This mornings must read article is Bloomberg’s summary of former St. Louis Federal Reserve President William Poole comments on the GSEs:
"Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.
Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won’t have enough capital to weather the worst housing slump since the Great Depression. The company’s credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said."
Sheesh, yet another bailout coming. How about we go back and recover some of that ill-gottenthe bonus money the corporate execs paid themselves over the past decade?
Fannie Mae (FNM) and Freddie Mac (FRE) still have a Aaa rating, according to the the agenices in charge of such things, criminal incompetence notwithstanding (that is an another discussion entirely). But derivatives traders aren’t buying that nonsense, and are trading the GSEs as if they were rated five levels lower.
Phonie and Fraudy (where ever did I steal that from?) also gets front page treatment in today’s WSJ.
I also had a good quote in CNN Money onTuesday: "The only thing surprising is that anyone was surprised by the problems."
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Previously:
Fannie Mae Looks Like Hell (November 16 2007) http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html
Fannie Mae: Ouch! (November 20, 2007) http://bigpicture.typepad.com/comments/2007/11/fannie-mae.html
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Sources:
Fannie, Freddie `Insolvent’ After Losses, Poole Says
Dawn Kopecki
Bloomberg, July 10 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=as4DEc5UFopA
U.S. Mulls Future of Fannie, Freddie
Administration Ramps Up Contingency Planning as Mortgage Giants Struggle
JAMES R. HAGERTY, DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, July 10, 2008; Page A1
http://online.wsj.com/article/SB121564782376340951.html
Fannie, Freddie Downgraded by Derivatives Traders
Shannon D. Harrington and Dawn Kopecki
Bloomberg, July 9 2008
http://www.bloomberg.com/apps/news?pid=20601009&sid=aY0CwXhA.F3w&
Feeling Fannie’s and Freddie’s pain
Chris Isidore
CNNMoney July 8, 2008: 4:49 PM Thttp://money.cnn.com/2008/07/08/news/economy/fannie_freddie/index.htm
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Fortune: The Fannie and Freddie doomsday scenario; It’s time to wonder what would happen if Fannie Mae and Freddie Mac failed. “If Fannie or Freddie failed, it would be far worse than the fall of Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”…
Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company’s market capitalization – the number of outstanding shares times the share price stands at $8.7 billion… Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.
More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid…That would allow give officials the ability to argue that they weren’t bailing out the companies, but rather making an investment that would pay off in the long run.
First they bankrupt the government, then the quasi-government. Next, will they bankrupt the pseudo-government? All just to make sure no more money gets spent on the “welfare state?”
This should clear up any shadow of a doubt for those who weren’t sure if we were screwed.
This should clear up any shadow of a doubt for those who weren’t sure if we were screwed.
This should clear up any shadow of a doubt for those who weren’t sure if we were screwed.
This should clear up any shadow of a doubt for those who weren’t sure if we were screwed.
I don’t think you can blame the rating agencies for their AAA rating. I’m pretty sure that rating is based on everyone knowing the US Govt will bail them out…
I don’t know why everybody’s so nervous and whiny about Fannie and Freddie — after all, Phil Gramm says we’ve never been more dominant.
In an interview with the Washington Times today, former senator Gramm, who is Sen. John McCain’s (R-AZ) “econ brain,” blamed the state of the economy on “the conviction of many Americans that economic conditions are the worst in two or three decades.” “You’ve heard of mental depression; this is a mental recession,” said Gramm.
“We have sort of become a nation of whiners,” he said. “You just hear this constant whining, complaining about a loss of competitiveness, America in decline” despite a major export boom that is the primary reason that growth continues in the economy, he said.
“We’ve never been more dominant; we’ve never had more natural advantages than we have today,” he said. “We have benefited greatly” from the globalization of the economy in the last 30 years….Thank God the economy is not as bad as you read in the newspaper every day.”
Whew. I feel better already. Time to go shopping!!
Of course they’re insolvent. The two GSE’s hold more toxic mortgages than anyone else. They were pressured by congress to become the new subprime lender for the market after all the subprime lenders went bankrupt or were taken over by Bank of America.
James Lockhart knew this was coming. That’s why he stated it was a bad idea to raise conforming loan limits. Regardless of what Lockhart says now, he knows they’ll have to raise a lot more capital one way or the other. Since it’s difficult to raise capital when your stock price is under $10, look for the GSE’s to borrow from the federal reserve in the not too distant future.
The readjustment and restructuring of the economy has begun. We are witnessing the beginning of the dismantling of large sections of the FIRE economy (finance, insurance and real estate). Although certain GSEs really ARE too big to fail, we will be surprised to see how many financial institutions are not too big to fail – and let’s face it, they deserve to fail. Treasury cannot backstop them all or the $ will collapse.
On the positive side, it is possible that the manufacturing side of the economy is already beaten down as far as it can go, and that we will see a recovery in that sector quite soon. The presently ongoing drop in oil and commodities prices will be a boon to many companies.
On a related note, in recent years it has been completely unfashionable to study math, science and engineering (except as a stepping stone to Wall Street). I would suggest that this is about to change in a big way – and that education and technology will be the focus of the Obama administration. The MBA classes might be a little smaller though….
Notice how Poole said that they are insolvent when using Fair Value Accounting rules.
I am not sure that I have a point…except to say if this mess ever turns around the earnings “write ups” will be exceptional.
Please don’t stop the beatings—they feel so good!!!! It must be all in my head!
“You’ve heard of mental depression; this is a mental recession,” said Gramm.
“We have sort of become a nation of whiners,” he said. “You just hear this constant whining, complaining about a loss of competitiveness, America in decline” despite a major export boom that is the primary reason that growth continues in the economy, he said.”
I only THINK my job went to India and there are no replacement jobs. The major export that jerk is talking about is OUR JOBS.
What do we export? TVs? IPODS? Computers? Autos? Auto parts? Just jobs. Even the state of Georgia now says we need to get rid of our IT staff and hire IBM to send those jobs to India. I would really like to know what cloud these asshats live on.
“Even the state of Georgia now says we need to get rid of our IT staff and hire IBM to send those jobs to India. I would really like to know what cloud these asshats live on.”
It ensures Georgia has lower taxes, and that’s all that matters to most Georgians, right?
Someday, the poor class and lower middle-class will get mad and start shooting.
Poole’s comments calls out Lockhart as a LIAR!
Gramm’s always been a nut-job. he’s been on the Bd Directors at UBS for a while now, i wonder if his specific duties were to oversee the tax-avoidance scheme by US billionaires secreting their money out of US into Lichtenstein.
Why is incompetence is a prerequisite for gov. employment? I’m willing to bet, there are a 100 plausable solutions to this mess.
Why not employ the same structure as low income housing? ex: Gov. steps in and backs the note up to a certain % of which will be deducted (artificially) from the principal. When the owner sells, he/she for goes both the capital gains exemption and must repay the temp. forgiven principal amount w/ interest.
Or just legalize pot. Pot = Munchies = More Snacking = Increase in Food Manufacturing = Higher Employment, Income = More Income to Pay Debt = Lack of debt means more purchasing power = More Pot Purchased =
Talk about renewable
Fannie and Freddie are standing on the knife’s edge before being saddled with another huge sour debt burden from the housing rescue bill pending…..
LEH cratering, they realize they have to get their price down to a level in single digits so they can squeeze thru the bailout door before FNM, Fred
Jim Rogers said Fannie was going bankrupt 4 years ago. People thought he was crazy.
Yes, Redfish Mark, what is going to happen to the political reality now that Fannie and Freddie will become another Gov’t agency.
This rescue was always about saving banks and giving the political types cover, with the GSE’s rotting flesh stinking up D.C. it gets harder to move the shell.
“Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.”
Bush could, say after the election in December, but before the next guy takes office. Neither McCain or Obama would want it hanging on their neck and a bad problem can just get blamed on the previous guy. Although I admit it would be more likely for Bush to do it if McCain were elected.
It seems to me we are witnessing the huge unintended consequences of creating a regulatory/tax scheme that massively encourages home “ownership” v. renting.
In market terms, we have created a housing market “full of longs” without many “shorts” (renters.) And obviously, a decent number of the market “longs” are on margin. This was also the situation for the Nasdaq in 2000. We have many, many years to unwind this situation.
In a broader view, the massive subsidization of exurbia and urban sprawl is now creating debilitating resource strains (gasoline/water/power). This was a trend decades in the making.
Unfortunately, the next 50 years may see a wrenching transformation that alters this trend. The suburbs/exurbs may become the American slums, the place where poor people live because multi-family living will be cheap. The middle/upper class will move back to the cities. The good news is we will see the revitalization of our urban centers and will become a much more effecient/productive nation. The bad news is the massive wealth that will get destroyed in the suburbs.
There are novel solutions to this mess…unfortunately it will take a lot of leadership, which we are definitely short right now.
– AT
What about the risk bailouts would pose to the government’s credit rating?
In April:
“A deep recession could force mortgage-finance titans Fannie Mae and Freddie Mac to require a federal bailout large enough to hurt the U.S. government’s top-grade credit rating, Standard & Poor’s warned Monday…”
Both Gramm and Poole are “idiots”. Poole’s statement is like the proverbial yelling “fire” in a theatre…
Check out this WaPo article from April 29, 2008, just after 2007 executive bonuses were awarded. Lots of good laughs:
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/29/AR2008042902699.html
Second paragraph:
The compensation committee of Freddie Mac’s board listed a variety of “notable accomplishments . . . that have better positioned the company,” including its “market-leading response to early signs of the subprime crisis.”
Market-leading response! HA!
“Sheesh, yet another bailout coming. How about we go back and recover some of that ill-gottenthe bonus money the corporate execs paid themselves over the past decade?”
BR – Thank you, Thank you! Finally someone is calling out on the profits that were made over the last few years. It’s not like the money ceases to exist, it’s just in the wrong hands.
In an interview on This American Life (http://www.thislife.org/Radio_Episode.aspx?episode=355) they talk to a guy who was at the hottest clubs drinking Cristal and spending $10k per week as a beneficiary of the housing boom. Angelo Mozilla sold $140 million of his personal holdings, and almost $600. million of insider stock.
Why, as a taxpayer, am I footing the bill?
Two comments from hearings today that will be worth revisiting in a few months:
Paulson: Fannie and Freddie are adequately capitalized.
Bernanke: We have not lost a penny on any of our lending.
– AT
William Poole is an idiot, he does not understand how freddie mac and fannie mae make their money. These two companies are absolutely not going out if business. They are monopolies, they charge only 18 basis points to guaranteed the loans, they don’t need to raise any more money, just jack up fees they charge to insure by them.
Frank – Bill Poole is technically correct. According to Fair Value Accounting Principles, Fanny Mae and Freddie Mac are insolvent.
I agree with what you wrote though. Now – if they are forced into insolvency, then Fair Value Accounting is to blame.
Fair Value accounting is causing great fear in this time of crisis. This is the unintended consequence of “mark to market”.
Ah, yes. Franklin Raines. Ain’t affirmative action grand?
I see some splits going on in the commentary. Can anyone work through the bailout gap of fundamental value, fair value, and the value derivatives guys value? I’m all for multiplicity of analyses, but of value, I’d like to shorten my odds on grounds of transparency, full and timely information, and a decent analytics team behind me, not mixed-incentivised about the proposition.
But where’s the money, where will it come from, and what will it mean? Not least when the next sector busts.
M