Marketwatch reports that the government discussed a contingency plan in case the unthinkable happens, and Fannie Mae (FNM) and Freddie Mac (FRE) were to fail.
But don’t worry — the Bush administration DOES NOT expect the entities to fail. And, they note no rescue plan is imminent.
Rex Nutting says Uh-Oh! This is a major contrary indicator, and it suggests Freddie and Fannie are toast!
Why?
"Is there any surer sign of an impending disaster than a reassurance from the White House that it doesn’t expect it to happen?"
Rex adds this short list of other things that the Bush administration didn’t expect:
Terrorists to fly airplanes into buildings.
Saddam Hussein to have been telling the truth about not having any weapons of mass destruction.
Iraqis to object to a long-term occupation by a foreign power.
Hurricane Katrina.
People in New Orleans to object to the government’s response to Hurricane Katrina.
The Democrats to take control of Congress.
The Democrats to cave in so easily on important issues after they took control of Congress.
Scooter Libby to get caught.
Jack Abramoff to get caught.
Abu Ghraib to be discovered.
Scott McClellan to smell the coffee.
The housing bubble.
The credit bubble.
The housing collapse.
The credit squeeze.
Bear Stearns to fail.
Gee, that’s a tough list to argue against . . .
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Source:
Bush administration’s faith is a contrary indicator
Rex Nutting
MarketWatch, 9:54 a.m. EDT July 10, 2008
http://tinyurl.com/6ddrnx
You forgot $4/gallon gas.
Oh, how I miss the days of cheap $4/gal gas…
Nice one. Since you are in a humorous mood today, this is on Yves Smith’s site today:
Q: What’s the difference between a pigeon and an investment banker?
A: The pigeon can still make a deposit on a BMW.
I don’t get it… are you saying that the Chimp – world’s biggest polluter – isn’t in control????
… and we. believe. in a strong. dollar.
“Q: What’s the difference between a pigeon and an investment banker?
A: The pigeon can still make a deposit on a BMW.”
First heard that right after the 1987 panic. Thought of it the other day.
…Obviously a reference to the Australian dollar.
Barry, I thought you preferred critical thought to political mud slinging. I’m not seeing how a long list of unrelated problems relates to the particulars of Fannie and Freddie.
Looking at a worse case scenario, where banks might fail, would you really expect the White House to announce to the populace that they should run to the bank and pull their money out before someone else beats them to it? The White House is providing leadership and I would expect that of any president, R or D.
Back to Rex, I believe that Fannie and Freddie are to big to be allowed to fail. So, what Rex says would appear to be wrong and appears to be politically motivated through his own wishful thinking. Time will tell.
…Obviously a reference to the Australian dollar.
leftback,
Q: What’s the difference between a porcupine and a BMW?
A: The porcupine has the pricks on the outside.
Exactly how does a run on Fannie Mae take place ?
Back to Rex, I believe that Fannie and Freddie are to big to be allowed to fail. So, what Rex says would appear to be wrong and appears to be politically motivated through his own wishful thinking. Time will tell.
You must work on Wall Street with that odd twist on logic. While technically they may not “fail,” the common shareholders will be wiped out, the taxpayers will have to bail the entities out and either our taxes rise or the nation goes deeper into debt. So by not failing you still have a giant, what’s the term? Oh… “clusterf**k.”
But…but…No one could have foreseen that allowing Freddy and Fannie to take those loans on their books was a bad idea!!!
Before people start going to far claiming the fiasco at FRE and FNM are all Bush’s responsibility, read this article from 2004. Here’s a snippet:
“Both political parties have bought into the idea that a vast, unfettered Fannie and Freddie are good for the country, and have only amplified the GSEs’ “American Dream” rhetoric. Republicans are still invested in the deregulation of Fannie and Freddie they helped engineer in the late 1980s. Democrats, generally the party of more regulation, have historically been Fannie and Freddie’s best friends, and the GSEs’ lush executive suites are packed with former Democratic staffers: Raines was Clinton’s director of the Office of Management and Budget, and his predecessor, James A. Johnson, a longtime aide to Walter Mondale, is now leading John Kerry’s search for a running mate. In the hearings on the Hill, neither Democrats nor Republicans have seemed favorably disposed to strict regulation of Fannie and Freddie, and American Banker has concluded that the GSEs’ lobbying power is strong enough that no regulatory bill will pass without their okay.”
Plenty of people forecast the problems in our financial system. We only have our elected representatives, and therefore ourselves, to blame for this situation. It’s time to focus on fixing it.
“Exactly how does a run on Fannie Mae take place ?”
Since, you ask, I’ll reply. The “run on the bank” was purely a quick example that we were all familar with. Your readers are too astute to need a lecture from me on bank runs. I was trying to illustrate that confidence plays an important piece of any economy. Which the WH is trying to provide.
Fannie Mae and Freddie Mac are thought of as government entities, but are traditionally funded with private funds. Fannie Mae just sold some 2 yr benchmark funds but had to pay a premium because their investors didn’t have “faith”. And the cost of borrowing is influenced by faith (risk) that it will be returned.
If I failed to be clear, ask again if you like.
Too big to fail, or too big to bail?
In addition to the shareholder’s price falling to zero, I suspect that the feds may not actually decide to back 100% of the outstanding balance of the securities.
Wouldn’t that be a kick in the teeth?
Market’s already starting to price that in, aren’t they?
Another worthwhile read from 2003. Here’s a sample:
“The best brains on Wall Street were unable to analyze and understand the evolving risks in Long-Term Capital. Freddie Mac and Fannie Mae’s risks exceed those of Long-Term Capital, therefore to efficiently regulate Freddie Mac and Fannie Mae, uniquely capable professionals are required with exceptional expertise in housing, mortgages, asset-liability structuring and securities portfolio risks.
It is unlikely that the Office of Federal Housing Enterprise Oversight has the expertise required to monitor the changing risk exposures of the GSEs. In fact, because of their size and diversity, it is unlikely that such expertise exists in any department within the federal government, or anywhere else for that matter.”
Be sure to read the last line of the article, though, and remember it was written in 2003.
Steve Barry’s comment gave me pause to think. Reality has many viewpoints.
I was looking at this externally, and not from the viewpoint of someone directly funding Freddie and Fannie. I suppose I thought that the government would step in to prop up Freddie and Fannie, but you are implying that this would not occur until Freddie and Fannie file bankruptcy, wiping out investors.
Maybe your right. I don’t know.
Heck-of-a-job Freddie…
Oh wait.
When they say that “no rescue plan is imminent”, that just means that
the final draft on the bailout plan needs a little editing and proofreading.
Although I’m too chicken to take a position, my bet would be that short sellers can still make a lot of money in these names… the Bush/ Paulson/ Frank bailout plan will flush the stockholders down the toilet.
When I’ve wondered or thought about them “failing”, I’ve asked myself how much Ben and all the rest want to be seen as the pariahs of the central banker set. To even think of defaulting (that’s what bk would or could do) on all that agency debt that all those other central banks have bought from us (and it’s been a very large amount)….i don’t think anyone should hope for what comes from that.
Rock,
I implied that? Damn I’m smart. I really wasn’t implying BK for F & F…the Government would likely step in before that. The companies would probably be nationalized and the shareholders will be for all intents and purposes wiped out. They probably won’t raise taxes to pay for this, just create some electronic entries somewhere that add to our debt and make it harder to attract the capital we need to keep the dollar a viable currency, which will make…oil rise (seems all roads lead to that).
Silly immature post Barry. To often I come here for serious discussion and leave shaking my head. Oh well, I’ll check back in a month….
Yes, I come here at 10 at night for serious discourse also — right after the Goldilocks cartoon,
Scott, ya gotta loosen up a bit
let’s hope senator schumer doesn’t chime in, or we’re in a world of shit.
let’s hope senator schumer doesn’t chime in, or we’re in a world of shit.
Barry, your retail broker doesn’t need to bother buying Fannie and Freddie – we are all going to end up “owning” them -whether we want to or not. What a mess.
I think people are confused because of the Bear Sterns bailout.
Normally, when a bank is nationalized, stockholder value goes to zero.
That it didn’t with Bear was unusual, and why so many people were (as Gramm would say) “whining” about it.
How about letting them fail, putting the mess on long term toxic clean up and getting government out of this version taxpayer funded mortgages altogether?
At least if they blow it up the public will be less willing to accept market socialism in the future. There may be a benefit to this explosion
If the GSEs fail, there will be a depression. Period. World wide. No question.
Mind you, I think there’ll be one anyway, but letting these chumps get the failure they deserve will kill our kid’s economy, never mind ours.
Me, I’d like to see public executions as a condition of a takeover…. but that’s just me.
“Too big to fail, or too big to bail?
In addition to the shareholder’s price falling to zero, I suspect that the feds may not actually decide to back 100% of the outstanding balance of the securities.”
If you’re a holder of the agency debt, which is worse: getting paid 50 cents on the dollar, or getting paid in full but the underlying dollar devalue 50%? what’s the implication of the dollar when uncle sam double the national debt in a blink?
Politics……about the only thing thats worse then the economy this year!!!!!
My take on politics…..Both parties suck, both presidential candidates suck AND both parties put us in this mess BOTH!!
Glad I am an independent, I would be completely embarrassed in public if I was labeled either a republican OR a democrat.
We nee a viable common sense 3rd party.
I think US citizens are finally waking up to the 2 party cabal we have.
“Terrorists to fly airplanes into buildings.”
Come on. Do sane people still believe in the story about Osama Ali baba and the 19 coke heads?
posted above “when a bank is nationalized, stockholder value goes to zero”
thats a subject for review … why do you investors let that law exist?
seems you helped in the abvances of the corporation, when all the real assets are divided up and sold off, why don’t you get your cut?
seems the board and top execs should be stripped back to normal people bankruptcy rules … they can keep a modest home & $15K car to get to their new job (Swiss accounts stripped bare) and a thank you for trying and best wishes at your next venture
Fannie and Freddie are two political cash cows which need to be lead to the slaughter house, not nursed back to health.
“why do you investors let that law exist?”
Err, what?
As a stockholder, you’re an OWNER. If the thing you own has no value (which is what “failed” means), then you don’t get jack. Which seems eminently fair.
People who are owed money by these failed institutions are first in line to get paid. If there’s anything left over, you get it.
Would you propose a different solution?
Good grief, has it really been so long since a decent downturn that we have to explain this stuff?