"It Could Cause Total Panic"

[boont]

The former chairman of the Federal Deposit Insurance Corp. who played a key role in healing the U.S. banking system after the savings and loan crisis said Thursday he advocates a breakup of struggling mortgage buyers Fannie Mae and Freddie Mac.


Catastrophic Losses

There is a real danger that Fannie and Freddie could go under if they are unable to refinance their debt. As reported by The Wall Street Journal earlier this week, Fannie and Freddie have $225 billion of debt they need to roll over by the end of September. "This is when the market could effectively shut them down," Seidman warned.

Yet if the GSEs go down, it would be "catastrophic" because the mortgage securities are in most banking systems around the world.

"It could cause total panic in the global financial system, which is based on credit," he said.

"Some people say let them fail and let the market sort it out, and the market will sort it out," Seidman added. "But in the meantime that could mean the end of the market and the financial institutions and banks. They tried that during the Great Depression. The market will work, but it's a question of cost, and the cost would be the collapse of the banking system."

Since the U.S. financial system is based on credit, the government almost has no choice but to help any big financial institution in danger of failing, he said.

(Excerpted from WSJ Market Watch)

 

[audreyh1]

It does seem that after the temporary experiment with curtailing naked short selling, the govt is once again back at its brinkmanship game with Freddie and Frannie. What was the point of that one month experiment exactly? Can't we get shorting rules in place that can be enforced?

However, I strongly doubt the govt will "let them fail" in the sense of default to the debt holders. The stock holders might be wiped out. But backing away from the government backstop that was explicitly stated a month ago is out of the question. This would not only destroy the US mortgage market, but it would be unacceptable to foreign governments who hold so much of that paper. If they take over Fannie and Freddie, their paper becomes US govt paper. We can hope that the paper quality is such that it is not in fact a cost to the US taxpaper.

Audrey

 

[boont]

"I strongly doubt"

"I strongly doubt the govt will "let them fail"

Audrey


Well, I guess my question would be, "Are we at that point"? Is this where we are today? Either the United States Government absorbs this or the financial system as we know it will collapse?

Audrey, are you really saying that these markets are so unstable that only massive government intervention can protect us a against global financial
collapse?

I, for one, cannot believe you are saying that.

boont

 

[audreyh1]

Oh give me a break!

I think you are just into crying wolf.

Audrey

 

[MichaelB]

Oh give me a break!

I think you are just into crying wolf.

Audrey

More like "The sky is falling, the sky is falling" - only trying to put those words in your mouth. A real political skill here - more appropriate for DC, especially in election season.

 

[FIRE'd@51]

Can't we get shorting rules in place that can be enforced?

IMO, putting back the "uptick" rule would go a long way towards curbing abuses associated with short selling.

 

[pedorrero]

I recall the dust jacket from the early 90s book "The Great Reckoning" It made (then) sensational predictions -- as all such gloom & doom tracts do -- such as

"The price of the average home will drop by 2/3" (only down about 20% so far!)

"The government will become a national pawn shop for failing banks, and take over real estate" (easy prediction, on the heels of the S&L fiasco of the 1980s; this looks like an odds-on safe bet -- the impending re-nationalization of Fraudie Mac and Fanny Mae-Not)

It'll be interesting to watch what the lame duck congress and President legislate after the election -- especially if Obama wins.

 

[chinaco]

Hopefully the top management of freddie and fannie have been fired. They should be sued for negligence and harassed in every legal/conceivable way.

No one should get a pass on it. They scr3wed up the country.

 

[cute fuzzy bunny]

You must be joking.

"Former Fannie Mae boss Franklin Raines paid himself about $50 million for years in which, we now know, the company lied about its earnings in order to inflate executive bonuses, while management was playing fast and loose with other people's money. Beginning in 2007, Fannie Mae and Freddie Mac went off the cliff, their stocks plummeting to less than 20 percent of their previous values, and taxpayers were put on the hook as guarantors of the firms' bad management decisions. The Congressional Budget Office estimates the Mae-Mac debacle will cost taxpayers $100 billion or more. Yet Freddie Mac CEO Richard Syron was paid $14.5 million for 2007, including a $2.2 million "performance bonus." Syron has taken home $38 million total from Freddie in the past five years. Fannie Mae CEO Daniel Mudd got $14.2 million for 2007, plus a substantial prepaid life insurance policy and other perks including "financial counseling, an executive health program and dining services," the Washington Post reported."

 

[Gardnr]

You must be joking.

"Former Fannie Mae boss Franklin Raines paid himself about $50 million for years in which, we now know, the company lied about its earnings in order to inflate executive bonuses, while management was playing fast and loose with other people's money. Beginning in 2007, Fannie Mae and Freddie Mac went off the cliff, their stocks plummeting to less than 20 percent of their previous values, and taxpayers were put on the hook as guarantors of the firms' bad management decisions. The Congressional Budget Office estimates the Mae-Mac debacle will cost taxpayers $100 billion or more. Yet Freddie Mac CEO Richard Syron was paid $14.5 million for 2007, including a $2.2 million "performance bonus." Syron has taken home $38 million total from Freddie in the past five years. Fannie Mae CEO Daniel Mudd got $14.2 million for 2007, plus a substantial prepaid life insurance policy and other perks including "financial counseling, an executive health program and dining services," the Washington Post reported."

Just friggen' outrageous, isn't it!!!!!! I don't know what it's going to take to stop the trend of CEOs and other top management from getting obscenely high compensation while at the helm of failing and poorly performing companies; not to mention outright banditry.

A revolt of some kind is in order.

 

[Notmuchlonger]

Just friggen' outrageous, isn't it!!!!!! I don't know what it's going to take to stop the trend of CEOs and other top management from getting obscenely high compensation while at the helm of failing and poorly performing companies; not to mention outright banditry.

A revolt of some kind is in order.

Dont buy the stock.

 

[Bikerdude]

Just friggen' outrageous, isn't it!!!!!! I don't know what it's going to take to stop the trend of CEOs and other top management from getting obscenely high compensation while at the helm of failing and poorly performing companies; not to mention outright banditry.

A revolt of some kind is in order.

Arm the masses. Tell them to take the rich out in the middle of the night and shoot them. Then divide up their homes, 100 sq. ft. per person 300 sq. ft. per family. Hey, it worked before. Just know what the definition of 'rich' is before the revolt.

 

[Spanky]

Arm the masses. Tell them to take the rich out in the middle of the night and shoot them. Then divide up their homes, 100 sq. ft. per person 300 sq. ft. per family. Hey, it worked before. Just know what the definition of 'rich' is before the revolt.

It's a noble idea, but we live in a civilized society and rely on the court (law) to prosecute them.

 

[Spanky]

Dont buy the stock.

It's funny, not long ago, that these two stocks were considered safe for the long term.

 

[Notmuchlonger]

It's funny, not long ago, that these two stocks were considered safe for the long term.

I was responding to the rant about CEO pay.

 

[Spanky]

I was responding to the rant about CEO pay.

I see - boycotting the stock so that the CEO will not receive huge compensation from stock options. Unfortunately, people who buy their stocks do not care about CEO compensation. Investors only care about getting a quick kill (or short-term return).

 

[HFWR]

Dont buy the stock.

Makes life hard for us lazy indexers...

Arm the masses. Tell them to take the rich out in the middle of the night and shoot them. Then divide up their homes, 100 sq. ft. per person 300 sq. ft. per family. Hey, it worked before. Just know what the definition of 'rich' is before the revolt.

Can't we have it earlier in the day. I can't stay up that late...

 

[FinanceDude]

I think that the govt is OBLIGATED to bail out Fannie and Freddie, after all there's that "implied" backing by the govt they have had all along.........

 

[cute fuzzy bunny]

It's funny, not long ago, that these two stocks were considered safe for the long term.

I quite clearly remember around 2004 all the pundits screaming about buying fannie and freddie. No brainers!!! I mean, look at this roaring housing market!!! Load up!!!

I'm fine with the CEO's making a lot of money while they were cooking the books and allowing their respective ships to wander into a sea of icebergs filled with mines.

But now that the ships are sinking, how about they and anyone else who cost the public billions all get shipped off to jail for a couple of years? As heads of companies that couldnt be allowed to be failures, their stewardship should have been more stringent than the average company...not less.

 

[Bikerdude]

Can't we have it earlier in the day. I can't stay up that late...

Would you like a blindfold?