The GSEs are the Federal Government's off-balance-sheet vehicles.

Can't they hold a bake sale. At least I'd get something in return. But nooooo! They are too dignified to beg. Robbing is so much more their style.

Amazing what the government will do to try and keep rates artifically low.

“If we knew then what we know now, we likely would not have designed entities like the GSEs that have private ownership but are required to undertake a public mission. These competing interests are too difficult to manage, and the potential long-term market distortions and public policy concerns are too significant.” Secretary Paulson, Sept. 20 2007

http://www.ustreas.gov/press/releases/hp565.htm

Let's see if I got this straight:

The consequences of the GSE's failure are to big and unknown to contemplate, so the answer to their insolvency is to loan them more money.

And make sure the this is publicly described as a "liquidity" problem, not an insolvency problem.

Does it ever occur to any of these geniuses that loaning more money to an insolvent corporation with an impossible business model, is just prolonging the inevitable and making the consequences worse?

FDIC's Insurance Deposit Fund: How's That for Under Capitalized?
FDIC's Insurance Deposit Fund: How's That for Under Capitalized? -- Seeking Alpha

I hope that by now EVERYBODY has read Willem Buiter article in the FT highlighted yesterday by Naked Capitalism:

Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

Liz,
Good for you. Let Uncle Sam take the risk. If a client asked me, I'd charge them for 5 seconds of my time to tell them that.
I know they're pushing the 401k's, but I'm not sure there are many takers. Think of all those Postal workers, defense and law enforcement.

here is our problem:

"... that government of the people, by the people, for the people, shall not perish from the earth."

while the educated middle class was busy with their jobs, kids, consumerism, and entertainment, our country was taken from us by stealth, and we noticed not at all.

IF this is the beginning of the fall...if...

then history will show that the end of citizen army and the conversion of our armed forced to "volunteers" and private contractors to fight wars that supported a financial system that served the privileged marked our demise.

At some point it seems we have to go from saving the system to cushioning the collapse. I suspect the failures are going to come faster in the next few months. Exacerbating the situation is the coming seasonal decline in home sales.

someone 4 or 5 threads down said that "...when the world is no longer willing to loan us money in debt denominated in dollars..."

(my words now) that's when we enter the alternative universe of an economic three ringed psychosis... i mean circus.

thats why saddams threat to sell oil not denominated in dollars, and irans threat to do the same demanded of our leaders a response with war.

the dollars collapse is the calling card for the next leg down...the end of the dollar as the worlds reserve currency.

IF this is the beginning of the fall...if...

then history will show that the end of citizen army and the conversion of our armed forced to "volunteers" and private contractors to fight wars that supported a financial system that served the privileged marked our demise.
mock turtle | 07.13.08 - 12:28 pm | #

Bingo !

America's most profitable corporations ( esp. since 2000 ) operate under the holding company of War Inc. War, Inc - Wikipedia, the free encyclopedia.

video
Video - Breaking News Videos from CNN.com

suze: Why aren't the regulators in jail? [2:30]

And more:

"... Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London. ..."

Anon, I find the SEC's timing on this rumor-quashing kind of chilling - as well as ominous. Wonder if this is a message to heel the financial press.

Let's see if they define 'rumor' as the spreading of falsehoods about the health of IndyMac, F&F etc.

I am making window signs for Monday which will advertise my "Dead Cat Bounce Sale". Most of my customers, of course,won't understand. On the other hand, the guy from the Vietnamese restaaurant will try to buy them.

WHY THE F$CK IS THE THOUGHT OF BAILING OUT A FOR PROFIT CORPORATION EVEN BEING DISCUSSED?????????????

The dumbasses at F & F f$cked up. let them and their shareholders, bondholders, and everyone else eat the consequences.

Bernanke is the STUPIDEST MOTHERF$CKER in the world

DSL total deposits 12B.

BB--at the Indymac burn rate I come up with 10-15 banks that can be saved.

Prolly why they waited so long to close down Indymac.

Have they raised their charges to the banks yet?

They aren't hardly making any loans any more. Not only has the horse escaped, but the smell of the manure is gone.

Amazing how people's thinking takes so long to change. Maybe some day this will need thinking about again, but there's lots of other stuff that needs to be addressed first.

Cramer said sell at 12,000. Ahemmmm.

The stock market is at 11,100, and I'll eat my had if it goes over 12,000 again until all this is over with. If it ever is.

I sold about 2/3rds of my shares last fall, thinking I didn't understand why the mkt was in the stratosphere, and I don't invest in what I don't understand. It was pretty close to the high. Pats sell on back. . .

I assigned below 10,000 as the time to buy back in. Now, I think 9,500 is more like it. Why am I not a rich ex hedge fund operator???

That is, "hat".

Wish we could edit these comments.

Considering Fannie and Freddie were driveby shootings by the hedge funds.

They were months, if not years away from actual failure, and yet this happened.

Well, if you're buying stock or a 10 year bond the health of F&F in 2 years is VERY relevant. And, that's where the panic has been so far.

I second Nemo's motion. By all means, go to Econbrowser to read Hamilton's concise summary of where we are at. Clears the air rather well.

Many months ago, Hamilton had a post in which he cautioned us to reject the idea that there is some "safe course" that the feds can set, guiding us around the shoals of inflation and deflation. The economy/financial system is not a ship.

He doesn't restate that point here, but he might have.

This situation seems fraught with danger no matter what "course" we set.

In the Roubini approach, (Hamilton notes) we let GSE debtholders take a small haircut. But what if many of those debtholders respond by refusing to continue to fund our system?

But bailing out debtholders is going to be expensive.

No safe course. Which reef do you want to hit, and how hard?

the story so far

You'd have to be a colossal fool to pour good money after bad. The thingies are probably worthless and even 15 billion or whatever more will not bring them back to life. And the present stockholders will get the shaft, clearly. I'd bet the two are goners and will have to be nationalized sooner or later. It should have been sooner, of course.

Also, one of Hamilton's charts shows an interesting dip in the GSE's share of the total mortgage market, right at the time the subprime frenzy was in full flower and companies were rolling their own MBS outside GSE guidelines.

This reminded me of mp's comment on an earlier thread, seeming to imply that some people would like to see the GSEs out of the way. Mr. Potter vs George Bailey? (except the GSEs are lot bigger and hence less lovable than bailey bldg & loan, I suppose)

Mr. Market and the American people are about to find out that there is a limit to US power.

Does it ever occur to any of these geniuses that loaning more money to an insolvent corporation with an impossible business model, is just prolonging the inevitable and making the consequences worse?

All the time. But the decision makers are politicians. For the Bush admin, delaying the crash even to March 2009 means they can loudly proclaim everything was fine until their successors took over and the 28% or so of the population that will believe them will keep them on the thinktank/rubber chicken wingnut welfare circuit for the rest of their lives. If they can put it off for 2 year the MSM and general population will believe them even if they handed the next administration a cake with a Great Depression thoroughly baked in.

For the Dems in Congress the incentives aren't quite so clear but since there's no obvious way to fix it without major political cost they're quite content to kick the can down the road and hope for the best.

Any history buffs here? Is America about to re-enact the events leading up to the French Revolution? If the middle class goes broke by being forced to prop up the wealthy, what else can result but class warfare?

There isn't enough class consciousness for that.

This is not anything like the events leading to the French Revolution. That was begun by a monarchy that needed to raise taxes and ran into a Middle Class that refused. So a kind of Constitutional Convention was called and the reformers, who wanted noble privelege done away with, got control and ran with it. It all got out of hand, the extreme radicals took charge, executed the king and queen, divested the nobles of their priveleges and started a foreign war to divert attention from the resultant problems. That paved the way for Napoleon.

Sorry, privilege not privelege.

How long, indeed, can Cramer rant and rave and wave his arms about discussing cash?

I think these things need to be hacked apart into maybe 10 large pieces apiece and then let loose with a couple of extra billion apiece. So no one of them is too big to fail. Also whatever legislation it was that prevented banks from gobbling each other up should be reenacted. Glass-Steagle was it? With an exception for times when the govmint needs to merge them for FDIC reasons. True this is a closing the barn door kind of thing, but it will stop digging the holes deeper. To mix my metaphors.

Roubini, aka Mr Pessimist, estimates the cost of a F&F bailout at 200-300 billion. That's bearable although mighty big. Of course anybody's numbers come from where the sun doesn't shine because they depend on unknowable default rates in an unknowable housing price decline.

A side problem with a bailout is that then the government has an enormous financial incentive to hold up housing prices, which could create some decidedly perverse incentives.

thats why saddams threat to sell oil not denominated in dollars, and irans threat to do the same demanded of our leaders a response with war.

argeto wrote
That's a scary, but plausible, coincidence. Now, we just need Norway to stop accepting dollars for their oil to test the theory out...
argento | 07.13.08 - 1:05 pm | #

mock turtle responds

no such test

if saudi, iran and iraq dollar denominate...norway is a piss in the ocean, and doesn't matter!!!!

"someone," not "some"

The situation today does not, unlike that of late 18th century France, involve: a noble class with its own laws and special privileges written into law; an absolute monarchy running the country; a government that is desperate to raise taxes (lowering taxes is the US mantra now); a government with no credit due to war expenditures (the heavy expenditures in Iraq don't give pause to this government that can still borrow at will); a revolutionary ideology about the complete reorganization of society (nobody wants present US society reorganized and there is no ideology to support any such thing).
The mere fact that we are going into a recession rather like several in our past is not at all like the crisis faced by the French Monarchy in 1787.

Lawerliz

Remember, there is no such thing as an ex Catholic.

Also whatever legislation it was that prevented banks from gobbling each other up should be reenacted. Glass-Steagle was it?

An economy with fewer (but larger) banks is less prone to bank runs than an economy with large numbers of small banks. Large banks are also less prone to concentration of risk like smaller, regional banks.

In a properly regulated market the consolidation of banks is generally a good thing and adds to the over-all stability of the financial system.

Glass-Steagall was mostly to keep commercial banks out of the investment banking business. If the US had kept to the spirit of that law we probably would have never seen commercial banks involved in SIVs, SPEs, or ABCP.

To begin to resemble the situation in France on the eve of the '89 revolution you would have to have in the US: a financial crisis so grave that the Congress would call a Constitutional Convention that could rewrite the US Constitution and a widespread Communist party with vast influence in intellectual circles wanting to communize the US, abolish private property, and nationalize all business. Obviously this isn't the present US reality at all.

"In a properly regulated market the consolidation of banks is generally a good thing and adds to the over-all stability of the financial system."

Andy Mellon will be pleased to here it. Keep telling yourself that.

Argento,

you may be right about norway being a big exporter rather than consumer of their domestic oil supplies.

but i would argue with you that as the world passes thru peak oil, what matters is which nations HAVE the oil rather than who today is exporting.

here is the rough list of proven oil reserve estimates circa 2006.

1. Saudi Arabia \t250
2. \tCanada \t 175
3. \tIran \t125
4. \tIraq \t150
5. \tKuwait \t100
6. \tUnited Arab Emirates \t100
7. \tVenezuela \t75
8. \tRussia \t60
9. \tLibya \t35
10. \tNigeria \t30
11. \tUnited States \t20
12. \tChina \t20
13. \tBrazil \t14
14. \tQatar \t 12
15. \tMexico \t12
16. \tAlgeria 12
17. \tKazakhstan 10 \t
18. Norway \t7.7

sorry... in billions of barrels

"Does the pacific-rim come to a screeching halt as well, or do they disconnect and carry on ?"

They will disconnect in the long run, but not in the short run.

History is on Asia's side now. Bill Clinton said that a number of years ago. I just happen to agree with it.

mp-

Interesting comment about Mellon. The question now is how doomed we are... others may not realize that last time this happened we were paying off WWI, while reducing taxes on the rich.

I've always thought that A. Mellon would still be disgusted by the Scaife that married into his clan and took his family name. Along with traitors like Norquist, he doesn't stand for the sort of hardworking 'lift all boats' conservatism of even the old robber barons (heck like in China today... they were building things!).

He did create the relatively modern progressive tax code (and at least popularize the concept of earned vs un-earned income).

"The fact is: sixty years of American profligacy is about to come to a screeching halt, so get used to it."

I'd say fifty years - and it's about time. It could also mean a shift back to core American values, which, contrary to the opinion of many, are not lost but dormant.

The econbrowser article suggests a 5-10% haircut on the bondholders is what fannie freddie would have right now.

I'm with the visceral mob that says that's the way to go. Let the next organization attract investors with an explicit government guarantee, and managers who are subject to the type of act that they tried to use in prosecuting Grasso.