflating the Bubble, but they WILL try everything. The only other option is crooks going out of business and Americans being able to afford to live here again, and they don't want that - not at any cost!
The problem is not on the supply side, it is on the demand side. FNM and FRE can offer to underwrite MBSs all they want (writing insurance policies is a very profitable business; paying out insurance policies, not so much), but what if no one wants to buy?
The same is true of housing at the lowest level; the GSEs can offer to make mortgages all they want, but if no one wants to buy a home due to fear of falling prices, nothing will move.
They will buy whatever they're told to buy. MBS, toxic junk . . .
Citation please.
to me this plan is predicated on the idea that $200b lending can turn into $2T through fractional reserve
I think the 200 billion is the amount of new lending made possible by dropping their capital requirements. The 2 trillion is, I think, what there new projected total capacity is - including their existing capacity plus the new amount freed up by the lowering of capital requirements.
what do you mean supply-demand? I think the idea is to repurchase their own GSE paper and put a credible floor under agency spreads.
Nate:
so if I understand you correctly:
they currently have 1.8T in capacity. after dropping their capital reserve requirement by 10% it frees up 200b, so 1.8T plus 200b = 2 T
thanks, I know I"m just not getting this right.
Burnside: no citation needed - I admit that I am just guessing about the GSE's being told to buy whatever it takes to keep the game going. But it is quite possible: Very few people in charge have done anything other than play dumb and/or line their own pockets with loot as this huge scam unfolded over the years, and sticking the taxpayers with the bill has been a tradition for a long time now (LTCM, Savings and Loan bailout, etc.) Why should this time be any different?
Probert: They can buy their own paper, but their capacity to do so is limited by their immediate liquidity. The huge expansion being envisioned will have to be driven either by debt--massive issuance of new MBSs or CP--or by equity--massive issuance of preferred stock--because the GSEs simply don't have $2T sitting around on their balance sheets.
What I was saying about demand is that if the GSEs go into the market and no one will buy their new offerings, whether MBSs or CP or preferred stock, there won't be any rescue of the sector happening any time soon. If all they have to work with is the money in their bank account, any attempt to hold up the markets will be short-lived.
YTL, I don't characterize OFHEO director Lockhart quite the way that you do. But that's just my opinion.
Peripheral Visionary,
gotcha.
I think you've got a good point because at this juncture we don't know if this is a public/private company. The GSEs' fiduciary duty is not clear.
A better solution would be to create a new entity as Volcker hinted yesterday, use it to buy GSE paper and issue government paper off of that entity, backed by full faith of US gov
I'm confused. Commercial banks and most other enterprizes are now beefing up reserves to preserve themselves. Are GSE's contrarian by nature?
probert - if this was done, the USD would see a downdraft
Is there a single federal leader willing to say the obvious? Home prices have much further to fall.
Anything that flies in the face of that principle is nonsense.
Anything that sensibly helps good borrowers buy at appropriate prices is fine.
why?
deficit spending?... yes, but maybe in that case the benefits outweigh the costs. But what do I know...
All this posturing is, without a doubt, preamble to a bailout by the taxpayer notwithstanding the Paulson's BS. They are trying very hard to pull wool over the ignorant people's eys!
Do I understand correctly that Fannie Mae and Freddie Mac have an exposure of about $ 2 trillion? If this is market to market, would it be correct to say that a 1% drop in market value would mean a loss of $ 20 billion? Is the capital "freed up" about 1/3 of $ 53 billion, i.e. about $ 20 billion? If U.S. house prices drop by 1%, wouldn't that wipe out most of that amount?
I'm actually not that bothered by the decrease in the reserves that they're required to have against losses. I just don't know enough to have a meaningful opinion as to what level of reserves are adequate. But investing that in mortgages and MBSs? Isn't this like investing your 401 money in the company that you work for? One of the main lessons we've learned so far is that mortgage defaults are much more correlated that they were thought to be. Shouldn't you strive to invest your reserves in something that is un-or even negatively correlated to the losses they are supposed to protect against? Especially if they buy MBSs made from crappier mortgages than those that they will buy directly. This allows them to secretly buy at the back door crap that they'd never buy publicly through the front door.
It's probably a good idea for Fannie and Freddie to crank up originations. Prices have already fallen about halfway back to the bottom in the bubbly areas like CA and FL. In combination with the new more-reasonable down payment requirements, mortgages made now won't be toxic anymore.
The question is how much loss have Fannie and Freddie already committed to?
Prices have already fallen about halfway back to the bottom in the bubbly areas like CA and FL
Some bubbly areas, and halfway = $100K.
use it to buy GSE paper and issue government paper off of that entity, backed by full faith of US gov
We could use NASA for this. They could put the paper into a rocket and shoot it into the sun.
Theory question RE: "OFHEO, Fannie Mae and Freddie Mac today announced a major initiative to increase liquidity in support of the U.S. mortgage market."
Is it possible to increase liquidity in said market without moving mortgage interest rates downward?
Given the right asking price, anything will sell. Uncertainty is a part of price equation...and it has an inverse relationship with price. So make with the price reductions and interest rate increases and let's all get on with our lives.
Please.
I've never SEEN so MUCH pissing into the wind in my short life.
Fair Economist writes: It's probably a good idea for Fannie and Freddie to crank up originations.
Correct me if I'm wrong, but doesn't the genesis of this debacle/crisis lie at the feet at previous attempts to crank up originations? Loosened lending terms and artificially low lending rates were used specifically to crank up originations. Look where that has left us.
Is there really a shortage of supply of dollars to be borrowed for home purchases? I would argue that the problem is not lack of supply but that the supply curve has shifted back, up and left that is, to its historical and proper place. The market is trying to get back to some sort of equilibrium. Why do so many supposed economists want to keep manipulating the market? It will only lengthen and exacerbate the temporary negative effects of this rebalancing.
Gosh.
"burnside writes:
YTL, I don't characterize OFHEO director Lockhart quite the way that you do. But that's just my opinion."
Huh?
Yearning to Learn,
My apologies. That was intended for Pondering the Mess @ 10:51a.