We are told that 90 American banks or in financial difficulty. The FDIC has insurance to fund about 40-45 billion dollar banking industry defaults. The California bank default will cost 4-8 billion dollars, we are told. Where will the money come from when the FDIC runs out of insurance money? Will the Treasury print more money to pay the insurance for the depositors of the next failing banks?
Unstated about the 15 trillion dollar owned and insured mortgages of Freddie Mac and Fannie Mae is the loss if only 10 percent of the mortgage value goes sour. That deficit is 1.5 trillion dollars. For the Treasury to absorb that obligation is to ask for the destruction of our currency.
It is becoming increasingly clear that the Fed's decision to bail out the guilty financiers (banks and brokerages houses) has set a precedent that may result in the forced liquidation of our dollar.
Let the Housing Bail-Outs Begin
A government takeover of one or both companies is among several options that have been considered by White House officials, according to a person familiar with the discussions who spoke on condition of anonymity. Senior Bush administration officials are considering placing either or both firms in a conservatorship if their problems get worse, the person said.The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, and Democratic Senator Charles Schumer. Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the U.S. would be compelled to start a rescue, according to estimates by Fox-Pitt Kelton and Friedman, Billings, Ramsey & Co.
``They must not fail,'' McCain, of Arizona, said yesterday during a campaign stop in Belleville, Michigan. Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' he said at an earlier stop in the state, one of the worst affected by the surge in foreclosures.
"They need a lot more capital," said John Paulson, who heads the hedge-fund manager Paulson & Co. that has made billions betting the housing market would decline. He pointed to "growing worries" about the deterioration of securities backed by mortgages as more homeowners default and home prices fall. Meanwhile, some high-profile bond investors snapped up Fannie and Freddie debt, believing the government would never allow them to default......
"Fannie Mae and Freddie Mac are too important to go under," said Democratic Sen. Charles Schumer of New York. "...If they need additional support, Congress will act quickly." But he added in an interview: "We're not at that stage. I hope and think it won't be needed."
A Treasury spokeswoman said: "As Secretary Paulson said today, we're not going to speculate about 'what ifs' on Fannie and Freddie. What we're focused on is legislative reform."
The Times said the administration also considered calling for legislation that provide an explicit government guarantee on the $5 trillion of debt owned or guaranteed by Fannie and Freddie. Such a move was seen as an unattractive option, however, because it would double the size of the public debt.
In addition, three options were suggested in the WSJ article:
In an email sent to clients Thursday morning, Beth Hammack, who heads trading in Fannie and Freddie debt at Goldman Sachs Group Inc., said she sees "many good options" falling short of the government taking over the companies. Among them, she said, would be a purchase by the Fed of some of their debt or mortgage-backed securities. A spokesman for Goldman, which is advising Freddie on possible ways to raise capital, said the views were Ms. Hammack's and not necessarily those of the firm.If things get bad enough, said Bob Napoli, an analyst at the securities firm Piper Jaffray & Co., the Federal Reserve could make large, 10-year loans to the companies "to make it clear that they have enough capital."
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Other possibilities might include the Treasury buying stock in the companies. In an extreme situation, the government might have to take over the companies in a transaction that might leave little or nothing for existing shareholders.
Option 1 (from the Marketwatch article) is a bail-out, but one that is a bit sly. The government is saying "we'll provide funding if X happens". However, my guess is the possibility of X happening is pretty high.
Option 2 (from the WSJ) is a bail-out of the direct kind, meaning one company takes on the distressed assets of another company.
Option 3 is an indirect bail-out with the Federal Reserve guaranteeing a steady supply of capital until the housing market recovered.
Option 4 is a corporate reorganization, plain and simple where company 1 buys a percentage of the stock of the second company.
Either option is a bail-out, make no mistake about it.
Now a bit of history.
First -- what exactly do these companies do? Basically, they provide liquidity to the mortgage market. The best way to explain this is to compare the mortgage market of 100 years ago and today. 100 years ago, you would go to your local banker and get a loan. If the banker thought you were credit worthy, you'd get a 30 year home mortgage. However, back then the bank would most likely own the mortgage for the entire life of the mortgage.
Fast forward to today. Banks don't keep loans on their books. Instead they sell them to investment banks, who then pool the mortgages into bonds -- either pass-through bonds or collateralized mortgage obligations (or CMOs). These in turn are sold to large, institutional investors like insurance companies, mutual funds etc...
Freddie and Fannie are quasi-public entities, meaning they have government charters but also raise capital from the private sector. In fact, many people who participate in the mortgage market have often felt that Freddie and Fannie have an unfair advantage because of their implied government backing. For years both institutions have said "no, we're not backed by the government." Now we know that's not true. Actually, we've always known that, it's just that now we really know.
Let's take a look at the charts.
Both charts say the same thing:
-- Prices are below all the SMAs
-- The shorter SMAs are below the longer SMAs
-- All the SMAs are heading lower
-- Prices are below the 200 day SMA
In addition, over the last few days both charts have fallen through major support on extremely heavy volume. Traders are dumping the stock as fast as they can. That should tell you something.
And this continues the downward saga of the financial sector in general:
Note the following:
-- Prices are below all the SMAs
-- The shorter SMAs are below the longer SMAs
-- All the SMAs are heading lower
-- Prices are below the 200 day SMA
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Good columns but you tend to lose me on the undefined acronyms.
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You need a box at the end of the article that explains all the acronyms.
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These are all good comments. Allowing the GSEs to fail would be extremely costly. Perhaps it would be extremely stupid. I think many of the commenters here don't understand how enmeshed Fannie and Freddie are in the national economy. Letting them fail could precipitate a depression here, then around the world, while it unemploys millions of people, and does even further damage to our international standing (thanks, George). We can ill afford that. I'm not a fan of gov't bailouts myself, but after wasting half a trillion dollars on these wars, perhaps more of our resources can be spent on propping up home ownership and preventing a worldwide economic meltdown.
Bloomberg reports that a foreign newspaper writes that the treasury is going to fund the two lending miscreants 40 billion dollars to start with. Corrupt, incompetent oversight and practicse are coming home. And the corrupt, incompetent leaders are panicking. Our empty treasury will bail out the broken organizations. They are too big to fail.
What Bush, Paulson and some Democratic leaders fail to ask: "Is the American Republic too big to fail?" If, no. Then why are we risking our currency and economy for the actions of gross larceny and swindling? If, the answer is yes, then what is the contingency plan when the entire financial system collapses from worthless money and a frozen economy and massive unemployment and penurious citizens unable to pay for the basic necessities of energy and food?
Only fools and opportunists continue to bail out a bankrupt economic, financial system.
And where are our Presidential candidates' positions on allowing an independent Fed to cavalierly decimate our currency to save corrupt financiers and oppportunists.
Bailouts, bailouts, get your bailouts. Home "owners", banks, brokerages, Wall Street, Main Street get your bailouts. Yes, Congress, the President, the Treasury and the Fed have bailouts for all occasions. Fraudulent loans blow up in your face, borrow more than you can afford, home "equity" loans for that boat, big screen and credit cards put you underwater? Don't worry; we've got a bailout just for you. Whether you're an ex-CEO who was paid hundreds of millions or just someone thinking they could get in, flip a house and pocket a hundred grand we've got a bailout that will fit your lifestyle. Oh, you really weren't thinking about your "investment" appreciating, you really thought that $175,000 house was worth $585,000? Relax; stupidity is just as good as dishonesty. You'll love doing business with Uncle Sugar where money is something we borrow too! Remember, the money we give you to pay off part of your loan goes straight to the banks, brokerages or millionaires' hedge funds to bail them out too. It's a twofer! Be sure to vote early and often for the pandering politicians of your choice.
The preceding was (will be) paid for by your children, grandchildren and their descendents either through their earnings or the pain of inheriting a bankrupt, Third World Nation. Remember, taking responsibility is a Republican slogan not an actual trait. Shifting responsibility is a Democratic trait not an actual admission.
Well said. The two party system is propping up a house of cards that is due to fall hard and
they will do anything and everything to keep it up until the election. Then it is going to crash.
Bush isn't going to Crawford folks. He's leaving the country.
Looks like the FRE, FNM talk was just a smoke screen for the actual bailout: Indy Mac.
Not sure what you mean. Indymac is a failed bank. They failed. The federal government is not bailing out the bank, allowing them to stay open. They have taken over the bank in an effort to return $19 billion in depositor funds and in an attempt to sell the bank wholesale to a willing buyer, or if that fails, sell it off piece by piece.
Perhaps you think that if the government acts at any time, it's a bailout. You'd be wrong about that.
What a bunch of morons saying "let em fail", "let em fail"...
If the US govt. doesnt bailout the bondholders of FNM and FRE, one by one each of the GSE (govt. sponsored enterprises) will fail. you ask why? answer: cost of capital.
if the bondholders of other GSE's realise that the GSE's dont have the implied backing of the US govt. the cost of capital for these companies would shoot through the roof. pretty soon, all these GSE's would be spending majority of their cash flow just servicing debt.
Privatize profits, socialize costs...got any new tunes for that player piano?
tough!, `let em fail`. life is all about the repercussions of our decisions in life, whether rich, middle class or poor, those rules apply to all.
We understand the cost of capital, but when is enough enough?
If we bail out every GSE that's in trouble all we've done is reward bad decisions and stuck it to the taxpayer.
Captialists are always talking about how the market will correct itself, so let's do it.
Let the GSEs fail. America will come to a screeching halt but eventually people will find ways to borrow money. We might even go back to the old fashioned cooperatives.
What's moronic is where deregulation has taken us.
Oh America, only now are you beginning to see the error of your ways, what a pity it will take the complete failure of your country to before you learn your lessons and can rebuild. many of course will die and be put into poverty before this happens, I can just see the worldvision ads now on the TV. ``Please help us save this American child` only a dollar a day``. Well, your dreaming if you think the world will even lift a finger except our middle one much like you did to us at the UN regarding Iraq.
Bye Bye.
Our leaders better think through taking on a new obligation of guaranteeing five (5) trillion dollars of mortgagees that were made with no oversight and less supervision. Our housing market is going into unprecedent depreciation. It will most likely depreciate 50-65 percent before its all over. In the Great Depression housing declined about 75-80 percent in three years (1929-1932). So, a 50 to 60 percent correction is a conservative estimate.
If the Fed is taking on the policy of guaranteeing these motrgages with borrowed-printing press dollars, what is the result? The answer is self explanatory. Immediately, there will be a run on the dollar combined by a refusal of our "trading partners to loan more monies. Interest rates will shoot skyward. There will be a scramble to buy up every thing that is not tied down in our bankrupt country. Finally, the dollar will collapse and the entire economic system will be subject to the influence of other than members of the Republic.
There is only one terrible decision that can be made by our national leadership: Let the entire system collapse. Immediately declare insolvency and create a new currency. Place a stop on foreign intrusion into our finance and economy and begin a new policy and procedure of economic self-sufficency as we prudently withdraw our military from overextended committments we can not meet.
If we bail out failing organizations, the result will be the total loss of our independence aa a democracy and Nation.
An important reason for Freddie and Fannie's predicament is that they both have been recently being used to buy up (bail out) the bad (worthless) loans-mortgages the "private" banks and investors were holding.
Very true and very underreported.
It has been underreported since the "stimulus package" included a provision nearly doubling the allowable mortgage limit for Fred and Fannie to $730,000!!
It was obvious that the intent was to bail out banks with overpriced houses, not save "low-income" purchasers of homes.
Now, the "debate" is about "bailing out" public supported entities, not "private" investors.
Ah yes, the "free market". What a sham. What a rip-off. What a shame.
Kudos for another excellent article on the mortgage biz Hale!
If I were making bets in this mess I'd stick to Chase. Good old Chase, they were always like the tortoise among the hares of Wells, Countrywide and Wamu to name a few. I worked for a company that sold loans in mass and we were always offered some big promises from other companies that fell through. But we always ended up back with Chase.
No I don't work for Chase, I'm not even in the business anymore, I struggle between part time jobs. But I saw a great interview with the CEO of Chase on Charlie Rose the other night. In stark contrast to many in the biz, including my old boss, Jamie Dimon CEO Chase, "If I have to teach you integrity, I don't want you."
Chase is my mortgage holder. I've wondered how they rack and stack in this mess. Nice to read someone write so glowingly of them. I like Dimon's line about integrity.
Chase also holds mine. I specifically went with them back in 2003 when I re-fied.
Knock on wood, I don't think Dimon would want to have to do another bailout, that was part of the interview. The other thing I like about him, is that he seems to know this business isn't about him, it's about a bigger pictures of people who have jobs, loans, and the US economy. There were tons of Peacocks out there just bragging about how much volume they did, bragging about themselves.
Another thing is that I don't think Chase ever did the "Option Arm" loans. I'd be interested to know the foreclosure rate on these.
Chase was always a little slow in paying, and we'd get promises from others that they'd pay more or faster(meaning more money b/c less time on the books). What happens is there are all these documents and people in warehouses going through them. Chase would hold back a percentage of money based on docs missing. But bottom line, Chase always lived up to their promises. Under promise, over deliver.
Let them fail, no bail outs
But your friends who write the laws say otherwise.
Instead of the fleecing of America we should call it the raping of America
Appropos.
Why not Option 5? Let them fail!
What we're practicing in this country is national socialism, the privatization of all profit and the socialism of all loss.
If they fail there will be winners and losers. Local banks with plenty of money might just get back in the home finance business.
Like you I'm a Texan and my dad was in the oil patch when it went t.u. 1982 and 1983. No one bailed out the oil industry. He fabricated vacuum trailers, frac tanks, lay down pick up machines. All are big ticket items if you're a small businessman (like the salt water haulers are); to get financed they needed to buy a truck and get the two sold as part of the deal. After 82 you couldn't get anything financed new or used.
No one shed a tear for those hard working men in the oil patch. No one shed a tear for the 100s of thousands of Texans who lost their homes. It was considered part of the game so why should we bail out Wall Street?
I'm vehemently opposed to taxiing windfall profits on oil companies and I find it ludicrous Congress persists in wanting them to solve the nation's energy problem (they are oilmen). And I'm incensed we're going to make the taxpayer eat another 300 billion in debt which now looks like it will be 5 trillion.
Let them fail, pick up the pieces, start over. Maybe next time Americans will demand regulation.
I say we use the Iraq method. Just print up 800 tons of $100 dollar bills, shrink wrap them on pallets and randomly lose them. Do this every week until everyone has a pallet of hundreds and take it form there. It's straight forward, fair and by Republican standards, economical.
Been saying that all year, olephart...since the "stimulus package" was announced.
Ever since Bernanke hinted Freddie and Fannie should buy the CDO crap, we saw THIS coming.
Privatize profits, socialize costs: The Republican Way.
Yeah, during the introduction of the new American product line.... Bailouts for All Seasons and Occasions..... didn't Paulson, Bernanke, and the Chimp increase F & F's charters to eat a larger volume of mortgage garbage?
It was a kind of "wink-wink, nudge-nudge" type of thing, with a CYA implied. One of those little secrets that everybody knows.
Since the advent of supply-side tinkle-down on us, the commercial lenders have been trying to kill F & F. Not because of their government "connection", but because they wanted a bigger share of the business, and F & F also annoyed them by exerting pressure on the spreads?
Help me out here.
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Posted July 11, 2008 | 10:30 AM (EST)