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Captain Corea
Joined: 28 Feb 2005
Location: Seoul
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 Posted: Sun Sep 07, 2008 1:31 pm Post subject: US takes over key mortgage firms |
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http://news.bbc.co.uk/2/hi/business/7602992.stm
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US President George Bush says mortgage giants Freddie Mac and Fannie Mae have been taken over because they posed "an unacceptable risk" to the economy.
The two companies account for nearly half of the outstanding mortgages in the US, and have lost billions of dollars during the US housing crash.
The most recent figures show about 9% of US homeowners were behind on their payments or faced repossession.
The federal takeover is one of the largest bail-outs in US history.
It was announced on Sunday by Treasury Secretary Henry Paulson.
"Putting these companies on sound financial footing, and reforming their business practices, is critical to the health of our financial system," President Bush said.
"The actions taken today are temporary, and will support housing finance in the near term."
'Comprehensive action'
As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business going forward.
Treasury Secretary Henry Paulson said the government was intervening in the wider interests of the financial system and of taxpayers since the financial position of the two firms was fast deteriorating.
He added that the two firms' debt levels posed a "systemic risk" to financial stability and that, without action, the situation would get worse.
"We examined all options available and determined this comprehensive and complementary set of actions best met the objectives of market stability, mortgage availability and taxpayer protection," he said.
"Fannie Mae and Freddie Mac are so large and interwoven in our financial system that a failure of either of them would create great turmoil in financial markets here and around the globe."
The move is intended to keep the two companies afloat, amid fears that either could go bankrupt as borrowers default on their home loans.
The two firms will be administered by the Federal Housing Finance Agency until their long-term future is decided.
The Congressional Budget Office has said such a move could cost up to $25bn but Mr Paulson said there was no reason why taxpayers should have to directly foot the bill.
Funding guarantee
Together, Freddie Mac and Fannie Mae own or guarantee about $5.3 trillion (�3 trillion) of mortgages.
But they have made a combined loss of about $14bn in the past year and officials were worried that they would no longer be able to continue functioning if such losses continued.
The Treasury's funding guarantees to the two firms - which will include it buying up high-risk mortgage backed securities used to fund the mortgage market - will last until the end of 2009.
During that period, neither Fannie Mae nor Freddie Mac will be able to make any payments to their shareholders.
But Mr Paulson warned that the move was only a short-term "stabilisation" exercise.
He said it would be up to Congress to agree proposals to reform the two firms and address their "pervasive weaknesses".
Federal Reserve chairman Ben Bernanke said he "strongly endorsed" the proposals to ensure the two firms remained financially sound.
"These necessary steps will help to strengthen the US housing market and promote stability in our financial markets," he said.
Banks around the world are highly exposed to the two companies and therefore, given the febrile state of markets across the world, it had become dangerous for doubts to persist about whether they were viable and would be able to keep up the payments on their massive liabilities, says the BBC's business editor Robert Peston.
A rescue plan passed by Congress in July gave the US government the authority to offer unlimited liquidity to the two companies, and to buy their shares, in order to keep them afloat. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Sun Sep 07, 2008 2:34 pm Post subject: |
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To paraphrase Everett Dirksen, "A few tens of billions of dollars here, a few tens of billions there. Sooner or later we're talking real money".
I would prefer there be better regulation of institutions that could wreck the economy before things get so bad (S & Ls) but when they do get to this state, I see no other good solution than taking them over. Justice demands that the CEOs end up living in a cardboard box down at the city dump. |
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Paddycakes
Joined: 05 May 2003
Location: Seoul
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| Posted: Sun Sep 07, 2008 6:15 pm Post subject: |
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| Wonder what affect this will have on the US dollar? |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sun Sep 07, 2008 6:27 pm Post subject: |
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| Paddycakes wrote: |
| Wonder what affect this will have on the US dollar? |
In the long-run, it'll be better that these mortgages are stabilized.
Fannie Mae and Freddie Mac offer gov't subsidized loans anyway. This is just the gov't admitting that it has a stake in the enterprise. I believe the institutions were only quasi-privatized under the Bush administration, and they're now being explicitly pulled back under the Federal umbrella. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Sep 07, 2008 8:26 pm Post subject: |
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Here is a comprehensive list of links on the subject:
http://bigpicture.typepad.com/comments/2008/09/fannie-freddi-2.html
From Housing Wire:
http://www.housingwire.com/2008/09/07/history-fannie-freddie-seized-by-federal-government/
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September 7 will now be remembered as the day the U.S. government took over the mortgage market. What that means for financial markets going forward has never been less certain.
This is no longer the worst mortgage crisis since the Great Depression; this is the worst mortgage crisis, period. It�s also the end of an era. The U.S. Treasury on Sunday announced a takeover of both Fannie Mae (FNM: 7.04 +9.66%) and Freddie Mac (FRE: 5.10 +3.03%), a move that has nearly no precedent in U.S. history. Together, the companies own or guarantee roughly $5.3 trillion in home loans, roughly half of all outstanding U.S. mortgages.
The bailout will involve as much as $200 billion in capital and credit lines to both GSEs, according to documents released Sunday afternoon by the Treasury.
Treasury officials said the government will immediately purchase $1 billion in senior preferred stock from each company; the preferred stock comes with a 10 percent coupon, quarterly dividend payments and provides warrants representing an ownership stake of 79.9 percent of each GSE going forward. All other preferred and common shares in Fannie and Freddie will see dividends halted by their new regulator, the Federal Housing Finance Agency, of FHFA � the FHFA will essentially serve as receiver for both GSEs, as both companies have been placed into conservatorship as part of the government�s plan.
Under the Treasury preferred stock purchase agreement, the government may purchase an additional $100 billion in preferred interests in each GSE if needed, although FHFA director James Lockhart suggested such a large investment likely wouldn�t be needed.
But after hearing from Lockhart for weeks that the GSEs were in solid financial condition, and that the Treasury had no intention to step in, how much of whatever is said can really be believed at this point?
�Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,� Paulson said in a press conference on Sunday. �This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement.�
As part of the nationalization, FHFA immediately canned Fannie CEO Daniel Mudd and Freddie chairman and CEO Richard Syron, although both will stay on in transitional roles. FHFA�s Lockhart named Herb Allison, former vice chairman at Merrill Lynch & Co. (MER: 26.73 +1.98%), to the CEO post at Fannie Mae; former US Bancorp (USB: 32.74 +3.44%) vice chairman David Moffett will now lead Freddie Mac.
�Unfortunately, as house prices, earnings and capital have continued to deteriorate, [the GSEs] ability to fulfill their mission has deteriorated,� said Lockhart. �In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt.�
Beyond the capital injections, the federal government said it will begin purchasing unknown amounts of agency MBS on the open market, a move it said would �promote the stability of the mortgage market.� The Treasury said it will appoint two independent asset managers as financial agents of the U.S. government to manage the a government portfolio of MBS with the goal of �promoting stabiliity and protecting taxpayers.�
Which means that the U.S. government could become akin to the single largest hedge fund on the planet. Amazing to think, for anyone that has been in the mortgage market.
Early sentiment suggests that the bailout may do little to quell investor�s nerves, however; the few sources we�ve talked to thus far have suggested that concern over commercial banks is likely to intensify.
�I can think of four large commercial banks in more tenuous positions that either Fannie or Freddie,� said one source, a hedge fund manager that asked not to be named. �Does this mean things are really even worse than we think there? Or that the government will need to step in there as well for the good of the US home owner?�
HW will have much more next week on this historic move, including a look at alleged accounting improprieties at Freddie, Wall Street�s reaction and role, what the bailout means, and more. |
And from the FT's Mohamed El-Erian
http://www.ft.com/cms/s/0/33ddd0ac-7cf7-11dd-8d59-000077b07658.htm
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l
The levees in New Orleans held fast as hurricane Gustav landed last week, sparing the city from the physical devastation experienced under Katrina. And had the levees fallen, the human tragedy would have been significantly reduced as most of the population had already been evacuated from the city.
This situation stands in stark contrast to the devastation that a deleveraging hurricane continues to wreak in the US and other parts of the world. Unlike New Orleans, the levees of the global economy have broken, one after another.
Also unlike New Orleans, a significant part of the global economy still lies in the path of this hurricane. Having caused havoc in the financial and housing sectors, the damage now encompasses sinister economic storms that are starting to rage in employment, consumption and investment in the US and abroad.
This realisation has rightly prompted yesterday�s dramatic announcement from the US Treasury that it will bring Freddie Mac and Fannie Mae, the two giant mortgage finance companies, under complete government control. The move aims to create a new levy that will halt further devastation caused by the deleveraging hurricane. And in establishing this levy, the US government is seeking to strike the delicate balance that is intrinsic to real and perceived �bail-outs�: committing sufficient public financing to avert disaster yet limiting the risk of moral hazard.
This is the third time this year that the US authorities have made a big policy announcement on a Sunday. The first, on March 16, provided emergency support by the Federal Reserve to investment banks. It generated a rally in global markets that lasted only two months before grim reality set in again.
The second, on July 13, signalled that the government�s wallet stood behind Freddie and Fannie. This yielded market relief for just a month. In both cases, the affected segments of the US economy did not have enough time to clean up the debris and start the rehabilitation and reform process.
Will this latest announcement prove more effective? The answer ultimately boils down to two big issues, which policymakers and market participants would be well advised to keep front and centre as they debate the finer points of technical specifications and the distribution of winners and losers.
First, the success of the action depends partly on whether it �crowds in� capital from both domestic and foreign sources.
This is key to stabilising markets and drawing a line under the process of global economic decline. Here, a commitment of the government�s balance sheet is necessary but not sufficient. Since the US government is already running a growing fiscal deficit and the country as a whole has a current account deficit, its balance sheet must be supported by other capital inflows, especially on the part of foreign holders of US debt who have become increasingly skittish in recent weeks.
Second, the action must be part of a broader policy response that has both a domestic and international dimension.
In this regard I have been impressed by the repeated observations of officials from countries that previously experienced the brutality of deleveraging hurricanes, particularly in Asia in 1997-98. Noting the piecemeal nature of US policies in the past year, they stress the importance of a holistic response from the authorities, including meaningful co-ordination of an often-diffused domestic policy apparatus and explicit, timely and targeted international support. This means, at the minimum, alleviating the housing problem in other stretched jurisdictions.
Over the next few weeks we will get a lot of information as to whether these conditions are being met. If they are, this latest levy will prove effective in stopping the deleveraging hurricane and allowing for clean-up operations to start � including reconciling markets to the new realities on the ground and leading to the establishment of better preventive measures against future hurricane formations.
If, however, the conditions are not met, the global economy will experience further significant devastation that will go well beyond housing and the financial sector. In this scenario, consumers residing in highly leveraged economies such as the US and the UK will feel even sharper and more prolonged pain, followed by those in several emerging economies. |
The commentary on this issue is generally on the 'terrible development' side. |
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mises
Joined: 05 Nov 2007
Location: retired
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Join Me
Joined: 14 Jan 2008
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| Posted: Mon Sep 08, 2008 5:19 am Post subject: |
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| How many years after Bush is gone will his legacy live on for? Will we ever be rid of this menace on the US and global economy? Will his incompetence be blamed on Alzheimer's? |
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Join Me
Joined: 14 Jan 2008
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| Posted: Mon Sep 08, 2008 5:20 am Post subject: |
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I have heard 300 billion mentioned already. |
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Join Me
Joined: 14 Jan 2008
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| Posted: Mon Sep 08, 2008 5:31 am Post subject: |
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| Join Me wrote: |
| How many years after Bush is gone will his legacy live on for? Will we ever be rid of this menace on the US and global economy? Will his incompetence be blamed on Alzheimer's? |
Come onnnnnnn...are all of the Bush apologists in bed already or are you just diddling yourself with your Sarah Palin videos? Do I really need to argue with myself? |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Sep 08, 2008 6:24 am Post subject: |
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http://www.boom2bust.com/2008/09/08/quote-for-the-week-31/
Robert Shiller, Yale economics professor and chief economist at MacroMarkets, had the following to say about long-term U.S. home prices in an interview on Yahoo! Finance�s Tech Ticker last week:
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| There�s a lot of misconceptions about home prices. People think that there�s a strong historical uptrend to them. And in fact, by my data, there is not. In fact, home prices in the United States, if you correct for inflation, in 1990 were about the same as they were in 1890. |
This is something every speculator all over the world needs to tattoo on their bum. Every area where there has been a large run up in house prices (Seoul, Shanghai, Dubai, Europe, Calgary, Vancouver etc etc) will see prices decrease to 'normal' levels. Historically normal. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Mon Sep 08, 2008 7:07 am Post subject: |
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There are two causes to this disaster: Socialism and Socialism.
Mae and Mac offer government backed housing loans which encourage overborrowing and risk taking.
The Federal Reserve's massive expanding of the money supply created a huge bubble.
The answer: return to private banking with NO government regulation and issue money with a 100% gold backing.
It keeps happening. The government, and since 1913, its agent the Federal Reserve, has caused: the Great Depression, every recession in US history and now this.
When will they ever learn,
when will they ever learn. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Sep 08, 2008 8:14 am Post subject: |
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Opposing views from Rogers and Buffett.
Buffett
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In stepping in to bail out and recapitalize collapsing home mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Hank Paulson �did exactly the right thing,� said billionaire investor Warren Buffett.
�I wouldn�t change anything in the plan myself,� Buffett said in an interview on CNBC. He said he expects this step will go a long way in calming the market and resolving the ambiguity surrounding the two companies.
�It�s best deal and the most sensible deal available now,� he said�
�If Bear Stearns was an 8.5 on the financial Richter scale, this was about a 9.9, or something of the sort,� Buffett said. �The government really had no choice but to do something. And then the question is: did they do the most sensible thing, and they did do that.� Buffett said. |
Rogers
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The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is �more communist than China right now� but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.
�America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich� it�s just bailing out financial institutions,� Rogers said�
�This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I�m not quite sure why I or anybody else should be paying for this,� Rogers told �Squawk Box Europe.� |
http://www.investorazzi.com/2008/09/08/warren-buffett-and-jim-rogers-on-fannie-freddie-bailout/
Buffett is a Democrat, and very pragmatic/non-ideological. Rogers is more of an ideological tornado. But I agree with Rogers in his position that this is socialism for the rich, in a sense. Private profits, public losses. |
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Pluto
Joined: 19 Dec 2006
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| Posted: Mon Sep 08, 2008 8:30 am Post subject: |
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Fannie Mae, Freddie Mac and their kid sister Sallie Mae should be put on the road to total and complete government divestment immediately. The taxpayer bailout of the two mortgage giants is one of the greatest financial tragedies of our time; it may likely cost more than a half a trillion, or perhaps a trillion, dollars by the time all is said and done. That said, I don't think the blame lies on any one person or party. Join Me's simplistic assertion that this is all Bush's fault is foolish. Especially, where in the Congress, Barny Frank and Charles Schumer, are calling for more socialization, if not outright nationalization. Bush and Sec. Paulson, ex-CEO of G. Sachs who's also proven himself to be a complete douchbag, should follow their free market instincts and clearly and unequivocally state that Fred, Fan and Sal are to be completely privatized with no more gov't intervention.
WSJ Editorial Board
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Weekend at Henry's
September 8, 2008; Page A18
In the 1989 movie "Weekend at Bernie's," a pair of young executives create the illusion that their dead boss is still alive to keep a party going. That's not too far from the premise of this weekend's Treasury bailout of Fannie Mae and Freddie Mac, the mortgage giants that have become financial zombies.
Treasury Secretary Henry Paulson wants to prop up the walking dead so the world keeps buying their mortgage-backed securities. His action may calm jittery credit markets, and it may get the companies through the current mortgage crisis -- albeit at enormous cost to American taxpayers. The tragedy is that he and Congress didn't act 18 months ago -- when the cost would have been far less -- and that he still isn't killing the Fannie and Freddie business model that has done so much damage. These corpses could still return to haunt us again.
* * *
At least Mr. Paulson has finally figured out he's been lied to. He arrived in Washington fresh from the Wall Street turnip truck saying that the battle over the two government-sponsored enterprises (GSEs) was nothing but a scrap between "ideologues." So he bought the Congressional line that Fan and Fred weren't a problem and would help financial markets through the housing recession. Even as he won new power this summer to add taxpayer capital to the companies, he said he had no intention to use that power and that he wanted to sustain them in their "current form." That political theater merely prolonged the market agony, while giving the companies incentive to take even greater risks.
This weekend's formal rescue puts an end to those illusions. Treasury and the new GSE regulator -- the Federal Housing Finance Agency -- both acknowledge that the companies are facing huge mortgage losses that will soon overwhelm their capital cushions. And this time Mr. Paulson has at least demanded something in return for his blank taxpayer check.
The new federal "conservatorship" is a form of nationalization that puts regulators firmly in control. The feds fired the company boards and CEOs, though the clean up needs to go further to change the corporate cultures. Both companies remain Beltway satraps that hire for reasons of political connection, not financial expertise.
The taxpayer purchase of preferred stock means that the feds will own about 80% of the companies if all the warrants are ultimately exercised. The feds also stopped dividend payments, saving about $2 billion a year. This amounts to significant dilution for current Fannie and Freddie shareholders, and it offers taxpayers some return on their bailout risk if the companies recover.
We only wish Mr. Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure. Fan and Fred holders had profited handsomely for decades by exploiting an implicit taxpayer guarantee that their management claimed didn't exist. Now that the taxpayers are in fact stepping in, the current common and preferred holders deserve to lose everything. Mr. Paulson apparently wanted to dodge that political fight. If Fan and Fred share prices rally this week, we'll know Mr. Paulson didn't demand enough.
The Treasury chief also gave a free pass to the holders of some $18 billion in Fan and Fred subordinated debt. He did so even though these securities were understood not to have the same status as mortgage-backed securities or other Fannie debt, and even though this will set a bad precedent for other bailouts. Watch for Citigroup's subordinated debt to jump in price as investors conclude that the feds would do the same thing if Citi needs a rescue.
By far the biggest risk here, however, is that the companies could still emerge with their business model intact. That model is the perverse mix of private profit and public risk, which gave them an incentive to make irresponsible mortgage bets with a taxpayer guarantee.
Mr. Paulson could have ended that model immediately by putting the companies into "receivership." Both companies could have continued to securitize mortgages, even as their riskiest businesses were wound down. But Treasury says its lawyers at Wachtell Lipton advised that receivership might have triggered default claims and thus caused a run on Fannie and Freddie debt. We hear there's some legal debate on that point. And in any case, had Mr. Paulson acted sooner and given markets time to understand that receivership doesn't mean immediate liquidation, the risk of a run might now be far less.
The Treasury plan does at least put some useful limits on Fan and Fred risk-taking, albeit starting only in 2010. Until the housing market bottoms out, presumably in 2009, the feds want the two companies to keep securitizing and guaranteeing mortgages as they do now. But in January 2010, the companies will have to start reducing their portfolios of MBSs by 10% a year, to a total of $250 billion. That will reduce one giant source of systemic financial risk.
Also in 2010, the companies will have to start paying a fee to the feds in return for their taxpayer guarantee. The fee -- which could be paid in cash, or in preferred stock and thus add to the government's controlling stake -- is designed to level the playing field with private mortgage securitizers.
Treasury says all of this will provide a motive for Congress and the new President to change how Fan and Fred do business, and in the meantime the conservator has also ordered a stop to their political lobbying. It's also nice to see that on this point Mr. Paulson has found religion. In his statement Sunday, he blamed the need for a bailout on "the inherent conflict and flawed business model embedded in the GSE structure." Welcome to our merry band of "ideologues," Mr. Secretary.
The Treasury chief has nonetheless decided to leave the hardest political choices to his successor, who will have to face down the usual phalanx of Fannie apologists: Democratic barons Barney Frank and Chuck Schumer, the homebuilders, various Wall Street sages and left-wing journalists.
Both Barack Obama and John McCain are now saying sensible things about the need to change the companies. But who knows how the political mood will have shifted once the housing slump passes. It's easy to imagine the next Treasury Secretary concluding that he also thinks the fight for permanent reform is too difficult. Then we are back to the same old stand.
* * *
The Fannie-Freddie bailout is one of the great political scandals of our age, all the more because it was so obviously coming for so long. Officials at the Federal Reserve warned about it for years, only to be ignored by both parties on Capitol Hill. The least we can do now is bury these undead monsters for all time.
See all of today's editorials and op-eds, plus video commentary, on Opinion Journal.
And add your comments to the Opinion Journal forum. |
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Manner of Speaking
Joined: 09 Jan 2003
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| Posted: Mon Sep 08, 2008 7:06 pm Post subject: |
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If I were an American journalist or member of Congress, I'd be very interested in seening much more detail as to the accountability of a) those who caused this mess, and b) how the bailout is going to be tailored to provide the maximum benefit to the economy at minimum cost.
The article states that "the senior management" will be dismissed and replaced, but it doesn't detail exactly who in senior management is responsible, how many officials will be dismissed, and whether or not any of them are going to receive a nice fat government-financed severance package. If I were a journalist I'd be going after that info like a dog after a bone.
I also don't doubt that some people are going to make a buck personally, on this bailout. |
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bacasper
Joined: 26 Mar 2007
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| Posted: Mon Sep 08, 2008 10:05 pm Post subject: |
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| Pluto wrote: |
| Fannie Mae, Freddie Mac and their kid sister Sallie Mae should be put on the road to total and complete government divestment immediately. The taxpayer bailout of the two mortgage giants is one of the greatest financial tragedies of our time; it may likely cost more than a half a trillion, or perhaps a trillion, dollars by the time all is said and done. That said, I don't think the blame lies on any one person or party. Join Me's simplistic assertion that this is all Bush's fault is foolish. Especially, where in the Congress, Barny Frank and Charles Schumer, are calling for more socialization, if not outright nationalization. Bush and Sec. Paulson, ex-CEO of G. Sachs who's also proven himself to be a complete douchbag, should follow their free market instincts and clearly and unequivocally state that Fred, Fan and Sal are to be completely privatized with no more gov't intervention. |
What he said. |
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