Of course I thought that the important quote form the WaPo was: Although the idea of extending government lending to Fannie Mae and Freddie Mac has been discussed, Fed leaders don't think that would get to the heart of the problems facing the companies ..... The article then goes on to say that they don't have any problem accessing capital. ISTM that their situation is similar to an upside down borrower with good credit. Additional borrowing or refinancing doesn't help their negative equity position.
In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary.
In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary.
No, no, no. It was George Bush's masterful calming of the waters what done it.
"the press credulously printed an unfounded rumor"
You just captured the entire history of the Bush administration. So called "journalists" (as opposed to those filthy bloggers) have functioned as nothing more than passive, stenographic enablers for whatever it is Bush, Cheney, and their cronies have wanted to do. The question of whether the news media are liberal or conservative is almost beside the point; the real problem is that they're astoundingly lazy. CR and Tanta do more hard work and investigation in a week than your average "journalist" does in a month.
No, no, no. It wasn't that at all. Everybody remembered last minute that that Hank Paulson said subprime was contained, so everything is clearly all right.
Now, it's all about the rumors. I noted a huge uptick in rumor-blaming in the last week. The underlying message is that if it weren't for people speaking out of school, we'd be sailing along at a brisk clip, with no clouds to be seen.
I think this uptick is significant, and points to just how stormy things will get. It is sort of a last refuge of hucksters--"Who you gonna believe? Me, or that rumormonger in the back of the crowd? Come on folks, step up and get yourself a bottle of Dr. Cleaver's Feel-good-like-the-50s elixer."
And nothing will give the rumor crushers more fuel than a Bernanke-Syron phone call taken back before it happened. Why, it's as if someone NEEDED a false rumor to flog--and the media took care of it.
Barry's right, if they are chasing rumor-mongers for jail time, they had better chase this one.
Any negative rumor that is used for prosecution without comparative prosecution for these BS positive rumors is just more reason revolution is the only solution.
It seems that some people are now remembering that the bonds of these agencies have 'not gov. guaranteed' written on them and that because of this, the bond holders have been getting about $50B extra each year for the 'risk'. Since most of the bonds are held by foreign governments, some people are acutally asking why they should be paid for taking the 'risk' and not assume the risk. Bad thinking, let the home owners suck it up, they are all rich anyway.
In line with the WaPo bit I quoted above, liquidity isn't their problem, solvency is. It is common for companies in a death spiral to have a negative net worth long before they are unable to borrow more money. Hope springs eternal, and if you're likely to bankrupt, it is rational for managers to continue borrowing if there is ANY chance of avoiding bankrupcy. This is WHY FDIC banks are more regulated by the government than corporations that AREN'T insured by the government.
Given that there is no explicit government guarantee of the GSEs, there is less theoretical reason for the government to step in and cease operations before the companies lose access to credit or capital. But since they are reported to be responsible for ~80% of lending this year, they truly are "too big to fail." This puts them in the strange position of having an implicit government guarantee, but no regulator with sufficient clout to end a possible death spiral as debts pile higher and higher.
Lending them more money at the discount window doesn't help when the problem is that their assets have declined to the point that they have a negative worth. If the RE and bond markets improve so that their assets regain their worth, lending can get them past the "rough patch." If the markets continue to decline, additional debt just makes the impact crater bigger. ISTM that just like the FB paying their mortgage with their HELOC, the plan seems to be to hold on for another day and hope for a miracle.
We need a government owned bank where people could easily and conveniently put their money over 100T and not worry about it. This nonsense of bailing out reckless banks should stop. Let reckless banks fail and the shareholders and big depositors take the hit. If you keep bailing them out they will simply go on to be even more reckless since they will always be rescued. Investors in reckless banks ought to emerge with nothing.
Anonymous writes:
Barry's right, if they are chasing rumor-mongers for jail time, they had better chase this one.
Any negative rumor that is used for prosecution without comparative prosecution for these BS positive rumors is just more reason revolution is the only solution.
Anonymous | 07.12.08 - 9:49 am | #
Good luck with that rumor prosecution thing - either way. Call me when the grand jury comes back with indictments. Until then I think I'll sort through my grocery coupons or something else just as exciting.
I think D Backel got it exactly right above - except he might have underestimated how many times 'the trick' will work.
Since most of the bonds are held by foreign governments, some people are acutally asking why they should be paid for taking the 'risk' and not assume the risk.
The Chinese are the biggest of the bondholders and it isn't wise to anger them or stiff them.
. . . the plan seems to be to hold on for another day and hope for a miracle.
A cynic might say the plan is to hold on for six more months and let the next guy take the hit, but I think they will try to hold on "forever."
Forever is defined as the time it will take for RE assets to appreciate or debt to be diminished by continued devaluation of the dollar or enough inflation to kick in to balance things out in nominal terms, whichever might first occur.
Covered bonds have a number of differences to other mortgage-backed bonds that explain why US regulators believe investors stung by the loose underwriting standards of the housing boom might be coaxed into buying these bonds instead.
First, covered bonds generally have much stricter limits on the loan-to-value ratio of the mortgages used in them and are never used to fund subprime borrowers. Secondly, while the pools of mortgages that back each bond are ringfenced to protect them from problems at the issuer, the issuing bank has to guarantee that it will pay back the bond if the mortgages themselves turn sour. These conditions could encourage better underwriting by mortgage lenders in the first place, while also inspiring confidence among investors.
Mr Paulson hopes they could provide much-needed credit for prospective homebuyers and help revive the flagging US housing market, where purely private sources of finance have all but evaporated. So far, only the government-sponsored mortgage financiers Fannie Mae and Freddie Mac have taken up the slack but they are also facing financial pressure.
One of the biggest potential prizes for a US covered bond market would be the opening up a whole new set of domestic investors who previously have not funded mortgage lending. Many bankers believe such an investor base has the potential to make a US covered bond market bigger than the European one.
Today we are also looking more broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal homebuying activity, said Mr Paulson.
You ought to pay off the bond holders for political reasons, but you can well afford to stiff the shareholders. Stupid idiots to have believed in Fanny and Freddie. Be a good lesson to them.
And nothing will give the rumor crushers more fuel than a Bernanke-Syron phone call taken back before it happened. Why, it's as if someone NEEDED a false rumor to flog--and the media took care of it.
Look, do I think that the Fed has been considering the discount window idea for weeks or months? Sure I do. I believe that the Fed has been kicking around any number of ideas, good, bad, indifferent, conceivable and inconceivable, for what to do about the GSEs. They damned well better be. War-gaming is their effing JOB.
That's not exactly the same thing as Ben calling up Dick on Thursday and telling him the window is open.
I mean, who do these people think Dick Syron is? He's a former regulator. He knows perfectly well what kind of scenarios are being subject to debate and analysis at the Fed. Anyone who thinks that Syron's own opinions on the subject haven't already been canvassed by the Fed as part of that debate and analysis is naive. So it's hard for me to believe that Bernanke had to call Syron on Thursday (bypassing Lockhart?) to let him know that the discount window option was just one of the possible cards on the table. If the call happened at all, I'd be more inclined to think that Ben was asking Dick what he thought about the idea.
But it was reported as the Fed chairman calling the CEO of Freddie Mac before the markets opened yesterday to tell him he had access to the discount window. Which of course flipped everyone out.
And I am supposed to believe that Ben called Dick back late yesterday to say that things seem to have calmed down enough that it was no go? How was that conversation supposed to have gone down? "Sorry, Dick, we froze your HELOC. Hope you hadn't made any plans"?
I still can't get the timeline quite straight, but as far as I can tell Reuters posted the story at 4:18 pm ET saying the Fed had no comment. An hour later Bloomberg has a comment from the Fed denying the whole thing. (I don't know how long the Reuters headline had been on the tickers before the story was posted online; I saw the headline at MarketWatch around 3:00, but the story didn't appear in full until later.) It rather sounds to me like somebody wanted a "scoop" too badly.
Unfrigginbelieveable! Bloomberg's tape is running, "Indymac Seized by US Regulators; Shumer Blamed"
On the contrary, i think anyone who exposes these over leverage and under capitalized institutions should be commended. Whether it is politically motivated or not.
I think another huge selloff in fannie and freddie next week is in order after the news gets digested over the weekend.
Someone on a thread yesterday said that Wachovia was holding back on funding. I have one place re-fi closing which has been on hold for weeks for no reason at all, every few days a new demand comes in for more bank paperwork and nothing happens. W. seems to be hoping this borrower will screw up so it doesn't have to make the loan. It demanded a new credit report. The FICA score went up, not down. There were "problems" unspecified with the the appraisal. Well, so? As far as I can see nothing is moving, which means for the moment nothing is worth anything. So if W. doesn't want to lend, why not just say so?
Why raise hopes?
So the borrowers can go elsewhere? Or, try to.
Having discouraged creative thinking for forever, these people are unable to think the impossible. They are unable to either move foreward or backward. They know the old ways aren't right, but can't figure out any new ways. Most likely, they are dead men walking, refusing to admit they are zombies. So they pretend to do business, without actually doing any.
Maybe they know they won't be able to sell this particular little loan to Fannie/Freddie??
Huge is a bit of an understatement, FRE ran 397.3 million shares with a 90 day MA of volume of 22.6 million...and FNM ran 409.3 million shares on a 90 day MA of volume of 29.8 million shares...
The next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations.
Question Mark and The Mysterians playing their one hit wonder "96 (billion) Tears."
Repeated from the previous thread apropos here:
Let's be clear here. the only reasons rumors have any power whatsoever is because we no longer fully trust what we are being told. Look at the stock market today. Rumor correct drove down the DJIA below 11,000 and rumor incorrect drove it to positive territory where the floor cheered, actually cheered only to see the average finish way down 90 minute later. This is no longer investing, this is all speculation. Substitute glod or oil for DJIA in the events above and the story still rhymes.
Adding:
When you treat people like children they act like children. No one should be surprised that the housing market and spreading to financials and eventually the general economy are acting irrationally. They are receiving false signals and have been ever since Fed Funds went below 4%. Now this morning we learn the Senate has passed the bailout bill. It will make things worse precisely because of the false signal it contains.
So if W. doesn't want to lend, why not just say so?
Probably because they've already issued a commitment letter on that loan, and they don't want to get sued for rescinding it. So they're just getting creative about interpreting the conditions in the letter.
I assume your client has a commitment letter? Are we scheduling closings these days without one?
Maybe someone wanted a scoop too badly. Or maybe this was a "trial balloon" from the Fed to test the market reaction.
Judging by the bond market reaction (longer-dated maturities sold off violently, indicating no faith in U.S. debt) I'd say that this balloon got shot down, for now.
jim writes:
Anybody know how much Fanny and Freddy debt the Chinese hold? Has Brad Setser said anything about this?
jim | 07.12.08 - 10:18 am | #
Last I saw he was still trying to get a handle on a reliable number - there really isn't any publicly available reliable data. Same thing applies to their sub-prime exposure - who knows.
What makes it even more difficult is it isn't held centrally - over the last few years PBoC & SAFE have encouraged the sector & regional banks to take positions of their own (to take some of the load of PBoC & SAFE). They have stepped up.
Count on one thing - these d00dz get paid first. If not our gov't goes to 100% pay-go overnight. Some of us here might think that not a bad idea in the LONG RUN... in the short run it would be about as much fun as going cold turkey on a steadily increasing 30 year heroin addiction. It will be 'avoided & deferred' as long as possible.
You might not like the interest rates compared to Corus Bank CDs, but you don't have to worry about getting all your money back (until the US Treasury defaults anyhow).
Let's see what happens on Monday when FRE and FNM have to sell bonds for financing. I suspect that the bonds will not sell as well as they would like. End result is that the FED will have to provide some funding which they are able to do (up to $2.5 billion if my memory serves me).
If the bonds do not sell well and the FED opens up the discount window, I will move the rest of my money out of money market into MGEMX for a currency play. I was sitting in bonds and moved out last week before the two year hit 2.4% and before the spike to 2.6%. I basically was flat but I can live with this as I did not lose the 20% that MGEMX lost.
However, I suspect that China will support their market in July and August as they head into the olympics. Also, I suspect the dollar to take a dive if the FED opens up the window. After the olympics, I suspect that China will revalue their currency to address their inflation and increase their purchasing power against the dollar.
On a side note, I hope you are doing well Tanta. With two family members who have fought your disease, it is a painful but winable fight. Hope the weekend finds you well. Cheers.
Also, I suspect the dollar to take a dive if the FED opens up the window.
After the olympics, I suspect that China will revalue their currency to address their inflation and increase their purchasing power against the dollar.
Too late for the dollar, it already took a dive, further diving though may not be excluded.
I believe china has raised rates numerous times over the past year or so, their problem is hot money is still coming in to the country at an astounding pace. My guess is that they will put in more regulations to curb that effect and to raise rates and bank reserve ratios again.
They don't really focus too much on the equity markets, it is not a top priority for them.
Commitment letter? Commitment letter? We never get no steenkin' commitment letters. Every once in a while I see one to be countersigned at closing. That is to say, I saw them before August 9, 2007 when the credit train ran into the mountain and everything seized up.
And I've never seen one that wasn't so vague and weaselly that the bank
couldn't think of an excuse to get out of it. I've never seen one clear enough that I'd be willing to sue the bank on the basis of breach of contract for failure to honor it.
I was the one that said wachovia was stopping loans. That's what I heard from a credible source. I immediately transferred most of my $$ from them to another "safer" instititution that I had ready for this type of thing.
If Bernanke was on the phone with Syron I doubt they were discussing Phil Mickelson's hole in one.
The WSJ says FRE is hitting the markets Monday for $3 billion in short term financing. If the sale goes OK all is OK. If it doesn't I suppose Syron will need to come up with the money someplace else and the FED is the only place I know you can get $3 billion quick.
The funny thing is that everyone comments on the falling dollar, but no one ever posits plausible solutions for strengthening it. How high would the interest rate have to be to attract foreign capital? Today, it's the solvency of FRE/FNM. Tomorrow, it'll be the rest of the financial industry. Then comes the solvency of Medicare. Next, Social Security.
Shumer speaks a truth and the Repub Bloomberg perpetuates the myth that it was Shumer's fault for wiping the lipstick off the pig.
BB you have a contrary nature and not good to live one's life in spite of everyone. You need to stand for something irrespective of anyone else.
I am happy that my paid for house sits on 2 1/2 acres. You'll know we have reached Appocalypes when I start calling myself farmerliz. We have orange lemon and tangerine trees. I also have a nice stand of rosemary and a cinnamon tree!. I know how to grow tomatoes. I can grow sunflower seeds. I have some ginger plants--don't know if these are the ones with the edible roots.
So maybe we can sell citrus and spices!! I should try and grow a nutmeg tree; might be too cold here.
Also in Miami had an allspice tree for a while but I grew it too close to the house and it had obnoxious roots.
Argento writes:
The funny thing is that everyone comments on the falling dollar, but no one ever posits plausible solutions for strengthening it.
Raise Rates to at least 4% and let the banks fail. It won't be done so am better off commenting on it falling, in case there still are some deluded people thinking it will rise.
No need to apologize, just my thoughts anyhow, i take things at face value.
The FED's mandate is to protect the banks, hence their drastic interest rate moves. I do hope they don't get power over the SEC as well. Power corrupts and absolute power corrupts absolutely.
I read somewhere yesterday, don't remember where, that there's a precedent to the fed buying GSE paper. SO this would be nothing new. What's the big deal ?
Russia, a holder of about $100 billion in U.S. agencies' debt, including securities of Fannie Mae and Freddie Mac , said on Saturday it was happy to hold the debt and had no immediate plans to reallocate. "Debt obligations of Fannie Mae and Freddy Mac are de-facto not inferior to U.S. sovereign debt obligations in their credit quality and still have the highest credit rating necessary for the gold and forex reserves investment,"
"I am happy that my paid for house sits on 2 1/2 acres. You'll know we have reached Appocalypes when I start calling myself farmerliz. We have orange lemon and tangerine trees. I also have a nice stand of rosemary and a cinnamon tree!. I know how to grow tomatoes. I can grow sunflower seeds. I have some ginger plants--don't know if these are the ones with the edible roots."
This illusion is called the self-sufficiency fantasy. It was barely possible two hundred years ago.
I used know of some villages in the back of beyond in Russia where it might have been possible. Even they were dependent to some extent on services from the outside.
We're all in this together, and we have to work out solutions - if necessary - together.
The FED's mandate is to protect the banks, hence their drastic interest rate moves. I do hope they don't get power over the SEC as well.
The current machinations have eerie similarities to 9/11, when all of the agencies were blaming each other. As a result, DHS was created as an overseer. Evidently, the Fed has become the financial equivalent of DHS.
My real concern is how much authority Congress will cede to the executive when the shit really starts to hit the fan. Executive nationalization, which Truman almost got done, would not be off the table.
but no one ever posits plausible solutions for strengthening it.
Raising rates would be . . . interesting, considering the amount of debt that is rolled over every quarter:
bills: $1T total, ~$150B rolled every quarter
notes: $2.5T, ~$300B rolled every quarter
t-bills are in the 2% range, notes are in the 4% range, the surviving bonds we issued in the 80s are in the 9% range.
Altogether the interest payment shock of moving to 4-8% would be ~$60B/yr, roughly (all my numbers are SWAGs so could be way off).
I find it humorous that we still have $40B of t-bonds paying over 10% extant from the early 80s. These bonds exist thanks to the Reagan tax cuts. Eg. nstead of taxing some wealthy dudes in 1983 $12B we borrrowed the money at 10-13% pa for 25 years from them. $36 billion in total interest to not tax $12B. What a deal, plus we've still got to rollover the $12B we owe them.
By that i mean that absolute power must not ever be concentrated in any one entity. There must be checks and balances. The alternative is too bleak to contemplate.
Troy:
That's why I wonder how a Volcker-type response could work to cure inflation. Sure jack up interest rates, and we'd be looking at the largest ARM reset in the history of the world. Ahhh, what a mess we made.
Sanity is prevailing.
Stop whacking the fantasy that fannie and freddie are busted.
Look at it this way- they get to borrow at 2-3% and lend at 6-7%.
No run on assets is possible, 'cause they sold bonds. Geez, so what if a bunch of losses are caused by mark to market. The real question is what are the realized losses.
That cash burn is the only question of solvency. The assets are huge, but most of them are sound. I don't see much of the pre 2004 stuff to do more than continue to be paid. There will be very little default on the tranches from 2005-2007, because, ironically due to their requirements, most of the really toxic trash was not eligible to be sold through GSEs without fraud being involved.
Now, what Indymac has on the books is probably the most toxic remnants of the boom excesses.
Ugh. What else is buried on the balance sheets from that era on all of the gogo lenders? who knows, but most of it didn't go GSE.
Remember, they were complaining about a lower percentage of loans and not making their fees during the boom.
Now they have the market nearly to themselves, so time to raise fees and push income.
Geez, they sound like buys to me, especially with explicit government backstops.
Crisis over, for them. Now, those banks with toxic portfolios, well, they are a different matter.
BB,you might read a bit about the "Hamdi" decision at "Dirt Rhoades Scholar".take a look at the Kelo decision,read the new fisa bill,the military commissions act,and patriot act 2.Buy lots of Tums first.
below....3 sentences from the FORSYTH column on Barron's...
"Treating them like hedge funds and forcing them to mark everything to market would go against that mandate, they point out."...
..."The impact of a failure of Fannie and Freddie, though technically insolvent, is beyond imagining, far greater than the bankruptcy of a Bear Stearns. For that reason alone, such an eventuality is unthinkable."...
In a free market, supply and demand naturally find an equilibrium but, in a market that is heavily dependent upon credit, and one where the government manages the supply of credit by enabling easy credit for things that history shows are not really true assets, then eventually, an overly enthusiastic market will correct, maybe substantially. In an overdue correction of this imbalance we are now seeing real estate (the tail) correct the dog (the mortgage bond market). Everyone's certainty that they are too big to fail won't stop it from failing if the excesses were really based upon systemic greed that we all convinced ourselves was completely reasonable. It wasn't reasonable. In 1962 my parents bought a house in a NYC burb from an old couple who bought it new in 1929 for about 30-35% more than they paid for it. ($32,00) That same house is valued at roughly $750,000 now. You tell me. What's really reasonable as a solution? Is it really to further devalue the currency to make this mandate keep up the illusion?
The lack of clear and unambigous action by the administration is troubling to say the least. Especially since you've got to assume that there are some parties (IBs, Hedge Funds, Etc) benefiting greatly from the drop in the stock price.
Less than half of U. S. mutual funds are owned by their managers, according to Morningstar. Thats a problem, contends the firm, since a fund manager who puts his or her money at risk alongside his investors is showing conviction in his strategy, says Russ Kinnel, Morningstars director of fund research.
AllenM don't overlook the problems with MI companies here. The mortgage insurance required by the GSEs is backed by companies that are also potentially insolvent. The total market cap for MGIC, PMI, and Radian is close to $750mill. Unfortunately they're probably backing a $trillion worth of debt. There's big time counterparty risk here.
Mortgage insurance is basically a writeoff. All of the assets will be paid to cover losses, and then they will be done. Market cap for mgic radian, and pmi is irrelevant, there value is in their asset holdings, which are far higher than their market caps. They have about $20 billion in assets that will be committed and they will be spent on foreclosure losses.
The thing is if lending grinds to a halt, the underlying bonds blow up due to a housing death spiral.
The Fed knows this, hence they will do whatever is necessary to backstop the market.
What people are missing is why Freddie wanted more capital, not to cover losses, but to write more business. That is why they wanted to raise capital, because with the cmo market imploding, they have the field to themselves.
The US government should invest $100 billion in fannie and freddie preferred stock and let 'em rip.
That would provide more than enough capital to reassure the markets, and would eventually be repaid with interest.
Look at it this way- they get to borrow at 2-3% and lend at 6-7%.
No run on assets is possible, 'cause they sold bonds. Geez, so what if a bunch of losses are caused by mark to market. The real question is what are the realized losses.
Exactly. Talk to me about their cashflow. As long as they have excess cashflow I don't care what their M2M paper losses are.
BTW - the 'run down' scenario you posted last night makes perfect sense... I'd be doing it already if I were them.
Understand 99% of the people who post on this and every other blog have NEVER run a business and have not had to meet ongoing immediate obligations so don't realize how well schooled these folks are at doing this... Most folks here are wage slaves and maybe do a little 'trading'... they don't realize how long a franchise can last given an almost annuity-like stream of cash (like the GSEs have). Then it just becomes a matter of cutting back new business generating out-of-pocket cash-eating operations sufficiently to be sure the franchise continues to run in the black CASHFLOW-WISE, quarter after quarter. Screw M2M and the horse it rode in on.
The GSEs can easily out wait the market if they are allowed to do so.
The Schumer & Poole "revelations" are actully causing me to turn a little tin foil in my attitude. Remember both of these gentlemen are well schooled in the art of keeping their mouths shut, or at worst dissembling in a non-commital way when pressed about a troubled institution. So why were they going after IndyMac & Freddie/Fannie with double barrel blasts across the bow? Since their jobs are/were to protect the financial system, not to help make a terrible state of affairs worse, it gives me the feel that this is a set up.
You make some interesting points. I don't know what the spread has to be to make money lending on depreciating assets though.
Considering loans all the way back to 2002 to the present are essentially forclosures for all the things that used to cause forclosures.
If we get another 10% from here then everything they are writing that doesn't have a big down is another loser.
Example:
I wrote about my sister in law about a year ago. She had a neg am loan and was due to default. She met a guy online and got pregnant. He finacially saved her and refi'd into a 30 yr fixed on $560,000. He makes 100 g and she makes 20 g. The house at the time appraised at $650,000 (a year ago). Well, due to the equity and his good credit they were given a loan that they can't afford. Sure, they are supposed to be able to but reality is interfering with theory. Anyway, they are having money problems and no doubt will split soon (already talking). The house is supposedly worth $550,000 now so it's a forclosure or short sale when they split. (the house next door is abandoned bank owned). My guess that if they sold it, it would go in the low $400,000's. If they walk then damage and time will increase the bank's loss. How many performing loans have to be made to make up this huge loss?
I just don't see Fannie and Freddie making money even with these spreads lending to a society with a 50% divorce rate when virtually nobody will be able to sell when the lose a job, get sick, divorce whatever.
I think resets are a small part of the pending forclosure problem.
Fannie and Freddie have to raise rates to make more on the performing loans to offset the high cost of the non performing ones.
Raising rates drops the value of homes, which further impairs their existing book, and increases the percentage of homes that go into the forclosure and increases the loss on each forclosure.
The only way to save Fannie and Freddie is to allow them to continue to lend money at a loss (i.e. at low rates). But if you do this then of course they are poor investments for equity investors and to be able to get capital to lend at a loss they have to be backed by the Govt.
The interplay between market psychology and actual fundamental economic realities is a fascinating thing to watch.
We've just been through a period where market psychology--expectations--drove housing prices to unheard-of levels. People (big guys and little guys) invested in a market they did not understand, based on expectations. But then economic reality set in: Too many mortgage loans made to people who could not pay the money back.
Now, a lot of people (including the people who hold the levers of power) are acting as though the GSEs' problems can be solved by managing expectations. They may be right--unless housing prices continue to decline--which could happen if the market expects them to decline. My head is starting to hurt now.
A mortgage broker told me a day or two ago that FNM is now flagging some parts of our area as "declining" in value. When they do that, the lenders who sell their mortgages to FNM are going to demand higher downpayments etc. That makes it harder for homes to sell, forcing sellers to lower prices, thereby cutting the value of other homes, putting more holders of existing mortgages underwater, etc. etc.
The FNMA 4.75% Pfd M had quite a day yesterday. Its cash yield went over 15% at one point and closed at 11.67%. With market uncertancy, their high cost of capital and home loan rates at 6.25, how can FNMA survive? I look for home loan rates to pop next week absent significant Fed/gov't action. It is time for the Fed/gov't to make the decision, back FNMA 100% or not. I vote for not. It is time bond investors to feel some pain too, even though this option must keep TPTB awake nights.
AllenM - "The real question is what are the realized losses"
That's partly true. The REAL question is more about "projected realized losses".
Unemployment heading higher and rates heading much higher.
Value of their bonds will take a series of hits on rates and their mortgages will default in progressively higher numbers as the housing market deteriorates. All this when they are already undercapitalized and the entire fragile US mortgage market is betting the farm on them stabilizing funding and prices from crumbling. Perfect storm.
The market's assumptions and movements are likely correct. You are much too optimistic.
Dryfly: "Understand 99% of the people who post on this and every other blog have NEVER run a business and have not had to meet ongoing immediate obligations so don't realize how well schooled these folks are at doing this..."
Are you refering to well schooled folks like those that ran Countrywide, Bear Stearns, IndyMac, New Century, (see implodometer for more companies run by 1%er well schooled individuals who have run businesses before......)well schooled
Dryfly - yes, they will. Their stock prices don't matter that much to their ability to function. If they are unable to raise private capital the government will throw it at them. Remember, the best our esteemed s_n_t_rs could come up with is to get the GSEs to play with the lovely jumbos, i.e., Alt-A. What has broken down is another leg in the securitization market. People are scared of buying directly from the banks unless it is filtered through some sort of government guarantee.
The US government should invest $100 billion in fannie and freddie preferred stock and let 'em rip.
yup FNM is losing ~3B/quarter right now . . . chicken feed in the scheme of things. We're importing 500 million barrels per day from OPEC, so 3B is just a $6/bbl kickback to the USG to keep us heiki.
Are you refering to well schooled folks like those that ran Countrywide, Bear Stearns, IndyMac, New Century, (see implodometer for more companies run by 1%er well schooled individuals who have run businesses before......)well schooled
Average Joe | 07.12.08 - 12:54 pm | #
How many companies have failed vs how many companies out there? Answer: NOT MANY have failed or are even close.
Sort of like how many mass murderers vs regular citizens.
You might think there are a lot but the bulk of reasonably well run companies do NOT get press... just like the bulk of regular citizens don't make the bloody lead at 11PM.
GSEs can run a very long time with near zero input of new business IF the regulatory bodies let them. Will they let them?
It would cost 3 times as much and apple would probably be worth 3 times less.
You can't just bottle globalization, unless things get really bad i suppose.
When I go to the grocery store, and I see frozen fish from China (which they can apparently sell for less than getting local frozen fish), then it seems that our cost structures are out of whack.
Hi-tech might be one thing (although I doubt there would be much difference in the parts costs, only the labor), but a basic food item should be more competitive. After all, there is a large transportation cost in getting that package of fish around the globe. Have we arrived at a point where "need to have it cheaper" so trumps our ability to pay a fair price ?
Have we arrived at a point where "need to have it cheaper" so trumps our ability to pay a fair price ?
About 20 years ago, when Wal-Mart started rearing its ugly head. I agree that if people stopped consuming so much foreign crap, then paying a fair price for domestic products wouldn't be a big deal. However, the fact that Detroit kind of sucks makes it difficult to be a "net" domestic consumer. It'd take a lot of local shrimp to offset my Toyota...
Value of their bonds will take a series of hits on rates and their mortgages will default in progressively higher numbers as the housing market deteriorates. All this when they are already undercapitalized and the entire fragile US mortgage market is betting the farm on them stabilizing funding and prices from crumbling. Perfect storm.
Again - it doesn't matter what the bonds are valued at IF they cashflow (i.e. people keep making the payments).
Guess what, if rates go up - that HELPS Fanny & Freddy wrt defaults & walk-aways. That's because the housedebtors aren't likely to get a better deal (payment-wise) anywhere else in that environment if they walk away. The yields would suck for GSEs relative to new biz but the old instruments would still cashflow relative to their initial investment.
So that forces them to cut more cost but doesn't put them at threat of failure. Only losing access to borrowing does that (and I believe gov't is lender of last resort as per their charter).
So they could run down indefinitely. Sort of a mortgage market equivalent of hibernation.
Well Allen, since so many businesses run v.s. fail, then by logic it must not take a 1%er individual to run a business.
In any case, I hear the same logic about the percentages of forclosure being so low. More than 90% of the loans out there are being paid on time....well then no problem I guess?
My point was that perhaps it doesn't have to do with depending on 1%ers to know what they are doing.
Perhaps any business that couldn't make money lending at 6% to people buying housing that were rising in value from 2002-2006, surely can't be making money to people buying houses that are going DOWN in value can they?
Fannie and Freddie will survive to continue lending.
They just wont make money doing so unless rates rise significantly.
If rates rise significantly then losses they are doomed to take anyway will get bigger.
Not a good place for equity investors in my book.
These companies will survive but will be forced to lose money to provide a service to the public and require taxpayer money to stay alive.
Getting a 1%er in charge wont mean a darn thing...according to this 50%er.
I agree with dryfly that most companies are well-run and do not fail. But I also agree with Average Joe. The people in charge of some very large, very important financial institutions have done things that seem breathtakingly evil, stupid or both. Again. Just a few years after the dotcom bubble. Wall Street's credibility is zero.
Average Joe - but your sister's loan is not a GSE loan. That's the difference. The book the GSEs have is markedly different than that of the private lenders.
Well Allen, since so many businesses run v.s. fail, then by logic it must not take a 1%er individual to run a business.
In any case, I hear the same logic about the percentages of forclosure being so low. More than 90% of the loans out there are being paid on time....well then no problem I guess?
The situation is the same but the 'problem' is different... If you lose your job but have lots of savings (or a really, really rich uncle who likes you)... you don't lose your house. Mybe you just cut back some & chill... so long as uncle lets you. You don't have to be a 1%er to figure that out.
But if you lose your job & have no savings, lots a debt and rely on 'strangers' for support (i.e. market sentiment)... then you got problems and even being a 1%er won't save you.
Guess which camp Fanny & Freddy are in & which camp Countrywide, BS & IndyMac were in?
The biggest epiphany the average Joe American can have today is the realization that our leaders are primarily engaged in managing Americans' psychology. I believe the best thing an American can do is to separate themselves from this psychological loop.
The Fed's actions are at least half psychology. They "manage expectations". They also influence where you put your money. If they want people to gorge on more debt, they lower rates. Theoretically, if they feel that people are blowing their cash too quickly or that prices are rising too fast, they raise rates.
It's become different lately. When asset (securities) prices seem to be at a precipice, Bernanke slashes Fed rates to make securities look more attractive. This pulls out a bunch of suckers from the sucker pool who come in and help cushion the blow of tanking asset prices. You'll notice that when he slashes rates, buyers for stocks, bonds, whatnot seem to come out of nowhere and push prices up for a bit. Shortly afterwards, prices fall again. Ironically, the best strategy seems to be to go against the Fed. When they are slashing rates, more than anything that should be taken as a clue that asset prices are going to fall.
When Henry Paulson goes on TV to make some statements, his job is psychological. If he says the sun is shining, you should assume there's a 50% probability that the sun is up at that moment, in other words, that there is no information content in his statements. But his aim is to get people to head out to the beach or the park or whatnot, expecting the sun to be up, whether or not it is. So when he said the subprime problem was contained, it was a statement that should have been totally ignored. Plenty of other evidence suggested it was not contained.
What so-called information do we get from Bush? Let's see, what has he told us:
- Go spend your $300 tax gift at Disneyland.
- Hussein has WMDs and is a close pal of Bin Laden.
- Mission Accomplished.
- The "science isn't in yet" on global warming.
- Intelligent Design is valid scientific theory.
If that's not our "leader" trying to manage the psychology of Americans I don't know what is. One could make quite a strong argument that Bush's informational content is negative rather than zero.
I think we've created one heck of a feedback loop in the US. We elect some people to run the government. Then those people come back and spend half their resources "managing" Americans thoughts. Americans then are influenced about whom they should elect come the next election cycle. They re-elect the bozos and give them a mandate to perform more psychological manipulation of the public. The public, so manipulated, believes these clowns and the cycle continues.
Everyone knows the "leaders" are actively engaged in PR. But I don't think most Americans realize PR is synonymous with propaganda. It's the same thing - propaganda. If Americans really believed in the principles on which this country was founded (LOL) then it should be illegal for government officials to engage in PR. But they do it, constantly. Every day they are out there trying to manipulate the public. They have actual PR firms working for them. What is a PR firm? A company that specializes in PROPAGANDA. Look it up. Propaganda became a dirty word when the Russians adopted it outright for their system of communism, so we now call it PR in this country. But if Castro does it, it's propaganda.
Instead, it should be the business of our government to do the work that the people need done. Like defend the country, provide a system of justice, and maintain a body that can enforce the laws. IT IS NOT NOR SHOULD IT EVER BE TO TRAIN US AS THEIR OWN LITTLE BRAINWASHED POODLES. Sadly, Americans are becoming more the trained poodle than the independent thinkers.
The consequences for blogland could be severe. I don't think it would take much for the government asshats to blame so much of what is wrong with America on the rumor mills found in the blogosphere. So much has already been blamed on rumors. Don't be surprised if the witch hunt leads to severe restrictions on what can be said on blogs and other outlets, which lately have been on the cutting edge of truth and reality.
But maybe Americans don't mind that they are being managed by the people they elect. Me, I mind for sure. I don't like it, and I reject it. Fortunately, it allows me to avoid many of the mass psychoses that plague us so. It can also be profitable when you recognize where it is acting in the marketplace.
Go into a model home and try to buy a new home. They offer a 6% rebate to help pay your FHA 3% down payment.
I drive around new neighborhoods were the houses were sold and financed less than a year ago. Several of the houses have for sale signs up already! Several are already walkaways.
Builders are still selling new houses to buyers for the high $400,000s, when the exact same model from the same builder is selling in the low $300,000 less than a mile away.
Some people say, who is buying these new homes? I say, who is lending to these buyers?
MOM, I think you and I would be surprised what the GSE's are STILL doing.
F & F is already treated as virtually sovereign debt. Should bonds implode, the dollar implodes - not sink, implode.
Two major issues need to be kept in mind, I think:
1) There are no good solutions, just as in Iraq. There only options that are better or worse. Yes, an explicit guarantee on F & F bonds will pressure the dollar, and that is not good. But we need to talk about that in relation to the other real alternatives and their consequences, which are far worse (imploding dollar when global investors rush to cash out of all US govt and agency issued bonds).
2) This is a Macro-economic problem with a giant capital M, and thinking it through requires thinking in terms of longer time horizons. Short-term, F & F may go bankrupt as businesses, as their stock collapse shows. Short-term, housing prices will fall, one must conservatively expect, to roughly 50% off peak prices - maybe more, maybe less (less likely, and wrong assumption for stress testing a disaster plan). But, longer term, houses will start selling in greater numbers as prices drop, probably 2 to 5 years out the prices will stop sinking, and 5 to 10 years out house prices will start to rise from the correction (and most likely from an over-correction). The mortgage business will become profitable again and, at the moment, F & F have a near monopoly.
Looked at in a Macro way, F & F's bonds cannot be allowed to fail, and F & F in some form (note the qualifier) have a profitable future.
The main problem is the present and how to get through it. The secondary and closely related problem is what to do about F & F and the whole mortgage financing sector (and finance more broadly).
Real leadership would backstop F & F now and couple that with either temporary nationalization, conservatorship, or regulation of the most powerful kind (in other words, three flavors of medicine, take your pick). Afterwards, F & F should either be privatized fully with major major major regulation of the entire financial sector that creates (pardon the pun) transparency like you've never seen before, or it should be kept a fully nationalized entity that works by civil service rules (i.e., pre and post Bush/Cheney/Brownie civil service rules, the kind made for grown-ups).
But that's the rub, real leadership. We are totally f---ed until 2009. Goodbye from the world's biggest polluter.
JDK: we need a system in which one can deposit and write checks as in a bank, not just buy savings bonds. That is a complicated task as I know. Lots of red tape. And if you own more than 100 thousand in US debt you have to pay them a fee to keep your money for you. We need a government owned BANK, not what we've got now. Other countries have one; we don't.
Please tell us Ben Bradlee's story
psychodave | 07.12.08 - 1:12 pm |
In May of 1964, LBJ press aide, Bill Moyers, told Bradlee that LBJ was looking for a successor to Hoover. Bradlee, who was editor of Newsweek at the time, put together a cover story on the search for Hoover's replacement.
On May 8, LBJ called a press conference with Hoover standing at his side. LBJ announced an executive order exempting Hoover from mandatory retirement.
Moments after the press event ended, LBJ turned to Moyers and whispered, "You call up Ben Bradlee and tell him, 'Fuck you.'"
Bradlee always said of himself, "You did it, Bradlee. You did it, you got him appointed for life."
Average Joe correctly points out house price declines and house sale volumes have different effects on F & F.
Price declines lead to defaults which lead to losses.
But price declines will also lead to more sales, which means more mortgages, which means more fees, and more mortgages on houses at reduced prices will mean that foreclosures will be reduced . . .
Specific companies will fail, but the mortgage business will once again become profitable.
Dryfly is correct: F & F (in some form) can weather the storm because they have the richest of rich uncles to fall back on, and that uncle can't allow his nephew to fail without disaster for the entire family.
The problem is huge and dangerous, but it is a short to medium term problem. Like Iraq, there are no good options, only better and worse.
So the GSEs get $100B in capital from the Gov't cheap, and lend it out at 5%. Who will buy the MBS at 4%? Not me for sure. So they do $100B of portfolio lending, big deal.
Co-worker example: Boyfriend and girlfiend make $160 grand together. They buy a bank-owned condo for $350,000 (was $500,000) just financed through countrywide.
They easily qualified.
If you knew her, then you know there is no chance in hell they will last 3 years.
This will be a $220,000 condo soon.
This is a quality loan that will no doubt go into forclosure.
In 1995, after being denied for not being married (month short of wedding)My fiance and I had to send a pleading letter with copies of our wedding guest list, along with the pre-printed wedding napkins to get a loan for a 10% down, $185,000 purchase of a new home with good credit and a family income of $75,000 from govt jobs.
Someone yesterday suggested an easy solution for much manipulation and volatility: outlaw shorting.
Shirley you're kidding?
I recall Ditto-head types telling me how immoral it was to short back during the Dot-com nonsense, now I'm hearing it from Air America-type doofuses. This in and of itself makes me feel all warm & fuzzy about it; if everybody hates you, you're probably on the right track. And this is coming from somebody who has a fundamentally "long" attitude, no Jas Jain am I. The armageddonists are wrong; so are the cheerleaders who only complain about "volatility" on the way down.
Whether or not these two clowns are solvent or not isn't really the major issue that most are missing. That is who has the most to gain by tanking their stock and forcing government to act. Follow the money.
So the GSEs get $100B in capital from the Gov't cheap, and lend it out at 5%. Who will buy the MBS at 4%? Not me for sure. So they do $100B of portfolio lending, big deal.
AFAIK, fractional reserve lending does not involve MBSs, so $100B in paid-in capital would drive $1T in lending, ~3 million home loans.
Everyone has been talking about Fannie and Freddie for months. It wasn't retail money that went after them, it was big money. The retail money followed, just as it always does.
When the big money is finished with those stocks it will crack the whip, and you'd better not be there when they do.
So, the idea is: figure out who's doing it and plan on getting out before they do.
If you haven't got the facilities to do that, you shouldn't be in it, and that's what I've been saying here for the last several weeks.
"You make the average American out to be an idiot."
I think not. Anecdotally, from friends and family, I would suggest that most folks are concentrating on their jobs, their families, their weekend plans. I hear recently that people are a little uneasy, and unsure of what is going on, but their economic focus is gas prices and job security. They're not especially focused on the market, or at least until they get their recent 401k statements. I'm talking about educated folks, doctors, school adminstrators, small biz, and managerial types.
Sure,they're unhappy with Bush and with the war, but they've' been living with those feelings for a while. The evening news feeds are something I like to watch...and they are full of soft news...heartwarming stories of adversity overcome or service pieces on health and drug concerns. Even their foreclosure stories are less analysis and more human interest. The warning flags being hoisted are very small and easily missed.
The corporate media are not the watchdogs of the republic, and those who read econ blogs are a smallish and self-selected group.
If we allow the GSEs go under then China's going to stop funding our mortgages. Well, China already made that decision!
So, we should allow the GSEs to go under (no federal bailout) and leave their bondholders (foreign governments) to consider their own bailout to minimize their losses. If they don't then we can use federal funds to start a new government sponsored lender.
Roubini says that Fannie and Freddie should have their debt restructured, and that it would only take a 5% haircut on the bonds to do it. This might be his best post ever:
@mp | 07.12.08 - 2:11 pm
Phew! Finally, somebody gets this thread truly on topic. Thank you.
Oh, the Bradlee/Jedgar (hat tip Lily Tomlin) story was fine too.
I always liked Wm. Manchester's inclusion of two right things Jedgar did.
1) He opposed FDR and Earl Warren (future Chief Justice) on internment of Japanese right after Pearl Harbor.
2) He was agin' Nixon's Plumbers idea, so Nixon had to seek staff to implement it elsewhere. Might've caused the subsequent effort to suffer.
So maybe you can be really wrong (Jedgar & Civil Rights, Jedgar & Organized Crime) and still be right [ducks & runs]
Yes, FNMA could loan out $1T at 5%, but their cost of debt, at least based on the FNMA Pfd M (rated AA-) is 11.5%. This lending would give them a negative cash flow of (-.065% * 900B) $58.5B. Not a good way to run a business.
The only thing that would truly help F&F at this point is a readjustment of home prices due to inflation. That would eventually make the $$$ value of homes equal to the amount of the mortgages on them.
This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F.
You can parse all the rumors and "bailout" proposals any way you want, but that's the nuts of it.
Getting back to Tanta's original post citing the confusion in who said what to whom, here's an excerpt from the AP
story:
The government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.
Then it just becomes a matter of cutting back new business
AllenM, dryfly - you guys are right but missing an important aspect of this. The reason why Freddie and Fannie HAVE to take on more business is to pick up the slack for all the CFC, IndyMacs, Thornburgh's and others who either are out of business or will be shortly. We're moving quickly to a market where Fannie/Freddie backed paper is the only game in town.
So if these guys can't keep up with the volume of new business because their balance sheets are damaged and need repair, they will need to de-lever, make fewer loans with less risk, and mortgage rates will have to rise.
This will start a second leg (or third?) leg down in housing that will totally crush what's left of the market.
Paulson and Ben know this, and that's why the idea of extending the temporary lending facility was floated. Rather than allow Fannie and Freddie to heal, this would be the equivalent of more crack for the addict. It would probably kick the can down the road into the McCain/Obama administration, however.
"This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F."
No. Bernanke has come right out and demanded that lenders take haircuts to principal. I wonder if he realized that F&F, the soon-to-be government OWNED entities ARE the biggest lenders.
This means inflation - real, true inflation including wage inflation.
Which you are not going to get, as long as you have a large-ish number of unemployed. If you can generate sufficient new job growth, then you can have your wage inflation. That is hard in the globalized environment when a growing percentage of goods we purchase are being subsidized by the governments over there, by buying our debt paper. Vicious cycle.
I think it is a mistake to look at F & F preferred stock as a benchmark of their cost of funds.
Rather, look at the bond market. Yesterday, when the rumor about Bernake hit, the F & F bond prices went up and yields lowered.
When the US backstops F & F with an explicit guatantee then their cost of funds goes down, and F & F get restructured either by nationalization or conservatorship or regulation like you've never seen before. . . and the equity gets wiped out.
Stock goes to zero, which means zero dividend. Bonds stabilize at Treasury level.
good posts on Naked Capitalism (one about Roubini) which argue it is time to stop the masquerade and bring some transparency through outright nationalization (Roubini calls for this and restructuring of the debt with 5% haircut).
I hear you. My favorite show bar none is C-SPAN's Washington Journal. Enjoy it for the interesting guests but the main attraction (in a can't take my eyes off an accident kinda way) is the callers. When "flo" from missouri calls in I'm looking for a pillow to hold up against the wall while I bang my head.
"Look at it this way- they get to borrow at 2-3% and lend at 6-7%."
So how can you lose money and put the business on the ropes? It can be done - if the 6-7% stops showing up in the mail. Then you still have the 2-3% to pay, unless you can pass the bag on ... which would be to the taxpayers in this case.
RayOnTheFarm writes:
We need a government owned BANK, not what we've got now. Other countries have one; we don't.
Well, as of 3PM PST on Friday, we sorta have one. Its headquartered in Pasadena, CA
As I pointed out before the government has no intention of keeping the bank. They will put lipstick on it and re-privatize it. The US is so scared of 'socialism' or anything that can be made to seem like it that it can't do sensible things that other societies, not so paranoid, can do.
Geezer, that Barron's article is a joke. It reads like Sebastian wrote it.
On second thought, I take that back, as that is not fair to Sebastian. He could do much better.
They confuse all kinds of things - like grabbing onto a small price increase in a few markets this spring, but not factoring in seasonality; focusing too much on sub-prime (which was bound to improve, simply because it doesn't exist anymore) and not Alt-A; and in general taking the polyanna approach.
"What people are missing is why Freddie wanted more capital, not to cover losses, but to write more business.
Agreed, but don't they have to let undercapitalized insures write more policies to do so?"
If you remember back to when FNM/FRE raised the capital and had their 30% reserve ratio reduced this was the exact time when a few levered hedge funds were imploding an dumping huge amounts GSE debt on the market. Supply > Demand is bad juju.
Fannie/Freddie did not use the extra capital to do more business, they used the money to buy back their own MBS to prevent a collapse in the MBS market.
Right . . . and the business model also gets into trouble on the supply side if the flow of funds gets squeezed shut or made more costly.
My understanding is that both things are happening: flow of funds in is restricted and more expensive (i.e., yields on F & F bonds went up, prices down), and losses have increased because of foreclosures . . . and fears of greater losses have increased because continuing price reductions in housing are expected, more foreclosures are also expected because of a shrinkig economy with shrinkinng wages and shrinking jobs and higher expenses for food and fuel, and the insurers of mortgages are going belly-up.
The thing to remember is that it is all cyclical to a great extent. F & F are insolvent now or will be soon. But their business model will work again in the future, out a few years, and since they provide a government service (and we are collectively hostage to their debt) there are good reasons to sustain their debt and restructure their operations.
Other options are worse. Wish it weren't so, but Americans voted to prove evolution wrong. Now we are left with the by-products of not-so-intelligent design.
One thing I don't understand given current technology, what is the purpose of using banks for a normal savings or checking account? You normally get no interest for checking accounts and .10 interest for brick and mortar savings accounts. Why do we even need to deposit our money in risk taking banks if there is no return on deposit? Given electronic technology, it seems like a big scam.
"The reality is that the U.S. has invested too much especially in the last eight years in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth.
This financial crisis is a crisis of accumulation of too much debt by the household sector, the government and the country to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs."
It was not a complete failure of regulation. It was not a bubble of biblical proportions. It was not an utter collapse of underwriting standards, or the product of an industry hollowed out by the termites of systemic moral hazard. It was certainly not a failure of management!
IT WAS CHUCK SCHUMER, AND DAMN HIM FOR ALL ETERNITY!!!1!ONE!
Absolutely right about the need for the fairness doctrine. In general, we need an explicitly and honestly mixed system: some things need to be socialized and discussed that way, some need to free market and the freeness of the market requires trust sustained by transparency, and that requires certain kinds of oversight and regulation.
Look at education as an example. Public education is a public good that works wonderfully well when the public pays for it as a public good. It does not work when the public wants the good but thinks no one person should have to pay for it (i.e, public expectations with privatized responsibility). It is the inverse of the moral hazard argument. Both are powerful arguments.
If we are more honest about the need for both a robust public sector and a robust free market, then we can have both.
Bushism shows us that dishonesty and manipulation for private gain in both sectors produces disaster in both sectors. You get washed out to sea in hurricanes, crushed when you bridge collapses, your kids are too dumb to get jobs, and your country gets destroyed in dumb wars that spit out dead bodies, empty treasuries, and make you less safe.
Geezer writes:
Barron's calls this the bottom in residential real estate -- and provides many details why:
I suspect that it's about time Barron's got one right. I have never heard anyone say that he or she ever made money following advice in that weekly rag (but it is a good read...). If anyone has made money on an idea they first read about in Barron's, please let me know about it.
right. housing is necessary, but non-productive. done right it is a social good. done wrong . . . well, we see what that is like.
extensions to Roubini's argument would include both good private sector investments and publi sector investments.
here is the brighter side of creative destruction: it is time to think boldy about both private and public sector investment, and the recession is the time for a big dose of public sector investment that will show future returns: education, green (greener) infrastructure, etc.
things are just going to suck until 2009, and even then they will suck, but there might be prospects of getting better . . .
JPM most recent 10-q:
Trading asstes GSE debt $30 billion, guess the loss will be offset by gains on their own deteriorarting debt..as the FT reported this week in a quick take on quality of earnings...
When the US backstops F & F with an explicit guatantee then their cost of funds goes down. . .
Stock goes to zero, which means zero dividend. Bonds stabilize at Treasury level.
Nitpick...
The rates on F & F and Treasury bonds will converge. An explicit guarantee of F & F debt would double(?) the national debt. Would probably triple it if you consider that a large portion of US debt is money it owes to itself (SS trust fund).
F & F bond rates would probably drop and Treasury rates rise but there are no guarantees. It's possible the action would cause foreign central banks to pull pegs and that interest rates for both would rise.
Even if the most probable even happened the result would be a huge windfall for owners of F & F bonds at the expense of holders of Treasury debt.
That transfer of wealth from holder of Treasury bonds to homeowners (via refis and higher prices) would be enough to keep most people from buying Treasury debt for a long time.
Right, if the gov't gives 100% explicit guarantee FNMA cost of debt falls. So the TPTB have a decision to make. Let the FNMA bondholders pay, or the taxpayer pay. Some have argued that an explicit 100% gov't guarantee on $5T of FNME (and FRE) debt will drop the US Treasury's credit rating below AAA (not good). On the other hand, Russia and China are already demanding an explicit gurarantee of agency debt by the US government, so I do not believe they will be inclined to buy more FNMA paper without it. Hence some sleepless nights for BB, Paulson their cronies. Damned if they do and damned if they don't.
If the US Treasury were to go to below AAA what are the implicatins for CAPM theory of risk free rates. Somehow I think it is bad for stocks..imagine that
the fairness doctrine was abolished oin the late 80s for good reason. The free and fair airwaves where people vote with their feet has failed to live up to the ideological left's grand design, other than that morn Al Franken and his bankrupt attempted network. The problem is not building the field it is getting them to come. For that you have to have something on offer, whatever it is. Wa la , capitalism.
It seems to me that there is no outcome where rates don't rise. A 2% move in rates should cause something like a 15% drop in principal to maintain an equivalent payment. Stick that in the housing market and see what happens...
Damn rumors! Fannie and Freddie were doing so well before Dick Cheney started those rumors! I'll tell more after I take my afternoon dosage of Prozac. (only 200mg-3 times a day)
An explicit guarantee on F & F bonds does not double the national debt. F &F bonds are differnt from Treasuries because F & F bonds are asset backed. Treasuries are pure "full faith and credit."
A guarantee on F & F bonds increases the national debt to the extent that the value of the assets backing the bonds falls below the value of the bonds. Roubini seems to estimate that at 5% of the value of the bonds.
Let's say it is 10% of the value of the bonds...or 20%.
Yes, that puts pressure on the Treasuries and the dollar, not as much as would be the case if the guarantee was a full assumption of debt. That is not what it would be.
In the end, it is a matter of alternatives. And there are no good choices. We have to pay the piper one way or another, and there are ways that are better, and ways that are worse.
Figuring out the best choice out of the bad options requires remembering the longer time horizon for the country and its economy, and remembering that there are cyclical as well as systemic elements to what is happening now.
A key point of the cyclical element is to remember that house prices will eventually bottom. The housing stock behind the F & F bonds will always be worth something - less and less over the next few years, but then the value will rise from over-corrected lows. And a key point about F & F is that they have the better end of the mortgage pool from the past 30 years (including the better end of the bad pool from the past 4 or 5 years).
F & F's stock is probably going to follow the Bear Stearns path. But F & F's assets behind its bonds are a different matter.
mp writes: you can have the facts of a story completely right and end up dead wrong.
Very true. If in 1964 I had a complete script of the vietnam war, I would not have been able to predict course the stock market 1964 - 1972. No way.
Even knowing the future, prediction is difficult.
Here is the take of Mark McQueen, a Canadian financial executive, on the Schumer matter:
Which makes it all the more interesting that he got into the details of this specific situation. It appears to me that he was just doing his job. Which is probably more than you can say, as an outsider, for the Office of Thrift Supervision [OTS].
If the SEC continues to be AWOL on most of its mandate, and the OTS cant help its charges avoid insolvency, huge corners of the U.S. capital markets fall to those members of Congress who are prepared to take the baton
It's Kabuki journalism - the WP thing and the lead piece in the NYT and all over the teevees - all makeup and fans and complicity masked as coyness.
I hope after the smoke clears we realize transparency would have stopped all of this nonsense - from the banking to the media side -- it probably would have stopped f and f from backing up all this bad paper to begin with.
Gonna go hike to another boro now, and tip a Sierra to CR and Tanta
I have no idea what specifically will be done re F&F. But I would wager that the bond holders (so many are foreign governments) will get bailed out 100% while the stockholders may end up with nothing.
BTW- we're already getting wage inflation for the products we consume...it's just happening in a different part of the world.
Speaking of one of those parts of the world (China), equity holders of FNMA/FRE are experiencing another kind of risk- "interparty" risk (for lack of a better word). Or, put another way, bondholders are getting much more "counterparty" by the day.
In China, shorting these stocks to zip is part of what might be called the "prior to" Events of Default Clause.
mp- not sure where you were going w/ the Bradlee example, but assume you're driving at the Law of Unintended Consequences.
What McQueen is describing is an implosion of leadership in the Executive Branch, which already hollowed out most if not all of the regulatory agencies.
Given that GWB is unavoidably at the helm until January, the next best alternatives are either: 1) pray like mad and close your eyes, or 2) move from lone wolves like Schumer to some sort of concerted bi-partisan commission of respectable Congressional leaders (or as close as one can get to that) with some respectable od-hands like Volcker (for example).
I prefer option 2. They won't have any power except the bully pulpit and maybe letting some daylight shine through, but it is better than option 1 (esp since I am an atheist and don't like getting hit in the side of my head when my eyes are closed)
Bluestatedon: Pace Tanta, but, Don, you've got the real name for a band: stenographic enablers. You've got 10% royalties if I make it big.
AllenM and dryfly: today was venue for your best posting. You guys are spot on. Bear porn is fun, but this blog is at its best with its recent pragmatism.
Lawyerliz et al.: on target about lenders these days. Even a commitment letter means nothing. Sue all you want.
And for those touting the idiot Americans: apparently you've not been abroad. There is a talented tenth, and beyond that people anywhere are very average. That's not an argument for why the banking system is in peril. It is the responsibility of the intelligent to foster solutions, the solutions rightly requested by an earlier post.
OK, the agency loss will be 10%, 20% or more, but not 100% of $5T. Will $1 - $1.5 trillion + deficit spending + massive trade deficit be enough to cause a drop the US credit rating?, it might. Why should the US taxpayer bail out Russian and Chinese SWF? $1.5 T is $$7,500 per US citizen. You sure are fast and loose with taxpayer money.
oh, and i love pavel. russians always understand the plight of women better than anyone. anna karenina has nothing on liz. or zhivago's (apparat)chi(c)k. nabokov is my reason for living lest anyone thinks i'm being facetious.
If you want to see who the foreign agency bondholders are, I've pulled the table from the most recent Treasury report, which has data through June 2007.
And American homeowners have been paying these guys billions in risk premiums above Treasuries because the bonds are EXPLICITLY not backed by the US government.
There can't be a run on the bank, since they sold bonds.
They do have short term paper, and that's what the WSJ is looking at at the "trigger." There business model isn't dependent on an inherent mismatch between assets and liabilities, so they may not be vulnerable.
As far as the comment by Freddie regarding running off their own portfolio -- that wouldn't mean not lending. Only not lending more then they securitize and sell. That would also eliminate the need for short term paper, no?
They could also sell some of their held portfolio, as they stated. Out of that huge portfolio, there has to be a lot of it that could be sold at whatever it's booked at or more. So a "run" is impossible.
They have doubled their fees and improved underwriting, so if their current business is profitable, and they don't have any real competition, then they can hang on for an extended period of time.
Not only are they too big to fail, but they may also be too big to fully punish the equity. We have already seen the collateral damage that can be done by the putative owners of financial entities under stress.
I don't see a path from the semi-private GSE to nationalized ones that doesn't involve disaster. Nationalization will require an act of Congress, which is a slow institution facing lots of public pressure and operating very much in the open. That makes pro-active nationalization impossible as I see it.
If Congress start talking about nationalization with bond haircuts the mortgage market will immediately collapse. Totally. The GSE's borrowing rates will soar, driving mortgage rates up - but nobody will lend at those rates because the feds will have to bring back some kind of GSE-ish entity and so all such loans will be refinanced. Months of Congressional maneuvers while there is no mortgage market would indeed mean a second great depression.
If Congress tries to nationalize pre-emptively without bond haircuts the outrage will be unbearable. The populace will go postal at the idea of accepting huge potential risk and probably losing AAA for treasuries when the biggest beneficiaries will be China and Russia. The fact that the admin has been insisting for years that the bonds are not guaranteed will make things worse. Nothing will happen.
So that leaves us with nationalization under crisis conditions - which again means a disaster so massive Congress is forced to act. Even then it's going to take some time to hash out details so we're still looking at weeks, perhaps months with a locked-up mortgage market.
Dr. Roubini's idea is good and fair - but I don't see any way to get there.
"And American homeowners have been paying these guys billions in risk premiums above Treasuries because the bonds are EXPLICITLY not backed by the US government."
Yes but....they paid many more billions less then they would have if their mortgages weren't guaranteed by F&F. They were a significant subsidy to mortgage holders.
The agiencies had say $8B in losses last quarter. Losses from sale of properties: proceeds from home sale less expenses less principal balance paid out to mortgage holder for guaranteed securities (ie negative cash flow). There was also a charge to capital of $8B. The agencies must meet their statutory requirement for capital so more must be raised. Who will pony up capital at a reasonable rate for a company in a downward death spiral? This is the same argument the monolines made. It is fallacious. The agencies are BK and the accountants will have to give them a going concern qualification in future financial statement opionions. Only a 100% gov't guarantee will save them, at a oppressive cost to US taxpayers who will have to bail out the bondholders for their losses.
wally writes:
"The only thing that would truly help F&F at this point is a readjustment of home prices due to inflation. That would eventually make the $$$ value of homes equal to the amount of the mortgages on them.
This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F."
You are correct, and Bernanke is lying. He knows that the only thing that has prevented a collapse of the growing post WW2 debt structure has been the ongoing 60 year wage-price growth which has allowed individuals and corporations to pay on and retire their debt.
Maintaining negative real borrowing costs, refusing to urge margin increases during speculative stock and commodity price run-ups, refusal to urge release of oil from the reserve and to allow domestic drilling, are reasons not to believe that the FR, the POTUS and the 535 in any way desire to contain inflation.
They are all lying, and their secret motto is and always has been 'inflate-or-die'. They have purposefully stimulated the latest price spiral, and will soon do all they can to encourage the wage spiral, not caring a bit how painful and dangerous a process it is, including to themselves, as the fall of past regimes during wage unrest - Britain in the '70s as an example - demonstrates.
And what a miraculous cure it will be for housing, mortgage and bank interests, assuming they haven't killed the economy and all the homeowners first. If it goes badly, they'll say what the doctor did: 'Well our operation was a success. Unfortunately the patient died'.
Put some of my own money into freddie on friday for a quick turn.
What will happen is all will be stabilized on monday, and shorts will have to unwind quickly.
That will be even more interesting to watch. Fannie and freddie survived their bank run, because it is on their equity price. COF and others dependent on deposits won't.
Cost of funds paramount, and the GSEs still are the cheapest. Remember fannie and freddie have huge cashflows coming in too. If you scotch the capital requirements under emergency conditions, they literally just have to retire bonds as the money flows in.
That was the essence of the Freddie Friday letter. We are solvent, and we can prove it by going into runoff, but our shareholders won't make any extra sugar, and there will be zero lending supporting the market. Remember, they have a deep book of loans that goes back before 2004, and that tail is solid. Further, a ton of loans written in 2005-2007 were in nonbubble areas using good guidelines to folks who will continue to pay. Fannie and Freddie were frozen out of nearly all of the bubble areas due to loan limits- fannie and freddie wrote almost nothing in California since 2004 due to the run up in housing prices- they were uncompetitive with 5/1 5% down arms.
remember 1) that the GSE were originally govt entities and then got semi-privatized, so nationalization has been done before, 2) and we are now in crisis, no need to wait for that, 3) but . . . succesful nationalization requires leadership that we do not have until, at least, january 2009. With leadership the Congress and country and international investors can be brought on board, with or without haircuts for bondholders.
Anonymous:
I think the losses in a guarantee are more likely to be closer to the 5% that Roubini estimates, and I think those losses can be made back over the longer run of 10 to 30 years. But, no matter, the question is what is the alternative to backstopping F & F bonds? The quickest way to see the dollar collapse and treasuries implode is to let F & F default on its bond
It is possible, though I think unlikely, that Paulson and Dodd and friends are correct, and that F & F will pull out of their tailspin without a guarantee or structural change. If that doesn't happen, then we as a country have a choice to make, and the choice is from bad options and worse options.
The outcomes of all options need to be compared. What do you think happens to the dollar and treasuries if F & F bonds default?
I think you're right about the internals at F & F, but I'm no way brave enough to put any kind of bet on F & F's stock price.
The stock price depends on confidence, and neither the stock market nor the economy nor the housing scene nor this current government gives any reason to be confident in the short term.
I know that just because george bush says something does not mean it is not true, but I still think his words are the best contrarian indicator out there.
I don't think anyone is seriously thinking that the GSE's are anywhere close to not meeting their guarantee obligations on bonds that have already been sold.
A lot of things have to happen first. They have to run through all their capital, among other things.
I suppose that their guarantee will become worth less, but is anyone suggesting that it is negative?
And as long as they are still the main game in town, they will be collecting fee income. What if they did exactly what they are doing now, except not guaranteeing the securities. The securities are still worth something and could still be sold -- although the interest rates would, no doubt climb significantly.
Fark shrub.
My bet is that the run is over and retail and hedgies (which constitute the recent a la last week) shorts get plastered when they sell their bonds, which will go like clockwork (remember- they are AAA fed eligible paper!)
Regarding Paulson and Bernanke "coming out of the Red closet," I wonder if we may yet see Marx proved right, where mature capitalism has inherently decayed to the point that its replaced in mass upheaval. I certainly think what we're staring over the precipice into is just the sort of situation that could see Marx vindicated.
Should the armageddon scenario envisioned by Roubini and others play out, I can't see how the US could get itself out of this nightmare should armageddon play out, with anything other than some sort of incredible campaign of (green) reindustrialization and infrastructure reconstruction a la the USSR post-NEP under Stalin.
I can easily envision a scenario were we see sky high forced savings being funneled into massive infrastructure projects and other investments into real factors of production, agricultural exports helping to finance this, a la 1880's and 1890's Russia, and strict capital controls imposed a la Malaysia in the Asian financial crisis. It's seriously time for some visionary leadership. The pain will be great, but if the USA takes this opportunity to rebuild itself, there's no reason we need to turn into a third world banana republic.
Re $8B#, it was from memory, sorry. Just now took a quick look at 1st quarter FNMA Cash Flow Statement. They had a $30B positive cash flow only after adding in a $42B Net Change in Trading Securities. So it looks to me, after an admitidly superficial look at the financial statements, that FNMA had a $12 B negative cash flow 1st quarter, not $8 B.
Joe Shmoe,
"The quickest way to see the dollar collapse and treasuries implode is to let F&F default on its bonds."
True, but what if the dollar is going to collapse and treasuries are going to implode even with a US guarante. What is the point in making the US $1T poorer before it happens for a guarantee that is not explicit?
And Russia and China have ever guaranteed what to whom???? Nations of whiners. Lets see, what are those siberian railway bonds going for these days....
There business model isn't dependent on an inherent mismatch between assets and liabilities, so they may not be vulnerable. Yes, but...They do have a real problem hedging against the interest rate driven mismatch between assets and liabilities. What first brought their lousy accounting into deep relief was the number of borrowers who refinanced when Ben dropped rates to near zero. They were still stuck paying out bonds at a greater rate of interest. They did make efforts to hedge against interest rate risks, but really, who would have predicted in 1999 that the FED would lower rates to 1% in four years?
I wonder if we may yet see Marx proved right, where mature capitalism has inherently decayed to the point that its replaced in mass upheaval.
Did Marx foresee mass media being owned & controlled by the capitalist class?
Outside of the internet, one is left with the a couple stories in the free weekly for any leftish balance to the so-called "liberal media" steady drumbeat of corporatist apologetics.
I think that when Poole, for example, warns of insolvency and declares that F & F are too big to fail and should be backstopped, he is focused on a potential default on their debt. Yes, they'd need to run through their capital first, and new funds coming would get shut off first, and then their capital would be depleted, and then they'd begin defaulting (though, in practice, what would happen first would be a panic to sell the bonds, hammering their price).
If there is no danger of default, then there is no need for a guarantee.
The discussion of F & F gets clouded (others might say made more complex) by competing concerns, such as concerns about F & F shareholders (sorry, I think they can go to the toaster without bail out), or concerns about the housing market (sorry, I don't believe in trying to sustain current prices, only in making the unwind as orderly as possible and providing social safety).
My understanding is that, short term, F & F are in potential trouble paying off their bonds at the margins because: 1) some small proportion of the mortgages backing their bonds are going bad and, 2) inflow of new capital is in jeopardy, witness the stock price collapse and rising yields on their new bonds. Under these circumstance F & F might come up short on paying on all of their bonds. Making the guarantee explicit ends that problem and allows F & F, however restructured, to become viable into the long term.
Maybe F & F can pull this out on their own. I have little faith in that.
uly 12 (Bloomberg) -- Henry Paulson, the U.S. Treasury secretary, is planning a $15 billion capital injection into U.S. mortgage companies Fannie Mae and Freddie Mac, the Times of London reported, without citing anyone.
The plan is ``high'' on the list of solutions to the nation's mortgage crisis, the newspaper said. In exchange for the capital, the U.S. government would get a new class of shares, the newspaper reported, citing no one.
Paulson's plan also would allow the two mortgage companies to use the Federal Reserve's discount window so they can borrow from the central bank, the Times reported.
Fannie Mae and Freddie Mac own or guarantee almost half the $12 trillion of home loans in the U.S. and lost about half their market value last week on speculation of a government bailout, the London-based newspaper said.
An explicit guarantee on F & F bonds does not double the national debt. F &F bonds are differnt from Treasuries because F & F bonds are asset backed. Treasuries are pure "full faith and credit."
I'm not sure the market would see it that way...
An explicit guarantee increases the stress of servicing US sovereign debt during times of economic stress.
If US household income were to come under stress tax revenues would decrease at the same time that F&F bond defaults would likely be increasing. If the US Treasury couldn't secure funds on the open market to cover an increasing deficit and the losses on F&F bonds Congress would need to either raise taxes or cut spending. Neither is a popular political move in a recession (as many politicians have found out when put on an IMF austerity program).
That leaves monetizing US debt by the Federal Reserve which is a de-facto default.
Walk-aways are going to explode in the next year. And large communities will be empty because J6P is dead broke just like every bank. To much debt everywhere.
"Should the armageddon scenario envisioned by Roubini and others play out, I can't see how the US could get itself out of this nightmare should armageddon play out, with anything other than some sort of incredible campaign of (green) reindustrialization and infrastructure reconstruction a la the USSR post-NEP under Stalin."
The USSR post-NEP was an agent of mass murder, mass terror. Of course, the US is a very different sort of society.
Incredible campaigns require immense social discipline.
What is the present social potential for discipline of the US?
RESERVE BOARD FINDS ACTION UNNECESSARY; Six-Hour Session Brings No Change in the New York Rediscount Rate. OFFICIALS ARE OPTIMISTIC Mellon Also Attends Cabinet Meeting, but Declines to Discuss Developments. Board Reviews Credit Situation. Cut in Discount Rate Expected RESERVE BOARD SEES ACTION NOT NEEDED BANK RATE CUT EXPECTED
"There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.
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."
QUOTE 2:
"So lets call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. 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. These GSEs were designed to make losses. They are expected to make losses. If they dont make losses they are not serving their political purpose.
So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart."
What you're referring to isn't a more honest form of socialism. Rather, it's a more direct link between large corporate entities and the Government (Treasury) and the Federal Reserve System, which altogether is more precisely called fascism. Voters have no input whatsoever, unlike in some of the recent center-left "socialist" governments in Europe.
I have yet to have someone provide me with an explanation why we have to save the GSE's. Some have referenced they are the only player in the mortgage market but due to the credit contraction they are only allowing knife catchers to purchase more houses that are still overpriced.
Apparently, Paulson and Bernanke are better than even they think they are. All they have to do is wish that it would be so . . . and it is.
Of course I thought that the important quote form the WaPo was:
Although the idea of extending government lending to Fannie Mae and Freddie Mac has been discussed, Fed leaders don't think that would get to the heart of the problems facing the companies ..... The article then goes on to say that they don't have any problem accessing capital. ISTM that their situation is similar to an upside down borrower with good credit. Additional borrowing or refinancing doesn't help their negative equity position.
grr... screwed up on the close italics html above. The WaPo quote ends with the elipsis.
Sounds like a good trick, promising aid and then pulling the rug out. That ought to work another eighty times or so before the markets catch on.
Damn. Now the trust is really gone.
In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary.
No, no, no. It was
Stupid Haloscan.
In this version, apparently, the Fed was ready to open the discount window but Hank Paulson's masterful calming of the waters yesterday made it unnecessary.
No, no, no. It was George Bush's masterful calming of the waters what done it.
I laughed, Tanta, I really did.
I bet there are some real confabs happening this weekend, though!
Goodness, Tanta, are you suggesting the WP is doing damage control on behalf of Reuters? That might be stretching things a bit...
"the press credulously printed an unfounded rumor"
You just captured the entire history of the Bush administration. So called "journalists" (as opposed to those filthy bloggers) have functioned as nothing more than passive, stenographic enablers for whatever it is Bush, Cheney, and their cronies have wanted to do. The question of whether the news media are liberal or conservative is almost beside the point; the real problem is that they're astoundingly lazy. CR and Tanta do more hard work and investigation in a week than your average "journalist" does in a month.
oh yeah, lots of confabs
now that the trial balloon has sparked sufficient interest
it was more along the lines of 'let's put this out on the stoop and see if the cat eats it
No, no, no. It wasn't that at all. Everybody remembered last minute that that Hank Paulson said subprime was contained, so everything is clearly all right.
Now, it's all about the rumors. I noted a huge uptick in rumor-blaming in the last week. The underlying message is that if it weren't for people speaking out of school, we'd be sailing along at a brisk clip, with no clouds to be seen.
I think this uptick is significant, and points to just how stormy things will get. It is sort of a last refuge of hucksters--"Who you gonna believe? Me, or that rumormonger in the back of the crowd? Come on folks, step up and get yourself a bottle of Dr. Cleaver's Feel-good-like-the-50s elixer."
And nothing will give the rumor crushers more fuel than a Bernanke-Syron phone call taken back before it happened. Why, it's as if someone NEEDED a false rumor to flog--and the media took care of it.
One things for sure, Mr. Market is going to find out for sure one way or another. He don't like uncertainty.
i would imagine this led to a lot of short covering in the equity markets...that equals less buyers on the way down for the broad mkt
Barry's right, if they are chasing rumor-mongers for jail time, they had better chase this one.
Any negative rumor that is used for prosecution without comparative prosecution for these BS positive rumors is just more reason revolution is the only solution.
We see how well Hank is doing with his strong dollar BS. Better go long AVON these guys are going to need a lot more lipstick for these two pigs.
Tanta
I hope your feeling better!!!!!!
It seems that some people are now remembering that the bonds of these agencies have 'not gov. guaranteed' written on them and that because of this, the bond holders have been getting about $50B extra each year for the 'risk'. Since most of the bonds are held by foreign governments, some people are acutally asking why they should be paid for taking the 'risk' and not assume the risk. Bad thinking, let the home owners suck it up, they are all rich anyway.
" eased immediate concerns "
Aren't you glad we're all confident Fannie and Freddie are solvent now?
I know I am!
If Bush and his cronies say it, it must be true.. or possibly every single thing they've said has been a lie this entire time.
F-F-F-F-F-F-F-Freddie and the Feds...
In line with the WaPo bit I quoted above, liquidity isn't their problem, solvency is. It is common for companies in a death spiral to have a negative net worth long before they are unable to borrow more money. Hope springs eternal, and if you're likely to bankrupt, it is rational for managers to continue borrowing if there is ANY chance of avoiding bankrupcy. This is WHY FDIC banks are more regulated by the government than corporations that AREN'T insured by the government.
Given that there is no explicit government guarantee of the GSEs, there is less theoretical reason for the government to step in and cease operations before the companies lose access to credit or capital. But since they are reported to be responsible for ~80% of lending this year, they truly are "too big to fail." This puts them in the strange position of having an implicit government guarantee, but no regulator with sufficient clout to end a possible death spiral as debts pile higher and higher.
Lending them more money at the discount window doesn't help when the problem is that their assets have declined to the point that they have a negative worth. If the RE and bond markets improve so that their assets regain their worth, lending can get them past the "rough patch." If the markets continue to decline, additional debt just makes the impact crater bigger. ISTM that just like the FB paying their mortgage with their HELOC, the plan seems to be to hold on for another day and hope for a miracle.
"mal writes:
F-F-F-F-F-F-F-Freddie"
Hank? Is that you?
We need a government owned bank where people could easily and conveniently put their money over 100T and not worry about it. This nonsense of bailing out reckless banks should stop. Let reckless banks fail and the shareholders and big depositors take the hit. If you keep bailing them out they will simply go on to be even more reckless since they will always be rescued. Investors in reckless banks ought to emerge with nothing.
Anonymous writes:
Barry's right, if they are chasing rumor-mongers for jail time, they had better chase this one.
Any negative rumor that is used for prosecution without comparative prosecution for these BS positive rumors is just more reason revolution is the only solution.
Anonymous | 07.12.08 - 9:49 am | #
Good luck with that rumor prosecution thing - either way. Call me when the grand jury comes back with indictments. Until then I think I'll sort through my grocery coupons or something else just as exciting.
I think D Backel got it exactly right above - except he might have underestimated how many times 'the trick' will work.
Tanta, perhaps The Feds will use the Scandinavian model of 1991-1993?
Since most of the bonds are held by foreign governments, some people are acutally asking why they should be paid for taking the 'risk' and not assume the risk.
The Chinese are the biggest of the bondholders and it isn't wise to anger them or stiff them.
. . . the plan seems to be to hold on for another day and hope for a miracle.
A cynic might say the plan is to hold on for six more months and let the next guy take the hit, but I think they will try to hold on "forever."
Forever is defined as the time it will take for RE assets to appreciate or debt to be diminished by continued devaluation of the dollar or enough inflation to kick in to balance things out in nominal terms, whichever might first occur.
Samuel writes:
Tanta, perhaps The Feds will use the Scandinavian model of 1991-1993?
Samuel | 07.12.08 - 10:10 am | #
Or even better yet, the Scandinavian model of the 1890s... encourage immigration.
US mortgage sector eyes covered bonds
http://www.ft.com/cms/s/0/3306e164-4ebc-11dd-ba7c-000077b07658,dwp_uuid=5db90a0e-4e6c-11dd-ba7c-000077b07658.html
Covered bonds have a number of differences to other mortgage-backed bonds that explain why US regulators believe investors stung by the loose underwriting standards of the housing boom might be coaxed into buying these bonds instead.
First, covered bonds generally have much stricter limits on the loan-to-value ratio of the mortgages used in them and are never used to fund subprime borrowers. Secondly, while the pools of mortgages that back each bond are ringfenced to protect them from problems at the issuer, the issuing bank has to guarantee that it will pay back the bond if the mortgages themselves turn sour. These conditions could encourage better underwriting by mortgage lenders in the first place, while also inspiring confidence among investors.
Mr Paulson hopes they could provide much-needed credit for prospective homebuyers and help revive the flagging US housing market, where purely private sources of finance have all but evaporated. So far, only the government-sponsored mortgage financiers Fannie Mae and Freddie Mac have taken up the slack but they are also facing financial pressure.
One of the biggest potential prizes for a US covered bond market would be the opening up a whole new set of domestic investors who previously have not funded mortgage lending. Many bankers believe such an investor base has the potential to make a US covered bond market bigger than the European one.
Today we are also looking more broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal homebuying activity, said Mr Paulson.
This is part of the solution???
Things are much worse than they seem. Take heed.
You ought to pay off the bond holders for political reasons, but you can well afford to stiff the shareholders. Stupid idiots to have believed in Fanny and Freddie. Be a good lesson to them.
And nothing will give the rumor crushers more fuel than a Bernanke-Syron phone call taken back before it happened. Why, it's as if someone NEEDED a false rumor to flog--and the media took care of it.
Look, do I think that the Fed has been considering the discount window idea for weeks or months? Sure I do. I believe that the Fed has been kicking around any number of ideas, good, bad, indifferent, conceivable and inconceivable, for what to do about the GSEs. They damned well better be. War-gaming is their effing JOB.
That's not exactly the same thing as Ben calling up Dick on Thursday and telling him the window is open.
I mean, who do these people think Dick Syron is? He's a former regulator. He knows perfectly well what kind of scenarios are being subject to debate and analysis at the Fed. Anyone who thinks that Syron's own opinions on the subject haven't already been canvassed by the Fed as part of that debate and analysis is naive. So it's hard for me to believe that Bernanke had to call Syron on Thursday (bypassing Lockhart?) to let him know that the discount window option was just one of the possible cards on the table. If the call happened at all, I'd be more inclined to think that Ben was asking Dick what he thought about the idea.
But it was reported as the Fed chairman calling the CEO of Freddie Mac before the markets opened yesterday to tell him he had access to the discount window. Which of course flipped everyone out.
And I am supposed to believe that Ben called Dick back late yesterday to say that things seem to have calmed down enough that it was no go? How was that conversation supposed to have gone down? "Sorry, Dick, we froze your HELOC. Hope you hadn't made any plans"?
I still can't get the timeline quite straight, but as far as I can tell Reuters posted the story at 4:18 pm ET saying the Fed had no comment. An hour later Bloomberg has a comment from the Fed denying the whole thing. (I don't know how long the Reuters headline had been on the tickers before the story was posted online; I saw the headline at MarketWatch around 3:00, but the story didn't appear in full until later.) It rather sounds to me like somebody wanted a "scoop" too badly.
Haloscan acting up.
Anybody know how much Fanny and Freddy debt the Chinese hold? Has Brad Setser said anything about this?
80 online on a saturday.
Can't be good.
Cheers,
Jim ...
As reported in Mish's blog today:
"There is $376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts."
F-F-F-F-F-F-F-Freddie and the Feds...
I can just see Paulson in those big rhinestoned glasses pounding away at the piano
Unfrigginbelieveable! Bloomberg's tape is running, "Indymac Seized by US Regulators; Shumer Blamed"
95 Misean, ticking up....
What are the odds that one of the GSEs goes to runoff mode and new lending goes thru "geniuses" like Wachovia, BofA and their ilk? 30%?
Does the market share of the GSEs force other banks out of meat & potatoes loans and into exotica?
uuu writes:
Unfrigginbelieveable! Bloomberg's tape is running, "Indymac Seized by US Regulators; Shumer Blamed"
On the contrary, i think anyone who exposes these over leverage and under capitalized institutions should be commended. Whether it is politically motivated or not.
I think another huge selloff in fannie and freddie next week is in order after the news gets digested over the weekend.
Speaking of irresponsible rumor-mongering, roughly around the 2:30 spike in FNM and FRE.
Video - CNBC.com
I'm sure Jim Cramer has the ear of the president. Somebody needs to prosecute this asshat, especially given his views on BSC's downfall.
Someone on a thread yesterday said that Wachovia was holding back on funding. I have one place re-fi closing which has been on hold for weeks for no reason at all, every few days a new demand comes in for more bank paperwork and nothing happens. W. seems to be hoping this borrower will screw up so it doesn't have to make the loan. It demanded a new credit report. The FICA score went up, not down. There were "problems" unspecified with the the appraisal. Well, so? As far as I can see nothing is moving, which means for the moment nothing is worth anything. So if W. doesn't want to lend, why not just say so?
Why raise hopes?
So the borrowers can go elsewhere? Or, try to.
Having discouraged creative thinking for forever, these people are unable to think the impossible. They are unable to either move foreward or backward. They know the old ways aren't right, but can't figure out any new ways. Most likely, they are dead men walking, refusing to admit they are zombies. So they pretend to do business, without actually doing any.
Maybe they know they won't be able to sell this particular little loan to Fannie/Freddie??
Cramer is dem, the only way he has the preznit's ear is if CNBS is aired while arbusto the younger is on the bike machine.
Huge is a bit of an understatement, FRE ran 397.3 million shares with a 90 day MA of volume of 22.6 million...and FNM ran 409.3 million shares on a 90 day MA of volume of 29.8 million shares...
The villains are not the bankers, but the economists
article
A very interesting article.
The next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations.
Rescue Debate: Paulson Insists Fannie, Freddie Holders Lose - WSJ.com
Stick-save Sunday night, woohoo
Question Mark and The Mysterians playing their one hit wonder "96 (billion) Tears."
Repeated from the previous thread apropos here:
Let's be clear here. the only reasons rumors have any power whatsoever is because we no longer fully trust what we are being told. Look at the stock market today. Rumor correct drove down the DJIA below 11,000 and rumor incorrect drove it to positive territory where the floor cheered, actually cheered only to see the average finish way down 90 minute later. This is no longer investing, this is all speculation. Substitute glod or oil for DJIA in the events above and the story still rhymes.
Adding:
When you treat people like children they act like children. No one should be surprised that the housing market and spreading to financials and eventually the general economy are acting irrationally. They are receiving false signals and have been ever since Fed Funds went below 4%. Now this morning we learn the Senate has passed the bailout bill. It will make things worse precisely because of the false signal it contains.
So if W. doesn't want to lend, why not just say so?
Probably because they've already issued a commitment letter on that loan, and they don't want to get sued for rescinding it. So they're just getting creative about interpreting the conditions in the letter.
I assume your client has a commitment letter? Are we scheduling closings these days without one?
Maybe someone wanted a scoop too badly. Or maybe this was a "trial balloon" from the Fed to test the market reaction.
Judging by the bond market reaction (longer-dated maturities sold off violently, indicating no faith in U.S. debt) I'd say that this balloon got shot down, for now.
jim writes:
Anybody know how much Fanny and Freddy debt the Chinese hold? Has Brad Setser said anything about this?
jim | 07.12.08 - 10:18 am | #
Last I saw he was still trying to get a handle on a reliable number - there really isn't any publicly available reliable data. Same thing applies to their sub-prime exposure - who knows.
What makes it even more difficult is it isn't held centrally - over the last few years PBoC & SAFE have encouraged the sector & regional banks to take positions of their own (to take some of the load of PBoC & SAFE). They have stepped up.
Count on one thing - these d00dz get paid first. If not our gov't goes to 100% pay-go overnight. Some of us here might think that not a bad idea in the LONG RUN... in the short run it would be about as much fun as going cold turkey on a steadily increasing 30 year heroin addiction. It will be 'avoided & deferred' as long as possible.
For those interested :
Iran to target '32 US bases' if attacked
AFP.com - International News, Photos, Videos, Graphics, World
"jim writes:
We need a government owned bank where people could easily and conveniently put their money over 100T and not worry about it..."
It already exists jim...
TreasuryDirect
You might not like the interest rates compared to Corus Bank CDs, but you don't have to worry about getting all your money back (until the US Treasury defaults anyhow).
Joh
Let's see what happens on Monday when FRE and FNM have to sell bonds for financing. I suspect that the bonds will not sell as well as they would like. End result is that the FED will have to provide some funding which they are able to do (up to $2.5 billion if my memory serves me).
If the bonds do not sell well and the FED opens up the discount window, I will move the rest of my money out of money market into MGEMX for a currency play. I was sitting in bonds and moved out last week before the two year hit 2.4% and before the spike to 2.6%. I basically was flat but I can live with this as I did not lose the 20% that MGEMX lost.
However, I suspect that China will support their market in July and August as they head into the olympics. Also, I suspect the dollar to take a dive if the FED opens up the window. After the olympics, I suspect that China will revalue their currency to address their inflation and increase their purchasing power against the dollar.
On a side note, I hope you are doing well Tanta. With two family members who have fought your disease, it is a painful but winable fight. Hope the weekend finds you well. Cheers.
franz writes:
Also, I suspect the dollar to take a dive if the FED opens up the window.
After the olympics, I suspect that China will revalue their currency to address their inflation and increase their purchasing power against the dollar.
Too late for the dollar, it already took a dive, further diving though may not be excluded.
I believe china has raised rates numerous times over the past year or so, their problem is hot money is still coming in to the country at an astounding pace. My guess is that they will put in more regulations to curb that effect and to raise rates and bank reserve ratios again.
They don't really focus too much on the equity markets, it is not a top priority for them.
How do you think this plays out, Tanta?
Tanta--
Commitment letter? Commitment letter? We never get no steenkin' commitment letters. Every once in a while I see one to be countersigned at closing. That is to say, I saw them before August 9, 2007 when the credit train ran into the mountain and everything seized up.
And I've never seen one that wasn't so vague and weaselly that the bank
couldn't think of an excuse to get out of it. I've never seen one clear enough that I'd be willing to sue the bank on the basis of breach of contract for failure to honor it.
I'm sure B. Setser's inbox was flooded yesterday.
Brad Setser: Follow the Money » Blog Archive » Too Chinese (and Russian) to fail?
Anonymous @ 10:59 gets to what I was thinking when I wrote: "Why, it's as if someone NEEDED a false rumor to flog--and the media took care of it."
This one had the feel of psyops yesterday--never felt quite genuine from the get go. (I guess that would actully be crappy psyops)
If I were Fannie or Fred, I'd be spreading the rumor that the fed was opening its window.
Of course, the problem with Fan/Fred is solvency, not liquidity, but this fact hasn't seemed to stop BB before.
@lawyerliz:
I was the one that said wachovia was stopping loans. That's what I heard from a credible source. I immediately transferred most of my $$ from them to another "safer" instititution that I had ready for this type of thing.
MGEMX?
If you want a currency play, why not try MERKX or MEAFX.
If Bernanke was on the phone with Syron I doubt they were discussing Phil Mickelson's hole in one.
The WSJ says FRE is hitting the markets Monday for $3 billion in short term financing. If the sale goes OK all is OK. If it doesn't I suppose Syron will need to come up with the money someplace else and the FED is the only place I know you can get $3 billion quick.
lawerliz is right. It is virtually impossible to get a commitment letter these days. Like pulling teeth.
Look for more of this next week :-
Seattle Post-Intelligencer: David Horsey
The Chinese are the biggest of the bondholders and it isn't wise to anger them or stiff them.
if the Chinese get stiffed on $400B they're willing and able to take it out of the Taiwanese's hide.
After the Olympics, of course.
The funny thing is that everyone comments on the falling dollar, but no one ever posits plausible solutions for strengthening it. How high would the interest rate have to be to attract foreign capital? Today, it's the solvency of FRE/FNM. Tomorrow, it'll be the rest of the financial industry. Then comes the solvency of Medicare. Next, Social Security.
Shumer speaks a truth and the Repub Bloomberg perpetuates the myth that it was Shumer's fault for wiping the lipstick off the pig.
BB you have a contrary nature and not good to live one's life in spite of everyone. You need to stand for something irrespective of anyone else.
I am happy that my paid for house sits on 2 1/2 acres. You'll know we have reached Appocalypes when I start calling myself farmerliz. We have orange lemon and tangerine trees. I also have a nice stand of rosemary and a cinnamon tree!. I know how to grow tomatoes. I can grow sunflower seeds. I have some ginger plants--don't know if these are the ones with the edible roots.
So maybe we can sell citrus and spices!! I should try and grow a nutmeg tree; might be too cold here.
Also in Miami had an allspice tree for a while but I grew it too close to the house and it had obnoxious roots.
is hitting the markets Monday for $3 billion in short term financing
$3B? Paulson can't stick-save the nascent bear rally over a short-term $3B loan?
Argento writes:
The funny thing is that everyone comments on the falling dollar, but no one ever posits plausible solutions for strengthening it.
Raise Rates to at least 4% and let the banks fail. It won't be done so am better off commenting on it falling, in case there still are some deluded people thinking it will rise.
Breaking news from NY Post -
Obama Picks Dick Gephardt For VP!
/ sarcasm
BB:
Sorry, that wasn't a shot at you. I meant all of the pundits on television.
Argento:
No need to apologize, just my thoughts anyhow, i take things at face value.
The FED's mandate is to protect the banks, hence their drastic interest rate moves. I do hope they don't get power over the SEC as well. Power corrupts and absolute power corrupts absolutely.
I read somewhere yesterday, don't remember where, that there's a precedent to the fed buying GSE paper. SO this would be nothing new. What's the big deal ?
Russia, a holder of about $100 billion in U.S. agencies' debt, including securities of Fannie Mae and Freddie Mac , said on Saturday it was happy to hold the debt and had no immediate plans to reallocate. "Debt obligations of Fannie Mae and Freddy Mac are de-facto not inferior to U.S. sovereign debt obligations in their credit quality and still have the highest credit rating necessary for the gold and forex reserves investment,"
Russia says happy to hold US agencies debt-Finmin
| Reuters
Shot across the bow.
uuu writes:
Shumer speaks a truth and the Repub Bloomberg perpetuates the myth that it was Shumer's fault for wiping the lipstick off the pig.
Try not to think of things as black or white. Most things are a lil grey.
"I am happy that my paid for house sits on 2 1/2 acres. You'll know we have reached Appocalypes when I start calling myself farmerliz. We have orange lemon and tangerine trees. I also have a nice stand of rosemary and a cinnamon tree!. I know how to grow tomatoes. I can grow sunflower seeds. I have some ginger plants--don't know if these are the ones with the edible roots."
This illusion is called the self-sufficiency fantasy. It was barely possible two hundred years ago.
I used know of some villages in the back of beyond in Russia where it might have been possible. Even they were dependent to some extent on services from the outside.
We're all in this together, and we have to work out solutions - if necessary - together.
The FED's mandate is to protect the banks, hence their drastic interest rate moves. I do hope they don't get power over the SEC as well.
The current machinations have eerie similarities to 9/11, when all of the agencies were blaming each other. As a result, DHS was created as an overseer. Evidently, the Fed has become the financial equivalent of DHS.
My real concern is how much authority Congress will cede to the executive when the shit really starts to hit the fan. Executive nationalization, which Truman almost got done, would not be off the table.
Pavel Chichikov writes:
We're all in this together, and we have to work out solutions - if necessary - together.
And work no doubt with enemies as well as friends. Everything in interconnected and interdependent.
Your enemy now may become your friend later and vice versa. Such is the flow.
but no one ever posits plausible solutions for strengthening it.
Raising rates would be . . . interesting, considering the amount of debt that is rolled over every quarter:
bills: $1T total, ~$150B rolled every quarter
notes: $2.5T, ~$300B rolled every quarter
t-bills are in the 2% range, notes are in the 4% range, the surviving bonds we issued in the 80s are in the 9% range.
Altogether the interest payment shock of moving to 4-8% would be ~$60B/yr, roughly (all my numbers are SWAGs so could be way off).
I find it humorous that we still have $40B of t-bonds paying over 10% extant from the early 80s. These bonds exist thanks to the Reagan tax cuts. Eg. nstead of taxing some wealthy dudes in 1983 $12B we borrrowed the money at 10-13% pa for 25 years from them. $36 billion in total interest to not tax $12B. What a deal, plus we've still got to rollover the $12B we owe them.
Argento:
I just hope some sanity prevails.
By that i mean that absolute power must not ever be concentrated in any one entity. There must be checks and balances. The alternative is too bleak to contemplate.
Troy:
That's why I wonder how a Volcker-type response could work to cure inflation. Sure jack up interest rates, and we'd be looking at the largest ARM reset in the history of the world. Ahhh, what a mess we made.
"We need a govenment owned bank that people could easily and conveniently put their money over 100T and not worry about it."
If things start getting real bad, the only bank will be the Bank of Bullion.
Sanity is prevailing.
Stop whacking the fantasy that fannie and freddie are busted.
Look at it this way- they get to borrow at 2-3% and lend at 6-7%.
No run on assets is possible, 'cause they sold bonds. Geez, so what if a bunch of losses are caused by mark to market. The real question is what are the realized losses.
That cash burn is the only question of solvency. The assets are huge, but most of them are sound. I don't see much of the pre 2004 stuff to do more than continue to be paid. There will be very little default on the tranches from 2005-2007, because, ironically due to their requirements, most of the really toxic trash was not eligible to be sold through GSEs without fraud being involved.
Now, what Indymac has on the books is probably the most toxic remnants of the boom excesses.
Ugh. What else is buried on the balance sheets from that era on all of the gogo lenders? who knows, but most of it didn't go GSE.
Remember, they were complaining about a lower percentage of loans and not making their fees during the boom.
Now they have the market nearly to themselves, so time to raise fees and push income.
Geez, they sound like buys to me, especially with explicit government backstops.
Crisis over, for them. Now, those banks with toxic portfolios, well, they are a different matter.
Someday this war's gonna end...
BB,you might read a bit about the "Hamdi" decision at "Dirt Rhoades Scholar".take a look at the Kelo decision,read the new fisa bill,the military commissions act,and patriot act 2.Buy lots of Tums first.
Saw the headline, thought immediately of Freddie and the Dreamers:
How do you do what you do to me?
I wish I knew
If I knew how you do it to me
I'd do it to you
How do you do what you do to me?
I'm feeling blue
Wish I knew how you do it to me
But I haven't a clue
"I'm shocked, SHOCKED to find there are rumors going on here!"
LOL never gets old.
below....3 sentences from the FORSYTH column on Barron's...
"Treating them like hedge funds and forcing them to mark everything to market would go against that mandate, they point out."...
..."The impact of a failure of Fannie and Freddie, though technically insolvent, is beyond imagining, far greater than the bankruptcy of a Bear Stearns. For that reason alone, such an eventuality is unthinkable."...
In a free market, supply and demand naturally find an equilibrium but, in a market that is heavily dependent upon credit, and one where the government manages the supply of credit by enabling easy credit for things that history shows are not really true assets, then eventually, an overly enthusiastic market will correct, maybe substantially. In an overdue correction of this imbalance we are now seeing real estate (the tail) correct the dog (the mortgage bond market). Everyone's certainty that they are too big to fail won't stop it from failing if the excesses were really based upon systemic greed that we all convinced ourselves was completely reasonable. It wasn't reasonable. In 1962 my parents bought a house in a NYC burb from an old couple who bought it new in 1929 for about 30-35% more than they paid for it. ($32,00) That same house is valued at roughly $750,000 now. You tell me. What's really reasonable as a solution? Is it really to further devalue the currency to make this mandate keep up the illusion?
The lack of clear and unambigous action by the administration is troubling to say the least. Especially since you've got to assume that there are some parties (IBs, Hedge Funds, Etc) benefiting greatly from the drop in the stock price.
Less than half of U. S. mutual funds are owned by their managers, according to Morningstar. Thats a problem, contends the firm, since a fund manager who puts his or her money at risk alongside his investors is showing conviction in his strategy, says Russ Kinnel, Morningstars director of fund research.
The Buffalo News: Business & Finance
Top funds may have lost $4 bln on Freddie, Fannie this week
Top funds may have lost $4 bln on Freddie, Fannie this week
| Reuters
Suckers
AllenM don't overlook the problems with MI companies here. The mortgage insurance required by the GSEs is backed by companies that are also potentially insolvent. The total market cap for MGIC, PMI, and Radian is close to $750mill. Unfortunately they're probably backing a $trillion worth of debt. There's big time counterparty risk here.
Former FNM insider spills the beans on his blog, this is good stuff...
Burnham's Beat: Fannie Mae's Golden Goose: A Lesson In Moral Hazard
For more info on financials :-
Reggie Middleton's Boom Bust Blog - All Blog Entries
Mortgage insurance is basically a writeoff. All of the assets will be paid to cover losses, and then they will be done. Market cap for mgic radian, and pmi is irrelevant, there value is in their asset holdings, which are far higher than their market caps. They have about $20 billion in assets that will be committed and they will be spent on foreclosure losses.
The thing is if lending grinds to a halt, the underlying bonds blow up due to a housing death spiral.
The Fed knows this, hence they will do whatever is necessary to backstop the market.
What people are missing is why Freddie wanted more capital, not to cover losses, but to write more business. That is why they wanted to raise capital, because with the cmo market imploding, they have the field to themselves.
The US government should invest $100 billion in fannie and freddie preferred stock and let 'em rip.
That would provide more than enough capital to reassure the markets, and would eventually be repaid with interest.
Someday this war's gonna end...
I ain't saying it's so, but Monday there just might be hell to pay.
Uh, doesn't the Fed already hold about $400 billion in agencies as collateral from the auction facilities?
They would be bailing themselves out.
AllenM writes:
and would eventually be repaid with interest.
I have a gripe with 'eventually', it seems that word is what makes a big mess bigger.
Look at it this way- they get to borrow at 2-3% and lend at 6-7%.
No run on assets is possible, 'cause they sold bonds. Geez, so what if a bunch of losses are caused by mark to market. The real question is what are the realized losses.
Exactly. Talk to me about their cashflow. As long as they have excess cashflow I don't care what their M2M paper losses are.
BTW - the 'run down' scenario you posted last night makes perfect sense... I'd be doing it already if I were them.
Understand 99% of the people who post on this and every other blog have NEVER run a business and have not had to meet ongoing immediate obligations so don't realize how well schooled these folks are at doing this... Most folks here are wage slaves and maybe do a little 'trading'... they don't realize how long a franchise can last given an almost annuity-like stream of cash (like the GSEs have). Then it just becomes a matter of cutting back new business generating out-of-pocket cash-eating operations sufficiently to be sure the franchise continues to run in the black CASHFLOW-WISE, quarter after quarter. Screw M2M and the horse it rode in on.
The GSEs can easily out wait the market if they are allowed to do so.
Will they be allowed to do so?
Anonymous, you get it exactly.
GSE debt as shown above is treated already as sovereign debt.
So make it so.
What is going to happen is that we are going to backstop them sufficiently to reassure Wall Street.
There are plenty of banks that will fail shortly, but fannie and freddie are TBTF.
PERIOD.
Unless you want to see the dollar freefall and collapse of the US government.
Someday this war's gonna end...
The Schumer & Poole "revelations" are actully causing me to turn a little tin foil in my attitude. Remember both of these gentlemen are well schooled in the art of keeping their mouths shut, or at worst dissembling in a non-commital way when pressed about a troubled institution. So why were they going after IndyMac & Freddie/Fannie with double barrel blasts across the bow? Since their jobs are/were to protect the financial system, not to help make a terrible state of affairs worse, it gives me the feel that this is a set up.
What people are missing is why Freddie wanted more capital, not to cover losses, but to write more business.
Agreed, but don't they have to let undercapitalized insures write more policies to do so?
Allen M.
You make some interesting points. I don't know what the spread has to be to make money lending on depreciating assets though.
Considering loans all the way back to 2002 to the present are essentially forclosures for all the things that used to cause forclosures.
If we get another 10% from here then everything they are writing that doesn't have a big down is another loser.
Example:
I wrote about my sister in law about a year ago. She had a neg am loan and was due to default. She met a guy online and got pregnant. He finacially saved her and refi'd into a 30 yr fixed on $560,000. He makes 100 g and she makes 20 g. The house at the time appraised at $650,000 (a year ago). Well, due to the equity and his good credit they were given a loan that they can't afford. Sure, they are supposed to be able to but reality is interfering with theory. Anyway, they are having money problems and no doubt will split soon (already talking). The house is supposedly worth $550,000 now so it's a forclosure or short sale when they split. (the house next door is abandoned bank owned). My guess that if they sold it, it would go in the low $400,000's. If they walk then damage and time will increase the bank's loss. How many performing loans have to be made to make up this huge loss?
I just don't see Fannie and Freddie making money even with these spreads lending to a society with a 50% divorce rate when virtually nobody will be able to sell when the lose a job, get sick, divorce whatever.
I think resets are a small part of the pending forclosure problem.
Fannie and Freddie have to raise rates to make more on the performing loans to offset the high cost of the non performing ones.
Raising rates drops the value of homes, which further impairs their existing book, and increases the percentage of homes that go into the forclosure and increases the loss on each forclosure.
The only way to save Fannie and Freddie is to allow them to continue to lend money at a loss (i.e. at low rates). But if you do this then of course they are poor investments for equity investors and to be able to get capital to lend at a loss they have to be backed by the Govt.
The future is written in stone.
...Market cap for mgic radian, and pmi is irrelevant
Not totally irrelevant because it makes raising capital more difficult.
The funny thing is that everyone comments on the falling dollar, but no one ever posits plausible solutions for strengthening it.
Find ways to encourage more domestic production, and less importation, of consumables/food/electronics/bling. Make more of it here and generate jobs.
Hand me an iPhone/iPod that says "Designed by Apple in California, assembled in USA"
The interplay between market psychology and actual fundamental economic realities is a fascinating thing to watch.
We've just been through a period where market psychology--expectations--drove housing prices to unheard-of levels. People (big guys and little guys) invested in a market they did not understand, based on expectations. But then economic reality set in: Too many mortgage loans made to people who could not pay the money back.
Now, a lot of people (including the people who hold the levers of power) are acting as though the GSEs' problems can be solved by managing expectations. They may be right--unless housing prices continue to decline--which could happen if the market expects them to decline. My head is starting to hurt now.
A mortgage broker told me a day or two ago that FNM is now flagging some parts of our area as "declining" in value. When they do that, the lenders who sell their mortgages to FNM are going to demand higher downpayments etc. That makes it harder for homes to sell, forcing sellers to lower prices, thereby cutting the value of other homes, putting more holders of existing mortgages underwater, etc. etc.
The FNMA 4.75% Pfd M had quite a day yesterday. Its cash yield went over 15% at one point and closed at 11.67%. With market uncertancy, their high cost of capital and home loan rates at 6.25, how can FNMA survive? I look for home loan rates to pop next week absent significant Fed/gov't action. It is time for the Fed/gov't to make the decision, back FNMA 100% or not. I vote for not. It is time bond investors to feel some pain too, even though this option must keep TPTB awake nights.
RayOnTheFarm writes:
Hand me an iPhone/iPod that says "Designed by Apple in California, assembled in USA"
It would cost 3 times as much and apple would probably be worth 3 times less.
You can't just bottle globalization, unless things get really bad i suppose.
Time will tell.
AllenM - "The real question is what are the realized losses"
That's partly true. The REAL question is more about "projected realized losses".
Unemployment heading higher and rates heading much higher.
Value of their bonds will take a series of hits on rates and their mortgages will default in progressively higher numbers as the housing market deteriorates. All this when they are already undercapitalized and the entire fragile US mortgage market is betting the farm on them stabilizing funding and prices from crumbling. Perfect storm.
The market's assumptions and movements are likely correct. You are much too optimistic.
Dryfly: "Understand 99% of the people who post on this and every other blog have NEVER run a business and have not had to meet ongoing immediate obligations so don't realize how well schooled these folks are at doing this..."
Are you refering to well schooled folks like those that ran Countrywide, Bear Stearns, IndyMac, New Century, (see implodometer for more companies run by 1%er well schooled individuals who have run businesses before......)well schooled
Dryfly - yes, they will. Their stock prices don't matter that much to their ability to function. If they are unable to raise private capital the government will throw it at them. Remember, the best our esteemed s_n_t_rs could come up with is to get the GSEs to play with the lovely jumbos, i.e., Alt-A. What has broken down is another leg in the securitization market. People are scared of buying directly from the banks unless it is filtered through some sort of government guarantee.
People aren't thinking straight.
The US government should invest $100 billion in fannie and freddie preferred stock and let 'em rip.
yup FNM is losing ~3B/quarter right now . . . chicken feed in the scheme of things. We're importing 500 million barrels per day from OPEC, so 3B is just a $6/bbl kickback to the USG to keep us heiki.
sorry, 500m bbl per quarter
how can FNMA survive?
The Fed teleports $100B of capital into FNM @ 2%.
10:1 leverage means FNM can lend out $1T @ 5% net.
Cost of capital: $2B.
Interest return: $$20B
Problem. Solved.
Are you refering to well schooled folks like those that ran Countrywide, Bear Stearns, IndyMac, New Century, (see implodometer for more companies run by 1%er well schooled individuals who have run businesses before......)well schooled
Average Joe | 07.12.08 - 12:54 pm | #
How many companies have failed vs how many companies out there? Answer: NOT MANY have failed or are even close.
Sort of like how many mass murderers vs regular citizens.
You might think there are a lot but the bulk of reasonably well run companies do NOT get press... just like the bulk of regular citizens don't make the bloody lead at 11PM.
GSEs can run a very long time with near zero input of new business IF the regulatory bodies let them. Will they let them?
It would cost 3 times as much and apple would probably be worth 3 times less.
You can't just bottle globalization, unless things get really bad i suppose.
When I go to the grocery store, and I see frozen fish from China (which they can apparently sell for less than getting local frozen fish), then it seems that our cost structures are out of whack.
Hi-tech might be one thing (although I doubt there would be much difference in the parts costs, only the labor), but a basic food item should be more competitive. After all, there is a large transportation cost in getting that package of fish around the globe. Have we arrived at a point where "need to have it cheaper" so trumps our ability to pay a fair price ?
f-erk, $1T x 5% is of course $50B, not $20B. Problem even more solved!
Have we arrived at a point where "need to have it cheaper" so trumps our ability to pay a fair price ?
About 20 years ago, when Wal-Mart started rearing its ugly head. I agree that if people stopped consuming so much foreign crap, then paying a fair price for domestic products wouldn't be a big deal. However, the fact that Detroit kind of sucks makes it difficult to be a "net" domestic consumer. It'd take a lot of local shrimp to offset my Toyota...
Anyone here remember Ben Bradlee's story about LBJ firing J. Edgar Hoover?
Value of their bonds will take a series of hits on rates and their mortgages will default in progressively higher numbers as the housing market deteriorates. All this when they are already undercapitalized and the entire fragile US mortgage market is betting the farm on them stabilizing funding and prices from crumbling. Perfect storm.
Again - it doesn't matter what the bonds are valued at IF they cashflow (i.e. people keep making the payments).
Guess what, if rates go up - that HELPS Fanny & Freddy wrt defaults & walk-aways. That's because the housedebtors aren't likely to get a better deal (payment-wise) anywhere else in that environment if they walk away. The yields would suck for GSEs relative to new biz but the old instruments would still cashflow relative to their initial investment.
So that forces them to cut more cost but doesn't put them at threat of failure. Only losing access to borrowing does that (and I believe gov't is lender of last resort as per their charter).
So they could run down indefinitely. Sort of a mortgage market equivalent of hibernation.
Well Allen, since so many businesses run v.s. fail, then by logic it must not take a 1%er individual to run a business.
In any case, I hear the same logic about the percentages of forclosure being so low. More than 90% of the loans out there are being paid on time....well then no problem I guess?
My point was that perhaps it doesn't have to do with depending on 1%ers to know what they are doing.
Perhaps any business that couldn't make money lending at 6% to people buying housing that were rising in value from 2002-2006, surely can't be making money to people buying houses that are going DOWN in value can they?
Fannie and Freddie will survive to continue lending.
They just wont make money doing so unless rates rise significantly.
If rates rise significantly then losses they are doomed to take anyway will get bigger.
Not a good place for equity investors in my book.
These companies will survive but will be forced to lose money to provide a service to the public and require taxpayer money to stay alive.
Getting a 1%er in charge wont mean a darn thing...according to this 50%er.
@ mp | 07.12.08 - 1:08 pm |
Please tell us Ben Bradlee's story
RayOnTheFarm writes:
Have we arrived at a point where "need to have it cheaper" so trumps our ability to pay a fair price ?
I agree with your sentiments.
But alas, it's been going on for years and decades.
When the chinese wanted to impose some sort of minimum wage structure, guess who protested because it would hurt their businesses.
And yes it is apparently cheaper to get fish elsewhere among very other various things.
I agree with dryfly that most companies are well-run and do not fail. But I also agree with Average Joe. The people in charge of some very large, very important financial institutions have done things that seem breathtakingly evil, stupid or both. Again. Just a few years after the dotcom bubble. Wall Street's credibility is zero.
Average Joe - but your sister's loan is not a GSE loan. That's the difference. The book the GSEs have is markedly different than that of the private lenders.
Well Allen, since so many businesses run v.s. fail, then by logic it must not take a 1%er individual to run a business.
In any case, I hear the same logic about the percentages of forclosure being so low. More than 90% of the loans out there are being paid on time....well then no problem I guess?
The situation is the same but the 'problem' is different... If you lose your job but have lots of savings (or a really, really rich uncle who likes you)... you don't lose your house. Mybe you just cut back some & chill... so long as uncle lets you. You don't have to be a 1%er to figure that out.
But if you lose your job & have no savings, lots a debt and rely on 'strangers' for support (i.e. market sentiment)... then you got problems and even being a 1%er won't save you.
Guess which camp Fanny & Freddy are in & which camp Countrywide, BS & IndyMac were in?
Average Joe writes:
Not a good place for equity investors in my book.
That is why i believe they will be trading at way cheaper prices very soon when reality sinks in.
What a mess.
The biggest epiphany the average Joe American can have today is the realization that our leaders are primarily engaged in managing Americans' psychology. I believe the best thing an American can do is to separate themselves from this psychological loop.
The Fed's actions are at least half psychology. They "manage expectations". They also influence where you put your money. If they want people to gorge on more debt, they lower rates. Theoretically, if they feel that people are blowing their cash too quickly or that prices are rising too fast, they raise rates.
It's become different lately. When asset (securities) prices seem to be at a precipice, Bernanke slashes Fed rates to make securities look more attractive. This pulls out a bunch of suckers from the sucker pool who come in and help cushion the blow of tanking asset prices. You'll notice that when he slashes rates, buyers for stocks, bonds, whatnot seem to come out of nowhere and push prices up for a bit. Shortly afterwards, prices fall again. Ironically, the best strategy seems to be to go against the Fed. When they are slashing rates, more than anything that should be taken as a clue that asset prices are going to fall.
When Henry Paulson goes on TV to make some statements, his job is psychological. If he says the sun is shining, you should assume there's a 50% probability that the sun is up at that moment, in other words, that there is no information content in his statements. But his aim is to get people to head out to the beach or the park or whatnot, expecting the sun to be up, whether or not it is. So when he said the subprime problem was contained, it was a statement that should have been totally ignored. Plenty of other evidence suggested it was not contained.
What so-called information do we get from Bush? Let's see, what has he told us:
- Go spend your $300 tax gift at Disneyland.
- Hussein has WMDs and is a close pal of Bin Laden.
- Mission Accomplished.
- The "science isn't in yet" on global warming.
- Intelligent Design is valid scientific theory.
If that's not our "leader" trying to manage the psychology of Americans I don't know what is. One could make quite a strong argument that Bush's informational content is negative rather than zero.
I think we've created one heck of a feedback loop in the US. We elect some people to run the government. Then those people come back and spend half their resources "managing" Americans thoughts. Americans then are influenced about whom they should elect come the next election cycle. They re-elect the bozos and give them a mandate to perform more psychological manipulation of the public. The public, so manipulated, believes these clowns and the cycle continues.
Everyone knows the "leaders" are actively engaged in PR. But I don't think most Americans realize PR is synonymous with propaganda. It's the same thing - propaganda. If Americans really believed in the principles on which this country was founded (LOL) then it should be illegal for government officials to engage in PR. But they do it, constantly. Every day they are out there trying to manipulate the public. They have actual PR firms working for them. What is a PR firm? A company that specializes in PROPAGANDA. Look it up. Propaganda became a dirty word when the Russians adopted it outright for their system of communism, so we now call it PR in this country. But if Castro does it, it's propaganda.
Instead, it should be the business of our government to do the work that the people need done. Like defend the country, provide a system of justice, and maintain a body that can enforce the laws. IT IS NOT NOR SHOULD IT EVER BE TO TRAIN US AS THEIR OWN LITTLE BRAINWASHED POODLES. Sadly, Americans are becoming more the trained poodle than the independent thinkers.
The consequences for blogland could be severe. I don't think it would take much for the government asshats to blame so much of what is wrong with America on the rumor mills found in the blogosphere. So much has already been blamed on rumors. Don't be surprised if the witch hunt leads to severe restrictions on what can be said on blogs and other outlets, which lately have been on the cutting edge of truth and reality.
But maybe Americans don't mind that they are being managed by the people they elect. Me, I mind for sure. I don't like it, and I reject it. Fortunately, it allows me to avoid many of the mass psychoses that plague us so. It can also be profitable when you recognize where it is acting in the marketplace.
MaxedOutMama,
Go into a model home and try to buy a new home. They offer a 6% rebate to help pay your FHA 3% down payment.
I drive around new neighborhoods were the houses were sold and financed less than a year ago. Several of the houses have for sale signs up already! Several are already walkaways.
Builders are still selling new houses to buyers for the high $400,000s, when the exact same model from the same builder is selling in the low $300,000 less than a mile away.
Some people say, who is buying these new homes? I say, who is lending to these buyers?
MOM, I think you and I would be surprised what the GSE's are STILL doing.
Weather Helm:
You make the average American out to be an idiot.
I do not have any other comments on this.
I think AllenM and Dryfly are correct.
F & F is already treated as virtually sovereign debt. Should bonds implode, the dollar implodes - not sink, implode.
Two major issues need to be kept in mind, I think:
1) There are no good solutions, just as in Iraq. There only options that are better or worse. Yes, an explicit guarantee on F & F bonds will pressure the dollar, and that is not good. But we need to talk about that in relation to the other real alternatives and their consequences, which are far worse (imploding dollar when global investors rush to cash out of all US govt and agency issued bonds).
2) This is a Macro-economic problem with a giant capital M, and thinking it through requires thinking in terms of longer time horizons. Short-term, F & F may go bankrupt as businesses, as their stock collapse shows. Short-term, housing prices will fall, one must conservatively expect, to roughly 50% off peak prices - maybe more, maybe less (less likely, and wrong assumption for stress testing a disaster plan). But, longer term, houses will start selling in greater numbers as prices drop, probably 2 to 5 years out the prices will stop sinking, and 5 to 10 years out house prices will start to rise from the correction (and most likely from an over-correction). The mortgage business will become profitable again and, at the moment, F & F have a near monopoly.
Looked at in a Macro way, F & F's bonds cannot be allowed to fail, and F & F in some form (note the qualifier) have a profitable future.
The main problem is the present and how to get through it. The secondary and closely related problem is what to do about F & F and the whole mortgage financing sector (and finance more broadly).
Real leadership would backstop F & F now and couple that with either temporary nationalization, conservatorship, or regulation of the most powerful kind (in other words, three flavors of medicine, take your pick). Afterwards, F & F should either be privatized fully with major major major regulation of the entire financial sector that creates (pardon the pun) transparency like you've never seen before, or it should be kept a fully nationalized entity that works by civil service rules (i.e., pre and post Bush/Cheney/Brownie civil service rules, the kind made for grown-ups).
But that's the rub, real leadership. We are totally f---ed until 2009. Goodbye from the world's biggest polluter.
MOM, to clarify, those selling in the low $300,000s are bank owned homes built and sold by the same builder in 04 and 05.
You make the average American out to be an idiot
\t
June 2005 Harris Poll:
Human beings evolved from earlier species.
22%
Human beings were created directly by God.
64%
Human beings are so complex that they required a powerful force or intelligent being to help create them.
10%
Not sure/Decline to answer
4%
JDK: we need a system in which one can deposit and write checks as in a bank, not just buy savings bonds. That is a complicated task as I know. Lots of red tape. And if you own more than 100 thousand in US debt you have to pay them a fee to keep your money for you. We need a government owned BANK, not what we've got now. Other countries have one; we don't.
Please tell us Ben Bradlee's story
psychodave | 07.12.08 - 1:12 pm |
In May of 1964, LBJ press aide, Bill Moyers, told Bradlee that LBJ was looking for a successor to Hoover. Bradlee, who was editor of Newsweek at the time, put together a cover story on the search for Hoover's replacement.
On May 8, LBJ called a press conference with Hoover standing at his side. LBJ announced an executive order exempting Hoover from mandatory retirement.
Moments after the press event ended, LBJ turned to Moyers and whispered, "You call up Ben Bradlee and tell him, 'Fuck you.'"
Bradlee always said of himself, "You did it, Bradlee. You did it, you got him appointed for life."
Just like we need to clarify "bottom in housing"---are you talking sales or prices?
We need to clarify the collapse of the GSE's.
I think the GSE's can survive and continue lending for several of the reasons that Dryfly and Allem M. point out.
I also feel they will collapse as far as any equity holder is concerned.
Does collapse mean socialized or ceases to operate?
Average Joe correctly points out house price declines and house sale volumes have different effects on F & F.
Price declines lead to defaults which lead to losses.
But price declines will also lead to more sales, which means more mortgages, which means more fees, and more mortgages on houses at reduced prices will mean that foreclosures will be reduced . . .
Specific companies will fail, but the mortgage business will once again become profitable.
Dryfly is correct: F & F (in some form) can weather the storm because they have the richest of rich uncles to fall back on, and that uncle can't allow his nephew to fail without disaster for the entire family.
The problem is huge and dangerous, but it is a short to medium term problem. Like Iraq, there are no good options, only better and worse.
If you please, sir...
Someone yesterday suggested an easy solution for much manipulation and volatility: outlaw shorting.
Anyone sorry characters out there willing to defend this practice?
But how could we do this when this appears to be the number one way for happy hedge fund political contributor to make its money?
Looking forward to reading all 500 comments here late in the afternoon.
OFF TOPIC:
Is AMZN a good short at this time?
Troy,
So the GSEs get $100B in capital from the Gov't cheap, and lend it out at 5%. Who will buy the MBS at 4%? Not me for sure. So they do $100B of portfolio lending, big deal.
The point of the Bradlee story is, of course, that you can have the facts of a story completely right and end up dead wrong.
Why not let Freddie and Fannie go under and use government funds to start a new lender to replace them?
Why not let Freddie and Fannie go under and use government funds to start a new lender to replace them?
All the red phones at the White House rings at once...
Beijing
Moscow
Frankfurt
Riyadh
MOM,
Co-worker example: Boyfriend and girlfiend make $160 grand together. They buy a bank-owned condo for $350,000 (was $500,000) just financed through countrywide.
They easily qualified.
If you knew her, then you know there is no chance in hell they will last 3 years.
This will be a $220,000 condo soon.
This is a quality loan that will no doubt go into forclosure.
In 1995, after being denied for not being married (month short of wedding)My fiance and I had to send a pleading letter with copies of our wedding guest list, along with the pre-printed wedding napkins to get a loan for a 10% down, $185,000 purchase of a new home with good credit and a family income of $75,000 from govt jobs.
When we get there again then we're at bottom.
Uncle Billy,
Someone yesterday suggested an easy solution for much manipulation and volatility: outlaw shorting.
Shirley you're kidding?
I recall Ditto-head types telling me how immoral it was to short back during the Dot-com nonsense, now I'm hearing it from Air America-type doofuses. This in and of itself makes me feel all warm & fuzzy about it; if everybody hates you, you're probably on the right track.
And this is coming from somebody who has a fundamentally "long" attitude, no Jas Jain am I. The armageddonists are wrong; so are the cheerleaders who only complain about "volatility" on the way down.
Whether or not these two clowns are solvent or not isn't really the major issue that most are missing. That is who has the most to gain by tanking their stock and forcing government to act. Follow the money.
Average American:
-> Knows who Britney Spears' latest boyfriend is, but can't figure out who Henry Paulson is.
-> Can't spell Declaration of Independence.
-> Doesn't know the Bill of Rights but demands his rights in court.
-> Can't figure out their mortgage payment but is sure that housing prices always go up.
-> Can't find Iraq on a map but is sure there are WMDs hidden somewhere in there.
So the GSEs get $100B in capital from the Gov't cheap, and lend it out at 5%. Who will buy the MBS at 4%? Not me for sure. So they do $100B of portfolio lending, big deal.
AFAIK, fractional reserve lending does not involve MBSs, so $100B in paid-in capital would drive $1T in lending, ~3 million home loans.
"who has the most to gain by tanking their stock and forcing government to act"
Hidden in plain sight.
Tony Snow has passed away from cancer.
Yahoo! 404 - Page Not Found
"AFAIK, fractional reserve lending does not involve MBSs, so $100B in paid-in capital would drive $1T in lending, ~3 million home loans."
More of the same thinking. In a hole? No problem. Just dig deeper faster.
Let's be clear about something.
Everyone has been talking about Fannie and Freddie for months. It wasn't retail money that went after them, it was big money. The retail money followed, just as it always does.
When the big money is finished with those stocks it will crack the whip, and you'd better not be there when they do.
So, the idea is: figure out who's doing it and plan on getting out before they do.
If you haven't got the facilities to do that, you shouldn't be in it, and that's what I've been saying here for the last several weeks.
Barron's calls this the bottom in residential real estate -- and provides many details why:
Bottom's Up: This Real-Estate Rout May Be Short-Lived - Barrons.com
BB writes:
Weather Helm:
"You make the average American out to be an idiot."
I think not. Anecdotally, from friends and family, I would suggest that most folks are concentrating on their jobs, their families, their weekend plans. I hear recently that people are a little uneasy, and unsure of what is going on, but their economic focus is gas prices and job security. They're not especially focused on the market, or at least until they get their recent 401k statements. I'm talking about educated folks, doctors, school adminstrators, small biz, and managerial types.
Sure,they're unhappy with Bush and with the war, but they've' been living with those feelings for a while. The evening news feeds are something I like to watch...and they are full of soft news...heartwarming stories of adversity overcome or service pieces on health and drug concerns. Even their foreclosure stories are less analysis and more human interest. The warning flags being hoisted are very small and easily missed.
The corporate media are not the watchdogs of the republic, and those who read econ blogs are a smallish and self-selected group.
If we allow the GSEs go under then China's going to stop funding our mortgages. Well, China already made that decision!
So, we should allow the GSEs to go under (no federal bailout) and leave their bondholders (foreign governments) to consider their own bailout to minimize their losses. If they don't then we can use federal funds to start a new government sponsored lender.
Roubini says that Fannie and Freddie should have their debt restructured, and that it would only take a 5% haircut on the bonds to do it. This might be his best post ever:
http://www.rgemonitor.com/roubini-monitor/252974/insolvency-of-the-fannie-and-freddie-predicted-here-two-year-ago-what-happens-next-or-how-to-avoid-the-mother-of-all-bailouts/
@mp | 07.12.08 - 2:11 pm
Phew! Finally, somebody gets this thread truly on topic. Thank you.
Oh, the Bradlee/Jedgar (hat tip Lily Tomlin) story was fine too.
I always liked Wm. Manchester's inclusion of two right things Jedgar did.
1) He opposed FDR and Earl Warren (future Chief Justice) on internment of Japanese right after Pearl Harbor.
2) He was agin' Nixon's Plumbers idea, so Nixon had to seek staff to implement it elsewhere. Might've caused the subsequent effort to suffer.
So maybe you can be really wrong (Jedgar & Civil Rights, Jedgar & Organized Crime) and still be right [ducks & runs]
We need a government owned BANK, not what we've got now. Other countries have one; we don't.
Well, as of 3PM PST on Friday, we sorta have one. Its headquartered in Pasadena, CA
Question is, will they behave like a federal owned/operated bank now ?
All the red phones at the White House rings at once...
Beijing
Moscow
Frankfurt
Riyadh
Perhaps the GSE's need to be reorganized as a Sovereign Debt Fund. For every yin, there's a yang.
Troy,
Yes, FNMA could loan out $1T at 5%, but their cost of debt, at least based on the FNMA Pfd M (rated AA-) is 11.5%. This lending would give them a negative cash flow of (-.065% * 900B) $58.5B. Not a good way to run a business.
someone famous once said (former Fed Head?) that the job of the Fed is to take away the punch bowl when the party gets out of hand
from what I'm surmising lately, the job has changed
now the Fed's task seems to be to keep spiking and refilling the punch bowl
so, drink up everybody
Like they said in Germany before May of 1945, 'enjoy the war because the peace is going to be a real bastard'.
Oh, Pavel, I know I'm not self sufficient, but it would be nice to starve slowly not quickly. Also, I could stand to lose 40 pounds.
My personal back ups are meant to tide me and the hub over for a few weeks or months while whatever happens, happens.
If it is bad as I suspect, the hub and I will be toast too.
The only thing that would truly help F&F at this point is a readjustment of home prices due to inflation. That would eventually make the $$$ value of homes equal to the amount of the mortgages on them.
This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F.
You can parse all the rumors and "bailout" proposals any way you want, but that's the nuts of it.
Getting back to Tanta's original post citing the confusion in who said what to whom, here's an excerpt from the AP
story:
The government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.
Can anything stop the inevitable run on the banks now? With unsecured depositord getting 50% this should be interesting!
Then it just becomes a matter of cutting back new business
AllenM, dryfly - you guys are right but missing an important aspect of this. The reason why Freddie and Fannie HAVE to take on more business is to pick up the slack for all the CFC, IndyMacs, Thornburgh's and others who either are out of business or will be shortly. We're moving quickly to a market where Fannie/Freddie backed paper is the only game in town.
So if these guys can't keep up with the volume of new business because their balance sheets are damaged and need repair, they will need to de-lever, make fewer loans with less risk, and mortgage rates will have to rise.
This will start a second leg (or third?) leg down in housing that will totally crush what's left of the market.
Paulson and Ben know this, and that's why the idea of extending the temporary lending facility was floated. Rather than allow Fannie and Freddie to heal, this would be the equivalent of more crack for the addict. It would probably kick the can down the road into the McCain/Obama administration, however.
"This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F."
No. Bernanke has come right out and demanded that lenders take haircuts to principal. I wonder if he realized that F&F, the soon-to-be government OWNED entities ARE the biggest lenders.
This means inflation - real, true inflation including wage inflation.
Which you are not going to get, as long as you have a large-ish number of unemployed. If you can generate sufficient new job growth, then you can have your wage inflation. That is hard in the globalized environment when a growing percentage of goods we purchase are being subsidized by the governments over there, by buying our debt paper. Vicious cycle.
Anonymous
I think it is a mistake to look at F & F preferred stock as a benchmark of their cost of funds.
Rather, look at the bond market. Yesterday, when the rumor about Bernake hit, the F & F bond prices went up and yields lowered.
When the US backstops F & F with an explicit guatantee then their cost of funds goes down, and F & F get restructured either by nationalization or conservatorship or regulation like you've never seen before. . . and the equity gets wiped out.
Stock goes to zero, which means zero dividend. Bonds stabilize at Treasury level.
good posts on Naked Capitalism (one about Roubini) which argue it is time to stop the masquerade and bring some transparency through outright nationalization (Roubini calls for this and restructuring of the debt with 5% haircut).
The dishonesty of the US economy is a disaster.
One way to support current prices would be to turn the interest deduction into a (partial) tax credit.
Prices aren't ~that~ out of whack right now. What was selling in Fresno for $350K in 2002 is now on the market for $460K.
The monthly carrying cost of $350K is ~$1800.
The monthly carrying cost of $500K is ~$2500.
Giving that additional $700/mo tax credit would require raising the present deduction 60% (ie. not quite doubling it).
Weather Helm on the "average american"
I hear you. My favorite show bar none is C-SPAN's Washington Journal. Enjoy it for the interesting guests but the main attraction (in a can't take my eyes off an accident kinda way) is the callers. When "flo" from missouri calls in I'm looking for a pillow to hold up against the wall while I bang my head.
"Look at it this way- they get to borrow at 2-3% and lend at 6-7%."
So how can you lose money and put the business on the ropes? It can be done - if the 6-7% stops showing up in the mail. Then you still have the 2-3% to pay, unless you can pass the bag on ... which would be to the taxpayers in this case.
RayOnTheFarm writes:
We need a government owned BANK, not what we've got now. Other countries have one; we don't.
Well, as of 3PM PST on Friday, we sorta have one. Its headquartered in Pasadena, CA
As I pointed out before the government has no intention of keeping the bank. They will put lipstick on it and re-privatize it. The US is so scared of 'socialism' or anything that can be made to seem like it that it can't do sensible things that other societies, not so paranoid, can do.
Geezer, that Barron's article is a joke. It reads like Sebastian wrote it.
On second thought, I take that back, as that is not fair to Sebastian. He could do much better.
They confuse all kinds of things - like grabbing onto a small price increase in a few markets this spring, but not factoring in seasonality; focusing too much on sub-prime (which was bound to improve, simply because it doesn't exist anymore) and not Alt-A; and in general taking the polyanna approach.
"What people are missing is why Freddie wanted more capital, not to cover losses, but to write more business.
Agreed, but don't they have to let undercapitalized insures write more policies to do so?"
If you remember back to when FNM/FRE raised the capital and had their 30% reserve ratio reduced this was the exact time when a few levered hedge funds were imploding an dumping huge amounts GSE debt on the market. Supply > Demand is bad juju.
Fannie/Freddie did not use the extra capital to do more business, they used the money to buy back their own MBS to prevent a collapse in the MBS market.
Of course Schumer gets the blame. The Emperor is enraged when the sensible citizen points out that he has no clothes on. That's all the Schumer did.
I blame the media conglomerates for this decade of misinformation and manipulation. Time to bring back the Fairness Doctrine.
Wally
Right . . . and the business model also gets into trouble on the supply side if the flow of funds gets squeezed shut or made more costly.
My understanding is that both things are happening: flow of funds in is restricted and more expensive (i.e., yields on F & F bonds went up, prices down), and losses have increased because of foreclosures . . . and fears of greater losses have increased because continuing price reductions in housing are expected, more foreclosures are also expected because of a shrinkig economy with shrinkinng wages and shrinking jobs and higher expenses for food and fuel, and the insurers of mortgages are going belly-up.
The thing to remember is that it is all cyclical to a great extent. F & F are insolvent now or will be soon. But their business model will work again in the future, out a few years, and since they provide a government service (and we are collectively hostage to their debt) there are good reasons to sustain their debt and restructure their operations.
Other options are worse. Wish it weren't so, but Americans voted to prove evolution wrong. Now we are left with the by-products of not-so-intelligent design.
One thing I don't understand given current technology, what is the purpose of using banks for a normal savings or checking account? You normally get no interest for checking accounts and .10 interest for brick and mortar savings accounts. Why do we even need to deposit our money in risk taking banks if there is no return on deposit? Given electronic technology, it seems like a big scam.
Chuck Schumer caused the great depression!!!
That Roubini article is excellent.
Money quote:
"The reality is that the U.S. has invested too much especially in the last eight years in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth.
This financial crisis is a crisis of accumulation of too much debt by the household sector, the government and the country to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs."
[RayOnTheFarm writes:
We need a government owned BANK, not what we've got now]
Oh, it's much worse than that. We have a bank owned government.
central_scrutinizer wrote:
Geezer, that Barron's article is a joke. It reads like Sebastian wrote it.
On second thought, I take that back, as that is not fair to Sebastian. He could do much better.
Thanks for the comment central_scrutinizer. I think it would be interesting to hear directly from Sebastian (as well as others) on this issue.
It was not a complete failure of regulation. It was not a bubble of biblical proportions. It was not an utter collapse of underwriting standards, or the product of an industry hollowed out by the termites of systemic moral hazard. It was certainly not a failure of management!
IT WAS CHUCK SCHUMER, AND DAMN HIM FOR ALL ETERNITY!!!1!ONE!
Char
Absolutely right about the need for the fairness doctrine. In general, we need an explicitly and honestly mixed system: some things need to be socialized and discussed that way, some need to free market and the freeness of the market requires trust sustained by transparency, and that requires certain kinds of oversight and regulation.
Look at education as an example. Public education is a public good that works wonderfully well when the public pays for it as a public good. It does not work when the public wants the good but thinks no one person should have to pay for it (i.e, public expectations with privatized responsibility). It is the inverse of the moral hazard argument. Both are powerful arguments.
If we are more honest about the need for both a robust public sector and a robust free market, then we can have both.
Bushism shows us that dishonesty and manipulation for private gain in both sectors produces disaster in both sectors. You get washed out to sea in hurricanes, crushed when you bridge collapses, your kids are too dumb to get jobs, and your country gets destroyed in dumb wars that spit out dead bodies, empty treasuries, and make you less safe.
Geezer writes:
Barron's calls this the bottom in residential real estate -- and provides many details why:
I suspect that it's about time Barron's got one right. I have never heard anyone say that he or she ever made money following advice in that weekly rag (but it is a good read...). If anyone has made money on an idea they first read about in Barron's, please let me know about it.
Geezer - buy a house in this market, and YOU will be the "bottom".
And char's comments above are spot on.
Central Scrutinizer
right. housing is necessary, but non-productive. done right it is a social good. done wrong . . . well, we see what that is like.
extensions to Roubini's argument would include both good private sector investments and publi sector investments.
here is the brighter side of creative destruction: it is time to think boldy about both private and public sector investment, and the recession is the time for a big dose of public sector investment that will show future returns: education, green (greener) infrastructure, etc.
things are just going to suck until 2009, and even then they will suck, but there might be prospects of getting better . . .
Uh, for you guys saying that cash flow is all that matters while asset prices don't....
Michael Milken is on line #2.
JPM most recent 10-q:
Trading asstes GSE debt $30 billion, guess the loss will be offset by gains on their own deteriorarting debt..as the FT reported this week in a quick take on quality of earnings...
When the US backstops F & F with an explicit guatantee then their cost of funds goes down. . .
Stock goes to zero, which means zero dividend. Bonds stabilize at Treasury level.
Nitpick...
The rates on F & F and Treasury bonds will converge. An explicit guarantee of F & F debt would double(?) the national debt. Would probably triple it if you consider that a large portion of US debt is money it owes to itself (SS trust fund).
F & F bond rates would probably drop and Treasury rates rise but there are no guarantees. It's possible the action would cause foreign central banks to pull pegs and that interest rates for both would rise.
Even if the most probable even happened the result would be a huge windfall for owners of F & F bonds at the expense of holders of Treasury debt.
That transfer of wealth from holder of Treasury bonds to homeowners (via refis and higher prices) would be enough to keep most people from buying Treasury debt for a long time.
joe shmoe,
Right, if the gov't gives 100% explicit guarantee FNMA cost of debt falls. So the TPTB have a decision to make. Let the FNMA bondholders pay, or the taxpayer pay. Some have argued that an explicit 100% gov't guarantee on $5T of FNME (and FRE) debt will drop the US Treasury's credit rating below AAA (not good). On the other hand, Russia and China are already demanding an explicit gurarantee of agency debt by the US government, so I do not believe they will be inclined to buy more FNMA paper without it. Hence some sleepless nights for BB, Paulson their cronies. Damned if they do and damned if they don't.
"Russia and China are already demanding an explicit gurarantee of agency debt by the US government"
And Russia and China have ever guaranteed what to whom???? Nations of whiners.
If the US Treasury were to go to below AAA what are the implicatins for CAPM theory of risk free rates. Somehow I think it is bad for stocks..imagine that
"Oh, Pavel, I know I'm not self sufficient, but it would be nice to starve slowly not quickly. Also, I could stand to lose 40 pounds.
"My personal back ups are meant to tide me and the hub over for a few weeks or months while whatever happens, happens.
If it is bad as I suspect, the hub and I will be toast too."
Dear Liz,
Do you really foresee a situation so dire that two highly trained and valued professionals are going to face starvation?
It would take something far more serious than an economic downturn to cause that.
May you both flourish and be well.
I do fear for the poor, though, especially those who are too old or ill to work.
joe shmoe writes
the fairness doctrine was abolished oin the late 80s for good reason. The free and fair airwaves where people vote with their feet has failed to live up to the ideological left's grand design, other than that morn Al Franken and his bankrupt attempted network. The problem is not building the field it is getting them to come. For that you have to have something on offer, whatever it is. Wa la , capitalism.
It seems to me that there is no outcome where rates don't rise. A 2% move in rates should cause something like a 15% drop in principal to maintain an equivalent payment. Stick that in the housing market and see what happens...
Responding to what MP wrote above, about the big money going after the GSEs--
The NYT traces their recent history here.
Long Protected by Washington, Fannie and Freddie Ballooned - NY Times
This suggests to me that there are other big entities out there that would like to take over the GSEs' business.
Damn rumors! Fannie and Freddie were doing so well before Dick Cheney started those rumors! I'll tell more after I take my afternoon dosage of Prozac. (only 200mg-3 times a day)
Kicker
An explicit guarantee on F & F bonds does not double the national debt. F &F bonds are differnt from Treasuries because F & F bonds are asset backed. Treasuries are pure "full faith and credit."
A guarantee on F & F bonds increases the national debt to the extent that the value of the assets backing the bonds falls below the value of the bonds. Roubini seems to estimate that at 5% of the value of the bonds.
Let's say it is 10% of the value of the bonds...or 20%.
Yes, that puts pressure on the Treasuries and the dollar, not as much as would be the case if the guarantee was a full assumption of debt. That is not what it would be.
In the end, it is a matter of alternatives. And there are no good choices. We have to pay the piper one way or another, and there are ways that are better, and ways that are worse.
Figuring out the best choice out of the bad options requires remembering the longer time horizon for the country and its economy, and remembering that there are cyclical as well as systemic elements to what is happening now.
A key point of the cyclical element is to remember that house prices will eventually bottom. The housing stock behind the F & F bonds will always be worth something - less and less over the next few years, but then the value will rise from over-corrected lows. And a key point about F & F is that they have the better end of the mortgage pool from the past 30 years (including the better end of the bad pool from the past 4 or 5 years).
F & F's stock is probably going to follow the Bear Stearns path. But F & F's assets behind its bonds are a different matter.
boob
I wrote the opposite of what you seem to say I wrote, and the real history is opposite of what you say (and seem to try to put in my mouth).
Is your sobriquet a joke?
mp writes:
you can have the facts of a story completely right and end up dead wrong.
Very true. If in 1964 I had a complete script of the vietnam war, I would not have been able to predict course the stock market 1964 - 1972. No way.
Even knowing the future, prediction is difficult.
Here is the take of Mark McQueen, a Canadian financial executive, on the Schumer matter:
Which makes it all the more interesting that he got into the details of this specific situation. It appears to me that he was just doing his job. Which is probably more than you can say, as an outsider, for the Office of Thrift Supervision [OTS].
If the SEC continues to be AWOL on most of its mandate, and the OTS cant help its charges avoid insolvency, huge corners of the U.S. capital markets fall to those members of Congress who are prepared to take the baton
I agree with him.
It's Kabuki journalism - the WP thing and the lead piece in the NYT and all over the teevees - all makeup and fans and complicity masked as coyness.
I hope after the smoke clears we realize transparency would have stopped all of this nonsense - from the banking to the media side -- it probably would have stopped f and f from backing up all this bad paper to begin with.
Gonna go hike to another boro now, and tip a Sierra to CR and Tanta
I have no idea what specifically will be done re F&F. But I would wager that the bond holders (so many are foreign governments) will get bailed out 100% while the stockholders may end up with nothing.
BTW- we're already getting wage inflation for the products we consume...it's just happening in a different part of the world.
Speaking of one of those parts of the world (China), equity holders of FNMA/FRE are experiencing another kind of risk- "interparty" risk (for lack of a better word). Or, put another way, bondholders are getting much more "counterparty" by the day.
In China, shorting these stocks to zip is part of what might be called the "prior to" Events of Default Clause.
mp- not sure where you were going w/ the Bradlee example, but assume you're driving at the Law of Unintended Consequences.
Jim
What McQueen is describing is an implosion of leadership in the Executive Branch, which already hollowed out most if not all of the regulatory agencies.
Given that GWB is unavoidably at the helm until January, the next best alternatives are either: 1) pray like mad and close your eyes, or 2) move from lone wolves like Schumer to some sort of concerted bi-partisan commission of respectable Congressional leaders (or as close as one can get to that) with some respectable od-hands like Volcker (for example).
I prefer option 2. They won't have any power except the bully pulpit and maybe letting some daylight shine through, but it is better than option 1 (esp since I am an atheist and don't like getting hit in the side of my head when my eyes are closed)
Look, the Fannie and Freddie band's anthem!
YouTube -
Bluestatedon: Pace Tanta, but, Don, you've got the real name for a band: stenographic enablers. You've got 10% royalties if I make it big.
AllenM and dryfly: today was venue for your best posting. You guys are spot on. Bear porn is fun, but this blog is at its best with its recent pragmatism.
Lawyerliz et al.: on target about lenders these days. Even a commitment letter means nothing. Sue all you want.
And for those touting the idiot Americans: apparently you've not been abroad. There is a talented tenth, and beyond that people anywhere are very average. That's not an argument for why the banking system is in peril. It is the responsibility of the intelligent to foster solutions, the solutions rightly requested by an earlier post.
Peace,
z.
Joe shmoe,
OK, the agency loss will be 10%, 20% or more, but not 100% of $5T. Will $1 - $1.5 trillion + deficit spending + massive trade deficit be enough to cause a drop the US credit rating?, it might. Why should the US taxpayer bail out Russian and Chinese SWF? $1.5 T is $$7,500 per US citizen. You sure are fast and loose with taxpayer money.
oh, and i love pavel. russians always understand the plight of women better than anyone. anna karenina has nothing on liz. or zhivago's (apparat)chi(c)k. nabokov is my reason for living lest anyone thinks i'm being facetious.
Freddie Maccury and the Rumors? Performing Bernankian Rhapsody?
If you want to see who the foreign agency bondholders are, I've pulled the table from the most recent Treasury report, which has data through June 2007.
Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds | FreedomWorks
It's over $1.3 trillion total.
And American homeowners have been paying these guys billions in risk premiums above Treasuries because the bonds are EXPLICITLY not backed by the US government.
Allen M / Dryfly :
Good observations.
There can't be a run on the bank, since they sold bonds.
They do have short term paper, and that's what the WSJ is looking at at the "trigger." There business model isn't dependent on an inherent mismatch between assets and liabilities, so they may not be vulnerable.
As far as the comment by Freddie regarding running off their own portfolio -- that wouldn't mean not lending. Only not lending more then they securitize and sell. That would also eliminate the need for short term paper, no?
They could also sell some of their held portfolio, as they stated. Out of that huge portfolio, there has to be a lot of it that could be sold at whatever it's booked at or more. So a "run" is impossible.
They have doubled their fees and improved underwriting, so if their current business is profitable, and they don't have any real competition, then they can hang on for an extended period of time.
Not only are they too big to fail, but they may also be too big to fully punish the equity. We have already seen the collateral damage that can be done by the putative owners of financial entities under stress.
I don't see a path from the semi-private GSE to nationalized ones that doesn't involve disaster. Nationalization will require an act of Congress, which is a slow institution facing lots of public pressure and operating very much in the open. That makes pro-active nationalization impossible as I see it.
If Congress start talking about nationalization with bond haircuts the mortgage market will immediately collapse. Totally. The GSE's borrowing rates will soar, driving mortgage rates up - but nobody will lend at those rates because the feds will have to bring back some kind of GSE-ish entity and so all such loans will be refinanced. Months of Congressional maneuvers while there is no mortgage market would indeed mean a second great depression.
If Congress tries to nationalize pre-emptively without bond haircuts the outrage will be unbearable. The populace will go postal at the idea of accepting huge potential risk and probably losing AAA for treasuries when the biggest beneficiaries will be China and Russia. The fact that the admin has been insisting for years that the bonds are not guaranteed will make things worse. Nothing will happen.
So that leaves us with nationalization under crisis conditions - which again means a disaster so massive Congress is forced to act. Even then it's going to take some time to hash out details so we're still looking at weeks, perhaps months with a locked-up mortgage market.
Dr. Roubini's idea is good and fair - but I don't see any way to get there.
"And American homeowners have been paying these guys billions in risk premiums above Treasuries because the bonds are EXPLICITLY not backed by the US government."
Yes but....they paid many more billions less then they would have if their mortgages weren't guaranteed by F&F. They were a significant subsidy to mortgage holders.
Ziggurat,
The agiencies had say $8B in losses last quarter. Losses from sale of properties: proceeds from home sale less expenses less principal balance paid out to mortgage holder for guaranteed securities (ie negative cash flow). There was also a charge to capital of $8B. The agencies must meet their statutory requirement for capital so more must be raised. Who will pony up capital at a reasonable rate for a company in a downward death spiral? This is the same argument the monolines made. It is fallacious. The agencies are BK and the accountants will have to give them a going concern qualification in future financial statement opionions. Only a 100% gov't guarantee will save them, at a oppressive cost to US taxpayers who will have to bail out the bondholders for their losses.
And for those touting the idiot Americans: apparently you've not been abroad.
Based on the demographics of this blog, my hunch is that you are WAY off base.
wally writes:
"The only thing that would truly help F&F at this point is a readjustment of home prices due to inflation. That would eventually make the $$$ value of homes equal to the amount of the mortgages on them.
This means inflation - real, true inflation including wage inflation.
Since Bernanke is dead set against that by his own frequently spoken words, he is therefore opposed to any 'solution' for F&F."
You are correct, and Bernanke is lying. He knows that the only thing that has prevented a collapse of the growing post WW2 debt structure has been the ongoing 60 year wage-price growth which has allowed individuals and corporations to pay on and retire their debt.
Maintaining negative real borrowing costs, refusing to urge margin increases during speculative stock and commodity price run-ups, refusal to urge release of oil from the reserve and to allow domestic drilling, are reasons not to believe that the FR, the POTUS and the 535 in any way desire to contain inflation.
They are all lying, and their secret motto is and always has been 'inflate-or-die'. They have purposefully stimulated the latest price spiral, and will soon do all they can to encourage the wage spiral, not caring a bit how painful and dangerous a process it is, including to themselves, as the fall of past regimes during wage unrest - Britain in the '70s as an example - demonstrates.
And what a miraculous cure it will be for housing, mortgage and bank interests, assuming they haven't killed the economy and all the homeowners first. If it goes badly, they'll say what the doctor did: 'Well our operation was a success. Unfortunately the patient died'.
The Blum and Rosner interview on Bloomberg from yesterday is worth a listen, I think:
Bloomberg.com: Search News - [
rosner blum]
Click play.
Fair, I'm with Zig on this one.
Put some of my own money into freddie on friday for a quick turn.
What will happen is all will be stabilized on monday, and shorts will have to unwind quickly.
That will be even more interesting to watch. Fannie and freddie survived their bank run, because it is on their equity price. COF and others dependent on deposits won't.
Cost of funds paramount, and the GSEs still are the cheapest. Remember fannie and freddie have huge cashflows coming in too. If you scotch the capital requirements under emergency conditions, they literally just have to retire bonds as the money flows in.
That was the essence of the Freddie Friday letter. We are solvent, and we can prove it by going into runoff, but our shareholders won't make any extra sugar, and there will be zero lending supporting the market. Remember, they have a deep book of loans that goes back before 2004, and that tail is solid. Further, a ton of loans written in 2005-2007 were in nonbubble areas using good guidelines to folks who will continue to pay. Fannie and Freddie were frozen out of nearly all of the bubble areas due to loan limits- fannie and freddie wrote almost nothing in California since 2004 due to the run up in housing prices- they were uncompetitive with 5/1 5% down arms.
So, in essence, they are not IndyMac.
Someday this war's gonna end...
Fair Economist:
remember 1) that the GSE were originally govt entities and then got semi-privatized, so nationalization has been done before, 2) and we are now in crisis, no need to wait for that, 3) but . . . succesful nationalization requires leadership that we do not have until, at least, january 2009. With leadership the Congress and country and international investors can be brought on board, with or without haircuts for bondholders.
Anonymous:
I think the losses in a guarantee are more likely to be closer to the 5% that Roubini estimates, and I think those losses can be made back over the longer run of 10 to 30 years. But, no matter, the question is what is the alternative to backstopping F & F bonds? The quickest way to see the dollar collapse and treasuries implode is to let F & F default on its bond
It is possible, though I think unlikely, that Paulson and Dodd and friends are correct, and that F & F will pull out of their tailspin without a guarantee or structural change. If that doesn't happen, then we as a country have a choice to make, and the choice is from bad options and worse options.
The outcomes of all options need to be compared. What do you think happens to the dollar and treasuries if F & F bonds default?
Anon....
I don't know where you are getting the $8 billion/quarter figure but it isn't from the agencies.
OFHEO raised capital requirements and has subsequently lowered them. They could lower them further.
The GSE's accounting isn't pretty, but they have been doing it for years.
AllenM
I think you're right about the internals at F & F, but I'm no way brave enough to put any kind of bet on F & F's stock price.
The stock price depends on confidence, and neither the stock market nor the economy nor the housing scene nor this current government gives any reason to be confident in the short term.
I know that just because george bush says something does not mean it is not true, but I still think his words are the best contrarian indicator out there.
Good luck with your gamble.
Joe Shmoe:
I don't think anyone is seriously thinking that the GSE's are anywhere close to not meeting their guarantee obligations on bonds that have already been sold.
A lot of things have to happen first. They have to run through all their capital, among other things.
I suppose that their guarantee will become worth less, but is anyone suggesting that it is negative?
And as long as they are still the main game in town, they will be collecting fee income. What if they did exactly what they are doing now, except not guaranteeing the securities. The securities are still worth something and could still be sold -- although the interest rates would, no doubt climb significantly.
Fark shrub.
My bet is that the run is over and retail and hedgies (which constitute the recent a la last week) shorts get plastered when they sell their bonds, which will go like clockwork (remember- they are AAA fed eligible paper!)
Just betting on market ugliness as usual.
It ain't like watch indybank blow.
Regarding Paulson and Bernanke "coming out of the Red closet," I wonder if we may yet see Marx proved right, where mature capitalism has inherently decayed to the point that its replaced in mass upheaval. I certainly think what we're staring over the precipice into is just the sort of situation that could see Marx vindicated.
Should the armageddon scenario envisioned by Roubini and others play out, I can't see how the US could get itself out of this nightmare should armageddon play out, with anything other than some sort of incredible campaign of (green) reindustrialization and infrastructure reconstruction a la the USSR post-NEP under Stalin.
I can easily envision a scenario were we see sky high forced savings being funneled into massive infrastructure projects and other investments into real factors of production, agricultural exports helping to finance this, a la 1880's and 1890's Russia, and strict capital controls imposed a la Malaysia in the Asian financial crisis. It's seriously time for some visionary leadership. The pain will be great, but if the USA takes this opportunity to rebuild itself, there's no reason we need to turn into a third world banana republic.
Ziggurat,
Re $8B#, it was from memory, sorry. Just now took a quick look at 1st quarter FNMA Cash Flow Statement. They had a $30B positive cash flow only after adding in a $42B Net Change in Trading Securities. So it looks to me, after an admitidly superficial look at the financial statements, that FNMA had a $12 B negative cash flow 1st quarter, not $8 B.
Joe Shmoe,
"The quickest way to see the dollar collapse and treasuries implode is to let F&F default on its bonds."
True, but what if the dollar is going to collapse and treasuries are going to implode even with a US guarante. What is the point in making the US $1T poorer before it happens for a guarantee that is not explicit?
Interesting week going forward.
My bet is that on the last trading day next week, equity markets are lower than last Friday's.
Since we are all speculating here(by that i mean guessing).
And Russia and China have ever guaranteed what to whom???? Nations of whiners. Lets see, what are those siberian railway bonds going for these days....
There business model isn't dependent on an inherent mismatch between assets and liabilities, so they may not be vulnerable. Yes, but...They do have a real problem hedging against the interest rate driven mismatch between assets and liabilities. What first brought their lousy accounting into deep relief was the number of borrowers who refinanced when Ben dropped rates to near zero. They were still stuck paying out bonds at a greater rate of interest. They did make efforts to hedge against interest rate risks, but really, who would have predicted in 1999 that the FED would lower rates to 1% in four years?
I wonder if we may yet see Marx proved right, where mature capitalism has inherently decayed to the point that its replaced in mass upheaval.
Did Marx foresee mass media being owned & controlled by the capitalist class?
Outside of the internet, one is left with the a couple stories in the free weekly for any leftish balance to the so-called "liberal media" steady drumbeat of corporatist apologetics.
Zig
The discussion around F & F is a bit chaotic.
I think that when Poole, for example, warns of insolvency and declares that F & F are too big to fail and should be backstopped, he is focused on a potential default on their debt. Yes, they'd need to run through their capital first, and new funds coming would get shut off first, and then their capital would be depleted, and then they'd begin defaulting (though, in practice, what would happen first would be a panic to sell the bonds, hammering their price).
If there is no danger of default, then there is no need for a guarantee.
The discussion of F & F gets clouded (others might say made more complex) by competing concerns, such as concerns about F & F shareholders (sorry, I think they can go to the toaster without bail out), or concerns about the housing market (sorry, I don't believe in trying to sustain current prices, only in making the unwind as orderly as possible and providing social safety).
My understanding is that, short term, F & F are in potential trouble paying off their bonds at the margins because: 1) some small proportion of the mortgages backing their bonds are going bad and, 2) inflow of new capital is in jeopardy, witness the stock price collapse and rising yields on their new bonds. Under these circumstance F & F might come up short on paying on all of their bonds. Making the guarantee explicit ends that problem and allows F & F, however restructured, to become viable into the long term.
Maybe F & F can pull this out on their own. I have little faith in that.
Fannie, Freddie to Get $15 Billion From U.S., the Times Says - Bloomberg.com
uly 12 (Bloomberg) -- Henry Paulson, the U.S. Treasury secretary, is planning a $15 billion capital injection into U.S. mortgage companies Fannie Mae and Freddie Mac, the Times of London reported, without citing anyone.
The plan is ``high'' on the list of solutions to the nation's mortgage crisis, the newspaper said. In exchange for the capital, the U.S. government would get a new class of shares, the newspaper reported, citing no one.
Paulson's plan also would allow the two mortgage companies to use the Federal Reserve's discount window so they can borrow from the central bank, the Times reported.
Fannie Mae and Freddie Mac own or guarantee almost half the $12 trillion of home loans in the U.S. and lost about half their market value last week on speculation of a government bailout, the London-based newspaper said.
An explicit guarantee on F & F bonds does not double the national debt. F &F bonds are differnt from Treasuries because F & F bonds are asset backed. Treasuries are pure "full faith and credit."
I'm not sure the market would see it that way...
An explicit guarantee increases the stress of servicing US sovereign debt during times of economic stress.
If US household income were to come under stress tax revenues would decrease at the same time that F&F bond defaults would likely be increasing. If the US Treasury couldn't secure funds on the open market to cover an increasing deficit and the losses on F&F bonds Congress would need to either raise taxes or cut spending. Neither is a popular political move in a recession (as many politicians have found out when put on an IMF austerity program).
That leaves monetizing US debt by the Federal Reserve which is a de-facto default.
Walk-aways are going to explode in the next year. And large communities will be empty because J6P is dead broke just like every bank. To much debt everywhere.
"Should the armageddon scenario envisioned by Roubini and others play out, I can't see how the US could get itself out of this nightmare should armageddon play out, with anything other than some sort of incredible campaign of (green) reindustrialization and infrastructure reconstruction a la the USSR post-NEP under Stalin."
The USSR post-NEP was an agent of mass murder, mass terror. Of course, the US is a very different sort of society.
Incredible campaigns require immense social discipline.
What is the present social potential for discipline of the US?
RESERVE BOARD FINDS ACTION UNNECESSARY; Six-Hour Session Brings No Change in the New York Rediscount Rate. OFFICIALS ARE OPTIMISTIC Mellon Also Attends Cabinet Meeting, but Declines to Discuss Developments. Board Reviews Credit Situation. Cut in Discount Rate Expected RESERVE BOARD SEES ACTION NOT NEEDED BANK RATE CUT EXPECTED
--New York Times, Oct. 30, 1929
"I went all in on red, but black came up. I know I'll win my money back, if I go double or nothing."
---Henry Paulson on the Bush economic strategy for bailing out anything that might be a bank or something.
I really like this economics professor. Couldn't have said it better myself.
Time for comrade Paulson to pull the plug on the Fannie and Freddie charade
QUOTE 1:
"There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.
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."
QUOTE 2:
"So lets call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. 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. These GSEs were designed to make losses. They are expected to make losses. If they dont make losses they are not serving their political purpose.
So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart."
What you're referring to isn't a more honest form of socialism. Rather, it's a more direct link between large corporate entities and the Government (Treasury) and the Federal Reserve System, which altogether is more precisely called fascism. Voters have no input whatsoever, unlike in some of the recent center-left "socialist" governments in Europe.
I have yet to have someone provide me with an explanation why we have to save the GSE's. Some have referenced they are the only player in the mortgage market but due to the credit contraction they are only allowing knife catchers to purchase more houses that are still overpriced.
äåâóøêà ãîäà ïîðíî äåâóøêà ãîëàÿ ýðîòèêà äåâóøêà ãîò ñåêñ äåâóøêà ãîò ñîñåò äåâóøêà äåä ìîðîç ìèíåò äåâóøêà äåëàåò ìèíåò äåâóøêà äåëàåò ìèíåò âèäåî äåâóøêà äåëàåò ìèíåò êîíþ äåâóøêà äåëàåò ìèíåò ïàðíþ side effects drug rehabs pharmaceutical at findpillsshop.com side effects drug rehabs pharmaceutical at findpillsshop.com side effects drug rehabs pharmaceutical at findpillsshop.com pharmacies pharmacy buy prescription drugs at findpillsshop.com pharmacies pharmacy buy prescription drugs at findpillsshop.com pharmacies pharmacy buy prescription drugs at findpillsshop.com pharmacies pharmacy buy prescription drugs at findpillsshop.com