The Sky May Actully Be Falling

[yakers]

Just checking in on a free hotel computer from Dawson Creek BC, on my way further north. Caught the news that Fannie & Freddie are getting bailed out, $5T (yes T) in assets at issue. Don't know what it all means but the market could be interesting tomorrow depending on how this is viewed. Breadlines next?

By the way, I'm still buying occasionally so maybe this will be an opportunity,could be the bottom soon as folks could certainly panic on this one.

[Retire Soon]

The latest line is that the Treasury department is frantically attempting to "shore up confidence" in the financial markets by announcing a drive to persuade congress to approve an increase in the line of credit for FNMA and Freddie Mac.

Treasury and Fed Pledge Aid For Ailing Mortgage Giants - WSJ.com

[laurence]

I'll admit this news is the first where I haven't rolled my eyes - completely - at the doomsday reactions. I'm still not stocking up on ammo and k-rations but I took notice. I may be gritting my teeth and mumbling "buying opportunity, dollar cost average" all week long.

[audreyh1]

It depends on what your definition of "bailed out" is.

Audrey

[laurence]

Considering their role in the markets, failure isn't an option. Talk about credit crunch if that happend.

[rogersteciak]

The sky might be falling, but it has fallen worse before even in relatively recent history:
http://www.nytimes.com/2008/07/14/business/14bank.html

Quote:

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion. But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

[audreyh1]

Considering that Fannie and Freddie were intially created by the US government in order to foster a liquid mortgage market and enable average Joe to buy a home, it would be ridiculous for the same government to stand by and do nothing while these companies faltered and became impaired to continue to issue mortgage backed notes.

It's been a wild ride, and the panic has seemed ridiculous when the default rates on Fannie and Freddie mortgages are at only 0.8% in one case, and 1.2% in another. Yet the equity markets have become totally panicked on these companies, coming to believe that the Bush government would allow shareholder equity in these companies to be wiped out. There has been quite a little ideological war going on between the markets and the Bush goverment's desire to somehow distance themselves from the "implied" government backing of these agencies. This has resulted in the equity of these companies going into free fall.

The Bush government finally blinked.

Since Freddie needs to auction notes on Monday to continue it's role as a mortgage provider, the government had to at least provide some confidence that it would facilitate whatever was needed to allow these agencies to continue their traditional role.

Anything else would shut down the mortgage market far worse than the subprime fiasco ever did.

It's been yet another wild confidence game (in the literal sense).

It's probably true that there are things about the Fannie and Freddie structure that could be improved, and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama.

Audrey

[boont]

" The sweeping measures to restore confidence in Fannie and Freddie — and the housing market in general — came ahead of a critical attempt by Freddie to borrow $3 billion from Wall Street today. The Government worked furiously behind the scenes over the weekend to ensure that Freddie Mac is able to sell the $3 billion of short-term debt in the group in a “Dutch auction” today — and at an acceptable interest rate. Treasury officials took the highly unusual step of calling leading banks and urging them to buy Freddie’s debt."

The Times

[brewer12345]

Quote:

Originally Posted by audreyh1 Considering that Fannie and Freddie were intially created by the US government in order to foster a liquid mortgage market and enable average Joe to buy a home, it would be ridiculous for the same government to stand by and do nothing while these companies faltered and became impaired to continue to issue mortgage backed notes. It's been a wild ride, and the panic has seemed ridiculous when the default rates on Fannie and Freddie mortgages are at only 0.8% in one case, and 1.2% in another. Yet the equity markets have become totally panicked on these companies, coming to believe that the Bush government would allow shareholder equity in these companies to be wiped out. There has been quite a little ideological war going on between the markets and the Bush goverment's desire to somehow distance themselves from the "implied" government backing of these agencies. This has resulted in the equity of these companies going into free fall. The Bush government finally blinked. Since Freddie needs to auction notes on Monday to continue it's role as a mortgage provider, the government had to at least provide some confidence that it would facilitate whatever was needed to allow these agencies to continue their traditional role. Anything else would shut down the mortgage market far worse than the subprime fiasco ever did. It's been yet another wild confidence game (in the literal sense). It's probably true that there are things about the Fannie and Freddie structure that could be improved, and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama. Audrey

Wow, you said exactly what I have been thinking about this. FWIW, I think the whole thing is a manufactured problem with no basis in reality.

Oh, and I think this may indicate a bottom, at least for now.

[audreyh1]

Quote:

Originally Posted by brewer12345 Wow, you said exactly what I have been thinking about this. FWIW, I think the whole thing is a manufactured problem with no basis in reality. Oh, and I think this may indicate a bottom, at least for now.

It's good to know that my layman's superficial grasp of what is going on is not completely off base!

It might have been a good bottom, except that banks are failing! Here we go for another round of bank panics.

Audrey

[brewer12345]

Quote:

Originally Posted by audreyh1 It might have been a good bottom, except that banks are failing! Here we go for another round of bank panics. Audrey

The frustrating thing about this round of nonsense is that the market is making little distoinction between banks. So the shakiest are going down right along with some of the safest and best-run banks in the US.

[MichaelB]

Quote:

Originally Posted by brewer12345 The frustrating thing about this round of nonsense is that the market is making little distoinction between banks. So the shakiest are going down right along with some of the safest and best-run banks in the US.

That's a buying opportunity.

[al_bundy]

Quote:

Originally Posted by brewer12345 Wow, you said exactly what I have been thinking about this. FWIW, I think the whole thing is a manufactured problem with no basis in reality. Oh, and I think this may indicate a bottom, at least for now.

if the US Government has to pump a few hundred billion $$$ to support the GSE's debts, isn't it the same thing as pumping money into the system via the Fed? you are still pumping money into the system which can lead to higher inflation. and if you have to borrow than the deficit/GDP equation changes and it can affect T-Bill prices

[samclem]

Quote:

Originally Posted by audreyh1 . . . and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama. Audrey

So, are the traders rushing in to buy the beaten-down stocks of Fannie and Freddy now that the last smidgen of doubt concerning the federal safety net has been removed? Sure, the Fed's don't guarantee the stock price, but surely this lowers the perceived risk of their business model.

And, while we're on the subject, why is the FDIC a "corporation"? Doesn't some of this stuff fall into the category of "inherently governmental" tasks?

[W2R]

Quote:

Originally Posted by samclem So, are the traders rushing in to buy the beaten-down stocks of Fannie and Freddy now that the last smidgen of doubt concerning the federal safety net has been removed? Sure, the Fed's don't guarantee the stock price, but surely this lowers the perceived risk of their business model. And, while we're on the subject, why is the FDIC a "corporation"? Doesn't some of this stuff fall into the category of "inherently governmental" tasks?

Perhaps you are assuming that government organization is designed in a logical way.

[ziggy29]

Quote:

Originally Posted by Want2retire Perhaps you are assuming that government organization is designed in a logical way.

How would you know that? It's not like you've had much of a chance to have a first-hand impression about how it works...

[W2R]

Quote:

Originally Posted by ziggy29 How would you know that? It's not like you've had much of a chance to have a first-hand impression about how it works...

Moi? tee hee

[Nords]

Quote:

Originally Posted by laurencewill Considering their role in the markets, failure isn't an option.

Quote:

Originally Posted by audreyh1 Considering that Fannie and Freddie were intially created by the US government in order to foster a liquid mortgage market and enable average Joe to buy a home, it would be ridiculous for the same government to stand by and do nothing while these companies faltered and became impaired to continue to issue mortgage backed notes.

Quote:

Originally Posted by samclem Sure, the Fed's don't guarantee the stock price, but surely this lowers the perceived risk of their business model. And, while we're on the subject, why is the FDIC a "corporation"? Doesn't some of this stuff fall into the category of "inherently governmental" tasks?

Hey, that's why they're called "government-sponsored entities".

It's interesting that nothing has actually happened other than extending a credit line and spewing out a few press releases. Yet you'd think that a fleet of cash-filled helicopters has been dispatched to Fannie & Freddie's HQs.

If nothing else, this year has hopefully helped people to be a bit more paranoid about taking on lifestyle debt. And maybe it's helped the regulators to clamp down on all the recent financing innovations-- like forbidding the use of the word "fixed" to refer to adjustable-rate mortgages!

Quote:

Originally Posted by brewer12345 Wow, you said exactly what I have been thinking about this. FWIW, I think the whole thing is a manufactured problem with no basis in reality. Oh, and I think this may indicate a bottom, at least for now.

I think the most frustrating aspect of this hysteria has been trying to estimate its effect.

People can figure out that a stock is getting to be a value. But it's awful darn frustrating to buy a bargain and watch it go down another 25%. Patience my ass, I wanna buy something...

[brewer12345]

Quote:

Originally Posted by Nords It's interesting that nothing has actually happened other than extending a credit line and spewing out a few press releases. Yet you'd think that a fleet of cash-filled helicopters has been dispatched to Fannie & Freddie's HQs.

The other funny thing about the wekkend's annnouncement's was the SEC's laughable intention to start looking into market manipulation via rumor mongering. Hey morons: if you want to clamp down on manipulation, reinstate to uptick rule on short selling!

[MichaelB]

Quote:

Originally Posted by brewer12345 The other funny thing about the wekkend's annnouncement's was the SEC's laughable intention to start looking into market manipulation via rumor mongering. Hey morons: if you want to clamp down on manipulation, reinstate to uptick rule on short selling!

I think the SEC is right. Only CEOs should be allowed to use false or misleading information to manipulate support stock prices.