Fannie and Freddie --- Now owned by Tax Payers

[chinaco]

It looks like we own it. The two CEOs are being fired. I hope they do not get a golden parachute.

I think they should be sued for negligence... perhaps pursued for fraud. It might be a stretch... but if they put investors at inordinate risk and packaged trash to resell and boost their pay... it might be able to stick.

Start by having the Justice department move to freeze their assets so they can't transfer them... but that may be too late.

Even if it doesn't stick... sick the IRS on them and pursue them into H3ll. Make their lives a miserable mess and force them to spend their last cent trying to protect themselves.





Paulson readies the 'bazooka' - Sep. 6, 2008

 

[UncleHoney]

It looks like we own it.

And it looks like we may not own as much as much as we are going to pay for.

http://www.nytimes.com/2008/09/07/business/07fannie.html?_r=1&hp&oref=slogin

 

[chinaco]

Another article that shows that Freddie Mac was covering it up. Any new investors thinking that Freddie was beaten up to much based on the accounting data they could publicly view were screwed.

They used a liberal interpretation of the accounting rules to deceive. I wonder who benefited from delaying the bad news. At at minimum company management drew their huge compensation package.


http://www.nytimes.com/2008/09/07/business/07fannie.html?bl&ex=1220932800&en=0e4d71145da494a5&ei=5087%0A


Some have speculated if these two were not taken over... it could lead to a lack of confidence in financial markets that would be similar to 1929 which lead to the great depression.

If history serves me speculation was one of the big cause of the great depression. Then fear of more damage cause more contraction and kept investors away.

 

[FIRE'd@51]

A news conference has been announced for 11:00 AM (EDT) this morning.

 

[Zathras]

It looks like we own it.

We don't own it, as we share in none of the future profits. We are just paying for the shortfalls.

 

[OAG]

We don't own it, as we share in none of the future profits. We are just paying for the shortfalls.

We surely do not own it. It owns us!

Like all of these "buy outs" & "cash infusion programs" it is just one more liability for the US Taxpayers to work on.

 

[BunsGettingFirm]

A news conference has been announced for 11:00 AM (EDT) this morning.

Very smart to schedule the news on a Sunday.

 

[2B]

We always did own it or, at least, we owned the liabilities. That's what a GSE is all about. The management, as bad as they were, were probably better than if Congress had been running it since the 1930's. If you doubt this, just consider SS, medicare, federal pensions, etc......

One positive should be a drastically lower interest rate on home loans. Concerns about Fannie and Freddie had forced a significant premium on the repackaged loans they sold. Now with direct Fed ownership, they should be much closer to their traditional spread over 10 year US bonds. Since they will be US bonds, they might actually trade at the same level. 3% home loans anyone?

 

[Zoocat]

We always did own it or, at least, we owned the liabilities. That's what a GSE is all about. The management, as bad as they were, were probably better than if Congress had been running it since the 1930's. If you doubt this, just consider SS, medicare, federal pensions, etc......

One positive should be a drastically lower interest rate on home loans. Concerns about Fannie and Freddie had forced a significant premium on the repackaged loans they sold. Now with direct Fed ownership, they should be much closer to their traditional spread over 10 year US bonds. Since they will be US bonds, they might actually trade at the same level. 3% home loans anyone?

I would think that foreign holders of FF bonds might look at our current debt,now with FF debt added, and wonder how the US govnmt will ever pay back these loans, especially once interest rates rise (not lower) and our debt service skyrockets. Here's an interesting analysis of the issue.
Debt and the dollar: The United States damages future living standards by borrowing itself into a deceptively deep hole

China recently has made it clear they are not going to take a hit on these bonds. Their national bank is in trouble because of investment in FF and other US bonds.They cut back investment by one quarter since the end of June. The Associated Press: Fannie, Freddie blind to the bubble

 

[thefed]

what's gonna happen to the stock?

 

[audreyh1]

The stock would go to zero, I believe.

As for the foreign holders - they are part of what put pressure on the US govt to do this. They stopped buying and started selling FF paper. They would rather hold US govt paper than FF paper under these circumstances, and the "conservatorship" turns FF paper into US govt paper for all practical purposes.

Bill Gross of PIMCO thinks this is the only way to stop the asset deflation spiral. Unless someone (US Govt/Taxpayer) steps up and backstops this, everything everyone owns will just keep going down in value as more distressed properties and securities are dumped onto the market due to the tight credit situation. The excessive leverage used in the past decade is one reason the problem is so large. And (perhaps due to excessive leverage) I guess there are no private investors left to stem the tide!

PIMCO - Investment Outlook Bill Gross Sept 2008 Bull Market

..And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. ..

Audrey

 

[chinaco]

Network news speculated that common stock would be worthless. Preferred holders might get something.... mainly because US Banks hold a major portion of the preferred stock.

 

[2B]

Network news speculated that common stock would be worthless. Preferred holders might get something.... mainly because US Banks hold a major portion of the preferred stock.

Failure of the preferreds would be almost as bad as the failure of the bonds. Restoring the preferreds to "par" would greatly improve the balance sheet of most banks. They were selling at a tremendous discount because of the risk of failure.

I think the common may be a different story. It probably should be worthless but technically the companies did not go bankrupt. They were "seized" by the Federal Government. Technically, the shareholders should be compensated for the loss of ownership if that's how it works out. The Feds could show to a judge that they were actually bankrupt. Either way I expect a series of court cases involving the common.

The news I've been able to find has been rather vague about how the common and preferreds will be treated.

 

[FIRE'd@51]

From the text of Paulson's statement

Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders - senior and subordinated - and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

IMO, what happens to the common will largely depend on whether this equity capital infusion is necessary, as it's terms are pretty onerous for stockholders (both existing preferred and common).

From WSJ

The Treasury said its senior preferred stock purchase agreement includes an upfront $1 billion issuance of senior preferred stock with a 10% coupon from each GSE, quarterly dividend payments, warrants representing an ownership stake of 79.9% in each firm going forward, and a quarterly fee starting in 2010.

 

[2B]

I waded through most of the text of his announcement. It damn near put me to sleep. There were some interesting wrinkles:

• The FF debt is still implicitly guaranteed not explicitly
• The Treasury is going to start buying mortgage debt with the intent of "holding to maturity"
• They will "not be run for profit" so the common and preferreds will pay no dividend
• Neither company will "fail" and the Federal control will expire in 2010
• Cash will be provided as needed to keep the companies with a "positive balance sheet" (they can't fail as long as the Feds are in control")
• Fannie and Freddie are being recapitalized as needed at a 10% interest rate that is deferred until the Federal control is removed which I assume will only happen when they can survive on their own
• An assumption on my part is that the preferreds would possibly begin paying their dividends after the Federal control is removed but that is not guaranteed

It will probably be a wild ride on Monday. The stock markets could go way up, way down or both several times. I am glad I don't own any Fannie or Freddie common or preferreds but I'm sure the financial stocks in my index funds do.

 

[Spanky]

It will probably be a wild ride on Monday. The stock markets could go way up, way down or both several times. I am glad I don't own any Fannie or Freddie common or preferreds but I'm sure the financial stocks in my index funds do.

I am hoping that the market will go "way" up.

 

[Spanky]

We surely do not own it. It owns us!
Like all of these "buy outs" & "cash infusion programs" it is just one more liability for the US Taxpayers to work on.

The government owns it, but taxpayers will be paying for it.

 

[Spanky]

I think they should be sued for negligence...

Should be prosecuted for misconduct.

 

[windsurf]

The CEO's and other officers: Isn't this the problem? Much of our financial lives are run by these bastards who milk "capitalism" until it it sours and then they are off to the next game. Shouldn't all salary and benefits be confiscated? Is there a partisan aspect to this mess?

 

[slouch]

I am hoping that the market will go "way" up.

I suspect there will be high volatility intraday Monday and although I won't even attempt to predict the Monday closing prices for the major indices, I suspect the downward trend will continue eroding stock prices in the broader US market for quite some time.

Housing stabilization will lead economic recovery - MarketWatch

According to the latest data from the Census Bureau and the National Association of Realtors, median home prices in July equaled 3.6 times median household incomes. This may be down from the peak of four times incomes set back in 2005, but it is still far above the 2.9 times of the 1980s -- when housing was more affordable and sales and construction grew at a steady pace.
In the halcyon days of the early 1970s, when home sales and construction were at their peaks both in absolute terms and relative to the size of the population, the ratio of home prices to incomes was less than 2.5.
To get back to the average of the 1980s, home prices would have to fall another 20%, on average. Add another 10 percentage points decline for housing to be as affordable as it was in the 1970s.
<snip>
Simply put, the first step on the road to recovery is lower housing prices. We will know when they are low enough to be affordable when sales pick up and the inventory of unsold homes begins to decline.
Once the markets see home prices stabilizing, the value of mortgage-backed securities will plumb bottom as well. In turn, this will allow the banks and other holders of these instruments to determine their market value, thus ending the recent spate of write-offs.
As this occurs, confidence should gradually return to the financial system, enabling lending to resume and the economy to grow. Then the Fed can begin withdrawing the excess liquidity now fueling inflation and all will be copasetic.

 

[cute fuzzy bunny]

The stockholders will get nothing but a write off.

The bond holders should be alright.

The CEO's and any culpable management should end up in jail. If anything, the overseers of companies that "cant be allowed to fail" and hold such an important role in the economy should be held to the highest standards and operated with the public interest in mind...to a much greater degree than the average public company.

 

[copyright1997reloaded]

Should be prosecuted for misconduct.

This problem has been long in coming, and for a long time certain people in congress (who are now screaming about protecting tax-payers) were big supporters of Fannie/Freddie and their underlying cause of "making home ownership more affordable". For example, take a look at this 1999 article from the NY Times:

Fannie Mae Eases Credit To Aid Mortgage Lending - New York Times

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

and

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.


In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

and the best one:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Sign me "Just waiting to see Barney Frank on T.V. blaming this on the B*sh administration"

 

[cute fuzzy bunny]

I remember around late 2003/early 2004 all the financial porn rags and the tv screamers were insisting that everyone should make huge investments in fannie and freddie.

I mean, why not? With the booming housing market going on, the best way to take advantage of it was in the very low risk mortgage market where you'd be well paid no matter which way things went.

Right?

Wait...what?!?

 

[donheff]

So - those off you who have followed this over the decades how about some history. Didn't "we" originally own them, then give them away to the private sector to put them in better hands, only to have to buy them back to save the global economy from what the "much vaunted" private sector did to them?

 

[cute fuzzy bunny]

Is it a good time to point out that all y'all with mortgages will now be paying for them twice?