Barney Frank: Treasury GSE Intervention is a “Done Deal”

Congressman Barney Frank, Chairman of the Financial Services Committee, says this is really happening:

"Rep. Barney Frank (D., Mass.) confirmed that Treasury Secretary Henry
Paulson is planning government intervention to back troubled mortgage
giants Fannie Mae and Freddie Mac.


The chairman of the House Financial Services Committee, said in a
statement Saturday that Mr. Paulson "intends to use the powers that
Congress provided it" in a law passed in July to keep Fannie Mae and
Freddie Mac stable and functioning. But Mr. Frank said he didn’t "know
the details of the proposed interventions," and a Treasury spokeswoman
declined to comment…

It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said…

Among the issues with which Treasury has been wrestling is whether to make an investment at such a low price that shareholders are effectively wiped out. Mr. Paulson is cautious about any plan that appears to benefit shareholders because he doesn’t want the government to be seen as bailing out investors who for years profited from the companies’ success."

Any questions?

>

Source:
Frank Confirms Treasury Intervention To Shore Up Fannie Mae, Freddie Mac
DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, September 6, 2008 2:39 p.m.
http://online.wsj.com/article/SB122072588739407007.html

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  1. larster commented on Sep 6

    If he knows it’s happening, one would assume that he knows the details, or maybe the details are still being worked out. Also interesting that Paulson wants to punish the shareholders, most of which are innocent byst5anders with no real influence, and let’s the top exedcs retain all of their bonus monies and inflated salaries. That’ll show ’em Paulson.

  2. jeffg166 commented on Sep 6

    let them eat cake.

  3. Jim Haygood commented on Sep 6

    ‘Mr. Paulson “intends to use the powers that Congress provided …” But Mr. Frank said he didn’t “know the details of the proposed interventions.” ‘

    This is the very definition of a rubber-stamp parliament. They passed a “law” giving Paulson a blank check. But they have no idea what’s in it, or what it does. Much like the Patriot Act, waved through unread by anybody.

    What a way to run a banana republic. Death to the dollar! America number 1!

  4. JustinTheSkeptic commented on Sep 6

    Can’t reach anywhere in my brian to explain the pain, must have capital, by the Capital, to provide U.S. Zilch.

  5. Terminator_X commented on Sep 6

    larster,

    The culpability of the shareholders is irrelevant. They knew the risks they were taking when they bought the stock. What is being proposed is for the government to absorb all future downside in the operation of these companies. The shareholders, common and preferred, should be wiped out before this occurs. If Uncle Sam takes the downside, no private party should take the upside.

    I’m also curious as to how FNM’s and FRE’s subordinated debt holders and derivative counterparties will be treated. It could be that payments on some of those obligations will be delayed until the entities regain solvency and Uncle Sam is made whole.

  6. show me a free market commented on Sep 6

    Barry, how in the heck can you suggest any of this even remotely has anything to do with a free market? When money is “fiat” (i.e. decreed by the government) and interest rates, the most important price in an economy, are set by 12 men gathering in a room? That has more to do with the Soviet Union than with free-market capitalism. When a highly-leveraged fractional reserve banking system is strongly encouraged and maintained purely by a government ‘lender of last resort’ (i.e. the Fed), then of *course* such a government-run monetary system is grotesquely unstable and prone to regular panics, crashes, and deleveragings. Without a lender of last resort and without the FDIC, our economy would never have gotten anywhere near as leveraged in the first place, and hence wouldn’t be in danger of catastrophic *de*leveragings (any bank that took on too much risk would quickly see a “run” to put it back in its place, and giving warning to other banks to be conservative.) Give me a gold standard and pure free-banking system with no Fed — then we can start talking about how the free market operates.

  7. Stuart commented on Sep 6

    They passed legislation in July to pave the way for this bail-out. Why so many people are surprised by this action is, well, to be polite, odd.

  8. Paul Jones commented on Sep 6

    The Congress is a non-entity; we live in an Imperium.

  9. JustinTheSkeptic commented on Sep 6

    Show me free markets, I would wager to bet that your 50x the brain than me about this stuff, but didn’t we have very high inflation back in the days when Spain was bringing in tons of gold from the New World? Hence what really needs to be figured out is what is the “fiat” ratio of currency to “living bodies, in global economies,” that best suits a expandable, yes not too inflationary invironment. Am I right or wrong?

  10. JohnB commented on Sep 6

    Right on, Stuart.

    Where were all these free market complainers when the problem was being created? Oh yeah, they were in line to get a below-market 2% teaser ARM, just like everyone else. Or maybe they were flipping houses. Or riding the bull market in equities.

    We are where we are today, and Paulson will come up with the best possible solution, going forward.

    Does anyone have a better idea? Should Paulson walk away from this whole mess? Let’s discuss the downside of doing that.

    What BS gets posted on these comment threads. Incredible bunch of fools out there. Scary thing is, they vote.

  11. John Borchers commented on Sep 6

    I like the comment about how FRE and FNM were profitable to shareholders.

    My 401k has a snippet of both FNM and FRE (because of SPY). It’s only been a loser now for the last 6 years.

  12. JohnB commented on Sep 6

    “The Congress is a non-entity; we live in an Imperium.”

    Excuse me, but it is well documented that Congress was thoroughly corrupted by Fan and Fred during the years when they were doing their damage to the free markets. Congress was a fully-involved co-conspirator.

    Congress is now more than happy to give the Administration full power to clean up the mess and pretend that congress was in no way involved.

    Dirty, dumb politics in the legislative branch is hardly an Imperium.

  13. Jeff commented on Sep 6

    Once Fannie and Freddie are “saved”, their CEO’s and top level officers need to be salary and compensation capped like the rest of the federal workers…the current cap is $191,300 (an no stock options or bonuses). That will free up a ton of money that can be used to buy up mortgages…

  14. show me a free market commented on Sep 6

    Justin, it’s true that there was inflation as a result of New World gold discoveries, but that pales in comparison to the inflation we see with fiat currency. The Spanish gold inflation averaged out to about 3% a year over that century. And that’s the *worst* inflationary episode ever seen under a gold standard. In contrast, look at all the inflationary disasters over the past 100 years — from Weimar Germany to Zimbabwe.

    But more broadly: Let the people decide what they want to use for money; they will choose whatever element best serves their economic interests. Historically this has been gold, but if a better element comes along the free market will switch to that. In any case, most importantly: take our monetary system completley out of the hands of the government. Separation of State and economics — in the same manner and for the same reason as separation of Church and State.

  15. show me a free market commented on Sep 6

    Justin, it’s true that there was inflation as a result of New World gold discoveries, but that pales in comparison to the inflation we see with fiat currency. The Spanish gold inflation averaged out to about 3% a year over that century. And that’s the *worst* inflationary episode ever seen under a gold standard. In contrast, look at all the inflationary disasters over the past 100 years — from Weimar Germany to Zimbabwe.

    But more broadly: Let the people decide what they want to use for money; they will choose whatever element best serves their economic interests. Historically this has been gold, but if a better element comes along the free market will switch to that. In any case, most importantly: take our monetary system completley out of the hands of the government. Separation of State and economics — in the same manner and for the same reason as separation of Church and State.

  16. jeff d. commented on Sep 6

    i guess we know why the USD has rallied and commodities have crashed for the last 6 weeks… the central banks needed to get a running start before they launched the most coordinated and destructive phase of completely debasing our currency and hyper-inflating. surely, they couldn’t do it with USD plumbing its lows and commodities heading into orbit!

  17. SINGER commented on Sep 6

    WHAT WILL THE MARKETS DO ON MONDAY AND BEYOND???

    IS THIS MOVE BAD FOR EQUITY MARKETS???

    EITHER A BIG DOWN MOVE AHEAD = BAD

    OR

    A BIG UP MOVE NOMINALLY WITH REAL GAINS BEING NON-EXISTENT = BAD

  18. Abbott_Of_Iona commented on Sep 6

    The Preferreds may not be wiped out. But will they get their coupon?

  19. JohnB commented on Sep 6

    “But more broadly: Let the people decide what they want to use for money; they will choose whatever element best serves their economic interests. Historically this has been gold, but if a better element comes along the free market will switch to that. ”

    iPods. Let’s agree to use iPods as our new currency.

    Think about how “gold” dates you when you use it as an answer. Ask anyone under 30 if they would prefer a new iPod or its equivalent in gold. Not hard to predict their response.

    Gold is only the answer if we all agree that it is the answer. I suspect most people in this world would attach greater utility to “oil” or “food” or “iPod” than to “gold”.

    Or maybe even “the dollar”.

    You know, apart from the kooks who post on BR’s threads and elsewhere, I’m willing to suspect that this Fannie/Freddie transaction is not the doom and gloom driver that people think it is, but rather it is pretty much already priced in.

    Disagree? Then tell me, where is the surprise in this weekend’s pending news?

  20. JustinTheSkeptic commented on Sep 6

    JohnB, maybe we should go back to JohnC – John Calvin, and start all over down this slippery-slope…because it do seem that that is the direction of man, and your right man!

  21. show me a free market commented on Sep 6

    JohnB,
    “Gold is only the answer if we all agree that it is the answer. I suspect most people in this world would attach greater utility to “oil” or “food” or “iPod” than to “gold”.”

    JohnB — we *did* all agree that gold was the answer — until FDR made gold illegal and confiscated it all, and made it illegal to make any contracts in gold terms. In other words, the government had to *force* people to stop using gold, at the point of a gun (and threat of jail).

    JohnB, you will quickly *re*discover the utility of gold when you try to carry $100 worth of oil in your pocket to buy groceries with. Or when you try to use your ipod to buy a newspaper, and you get 98% of an i-pod back as change.

  22. JustinTheSkeptic commented on Sep 6

    JohnB, who’s saying that this is doom-O-gloom, in itself??? This is speed-bump-to doom-O-gloom. Where tell us do you think the U.S., ah! the World Economies will be two years hence?

  23. JustinTheSkeptic commented on Sep 6

    Showmefreemarkets, but would you not agree that one man/woman today is in “total welfare terms,” better off than one man/woman in the days of yore? To suggest that liquidity never needs tweeking is being a bit nievte.

  24. matt commented on Sep 6

    Hank, is that a bazooka in your pants, or are you just happy to see me.

  25. free markets commented on Sep 6

    Poster above said: …”Gold is only the answer if we all agree that it is the answer. I suspect most people in this world would attach greater utility to “oil” or “food” or “iPod” than to “gold”. Or maybe even “the dollar.”

    I would agree to a peg that available in nature and is not man-made, like i-pods, dollars, test tube babies, and make sure that it expands at an aggregate pace that matches the real economic growth around the world…

    – Layman

  26. frank commented on Sep 6

    i own skf, maybe i can get bailed out….but in all reality what does this mean for the market?

  27. NOah commented on Sep 6

    Yea, two:

    1) So my FNM OCT $5 PUTS will be good for Monday & beyond?

    and…

    2) Where does GOLD open? Up $30? $40?

  28. NOah commented on Sep 6

    Frank,

    I love SKF, normally between 90-100, and owned it a number of times over past 12 months. However, I think the market will interpret this as a removal of systemic risk, and will tighten spreads significantly in the weeks to come. I would expect a fairly sustainable rally in all financials.

    Normally, I would want to buy SKF in mid 90s, and buy more as it falls to build the position. This time, be careful. I prob wont buy it until mid 80s to start the position cause I think this financial rally will last longer than some think.

    Ultimately, we still have plenty of pain so the short play, and SKF will be in favor again, but not in very near term I dont think.

    Just my two cents

  29. Steve Barry commented on Sep 6

    Let me add my 5 cents (2 cents inflation adjusted). What happened here is that part, of course not all, of the US went on a drunken binge, courtesy of our rich Uncle Al. They spent like mad and did lots of damage to the hotel room. Now we all are stuck with the bill, even if we did not join the party. This analogy must be multiplied on a scale that boggles the mind. This credit chart will show you how big a mess was made. The only result I can envision is a Depression. Nothing can stop it…can’t even contain it. If you were born in 1937 let’s say, missed the heart of the Great Depression, missed serving in WWII, Korea and Viet Nam, you have led a charmed life. The rest of us will now be paying the bill. And none of the damage could have occurred without the miracle of fiat currency. But fiat currency doesn’t blow bubbles…central bankers blow bubbles. And if you are stuck inside from the storm and want to read a nice piece, try The Once and Future Money. Monday, save your ass by shorting the market. Anything else I can add would just be worthless crap.

  30. NOah commented on Sep 6

    Steve

    Ha. Yes I discussed PEAK CREDIT & WHAT THAT MAY MEAN about 4 weeks ago.

    I hear ya. I got my gold and I am only getting long for tradable rallies. But, I know how stocks react. They will rally on the removal of uncertainty, tighter spreads, some buying of distressed paper, and on and on, thinking the end of the mess is over with as they ‘look to the light at the end of the tunnel’, so to speak.

    Bear market rallies are fierce. Anyway, I def want to be short but will wait to see the reaction for a while first. I would nto be surprised to see a rally, powered by financials, to Dow 12,500 first, before the meltdown. Who knows. Let see. Id rather be short anyway at much higher levels so bring it on. I got my gold, financial calls, and GSE puts.

  31. NOah commented on Sep 6

    Sorry Steve, forgot link with the discussion on that Debt to GDP chart. Thing is, this time around the debt was taken on to support growth and NOT in response to a great depression!

    PEAK CREDIT & WHAT THAT MAY MEAN – Aug 4th

  32. Stock Shotz commented on Sep 6

    We have got to get out of the bailout/handout mode and let the FREE MARKETS WORK.

    Check out more of our views at http://www.stockshotz.blogspot.com

    We interviewed Jim Rogers and he insists that everytime the government steps in with a bandaid, it ultimately makes things worse. I agree. Hear the interview on our site.

  33. Steve Barry commented on Sep 6

    Noah…thanks for the link…you are right on it. I am no expert on the Depression, but if you look closely at the chart, you see that DEBT/GDP spiked after the market crash of 1929…so a debt bubble did not cause the crash. In fact it may never have been a debt bubble in the Depression…debt may have just stayed constant, but as GDP plunged in the depression, DEBT/GDP soared, because the denominator plunged. That is the scariest thing of all…it means we have NEVER even seen a debt bubble crashing. It could throw the whole world into upheaval.

  34. Steve Barry commented on Sep 6

    Walked into Modell’s today to buy my girl a soccer ball. What do you think happened the millisecond I walked through the door? I was hit up by some downsized Dilbert working for minimum wage to open up a brand new Modell’s credit card. I told him this country is going to hell from debt and he could keep the card. Don’t think he understood.

  35. Eric Sebille commented on Sep 6

    I do not see how this is good for financials, it may create a short covering rally, but this is the 2nd and 3rd financial institution that once the books have been reviewed it has been determined they are severly insolvent. What is truly hiding in, Capital One, AIG, Lehman, Citigroup, would a deep analysis of these books deem them insolvent as well??

  36. Noah commented on Sep 6

    Steve –

    Exactly. As I said above and in the article:

    “Thing is, this time around the debt was taken on to support growth and NOT in response to a great depression!”

    The spike last time was in response to the depression. This cycle, it was just our way of life, consumption, spending habits, and lack of saving to sustain economic growth. Big difference for the end result. This time around, we have not got there yet.

  37. Steve Barry commented on Sep 6

    Barry posted a list a few weeks back that showed GE as having rather large level 3 assets per total capital. Now they are being probed for hedge accounting on derivatives. What would be a more delicious irony, than if CNBC’s parent, the second largest market cap in the S&P, were shown to be another Enron, but so large that they take the whole market down with them?

    GE gets “Wells notice” in SEC accounting probe Fri Sep 5, 5:55 PM ET

    CHICAGO (Reuters) – General Electric Co (GE.N) said on Friday it had been notified by U.S. regulators that a civil complaint could be filed against the company following a more than three-year-long probe into its use of hedge accounting for derivatives and other accounting matters.

    In a filing with the U.S. Securities and Exchange Commission, the company said SEC staff had issued a so-called “Wells notice” on Thursday, advising GE the agency may “bring a civil injunctive action against GE for possible violations of the securities laws.”

    GE said it was continuing to cooperate with the agency but disagreed with its latest move.

    Russell Wilkerson, a spokesman for the company, said the filing by the SEC was standard procedure in complex disputes like the one GE is in with the agency.

    “We’ve already disclosed these items in previously filed SEC reports, we’ve corrected our financial statements and where necessary implemented remedial measures,” he said.

    SEC spokesman John Heine had no comment on the matter.

    The investigation, which began in January 2005, centers on GE’s accounting policies and practices, including items related to revenue recognition and the company’s presentation of cash flows.

    In the filing, GE said its dispute with the agency centered on how it accounted for a number of derivatives, including those it used to hedge against interest rate risk related to commercial paper, as well as the way its aviation, rail, healthcare and industrial businesses booked certain items.

    GE said that the net cumulative effect of the items in question on its financial statements was to reduce earnings by about $300 million in the period from 2001 through December 31, 2007.

    The company said it was continuing discussions with the regulatory agency and hoped to reach a settlement, though it warned there could be no assurance of an agreement.

    (Reporting by James Kelleher; additional reporting by Rachelle Younglai; editing by Carol

  38. Noah commented on Sep 6

    Eric – thats exactly why you know how the story will ultimately end. Stocks are irrational and dont price in what is going to happen, only what is anticipated to happen. Certainty/Uncertainty greatly influences this thought.

  39. BillyPilgrim commented on Sep 6

    The view from Tralfamadore,

    UYG being bid up hard after hours Friday, so expect the markets to follow though for a while, but we don’t rationally see how any rally sustains, although we all know or should by now “markets can stay irrational longer than we can stay solvent.” In any event Monday will be interesting.

    Tralfamadoreians, for one, will bide their time earning the meager 90 day t-bill rate until its time to short this market once again. At some point those with the money will no longer be amused by rabbit in the hat tricks.

  40. Red Baron commented on Sep 6

    It appears the preferred shareholders and subordinated debt holders are not going to be spared serious pain.

    The latest from Bloomberg:
    http://www.bloomberg.com/apps/news?pid=20601087&sid=aA419ISkTYD4&refer=home

    The Treasury plans to put Fannie and Freddie into a so- called conservatorship and pump capital into the companies, House Financial Services Committee Chairman Barney Frank said in an interview after being briefed by Paulson. The government would make periodic injections of funds by buying convertible preferred shares or warrants in the companies as needed, avoiding large up- front taxpayer costs, according to a person briefed on the plan.

    “This is no bailout, particularly for the shareholders,” Frank said. The federal government “will be senior to all shareholders, preferred and common.”

    Holders of the companies’ corporate debt and preferred shares are “very unlikely to come out of this at all happy,” and the chief executive officers will be forced out, Frank said.

  41. Jeff commented on Sep 6

    Looks like Bill Gross gets what he wants – A bailout that bails him out as much as anyone. This is pathetic!

  42. stevesliva commented on Sep 6

    Interesting that Paulson is again taking the position that shareholders need to hurt. The Vanity Fair article on Bear Stearns made it clear that it was Paulson who strongly advocated lower valuations of Bear’s stock– like $2. He’s at it again. And it makes more sense this time. There’s no run on these banks, they’re just plain overextended.

  43. Howard commented on Sep 6

    Hey Guys, “free” market capitalism is dead. Killed by the Princeton, Harvard, Chicago Axis of Connivance. You cannot tell me that vehicles like the ones floating around that nobody can explain are anything more than speculative commission generators for the smart guys. Of course we’ve all been a part of it if we had any financial smarts, but that is the rub. I’ve been in the business for 20 years and I guarantee that almost none of my clients really knew what I was selling them. IN FACT I didn’t know what I was selling, but I didn’t know that I didn’t know what I was selling them either. Get rid of commission hustlers with PhDs from all the usual places and turn it all back over to the deeze dems and dozes crowd that only knows stocks, bonds, and annuities. Car loans and mortgages get paid off and cannot be “securitized” past one step.

  44. leftback commented on Sep 6

    Now that we have absorbed the non-shock of the bailout.. I guess I was a little surprised by the timing, but in retrospect the strange Bill Gross release might have been a sort of coded warning. Anyone watching Treasuries might suspect that the primary dealers were given a courtesy tip-off as the 2-year sailed from 2.09 to 2.25 – this is the way the world works as we know.

    Frank asked about SKF. First of all I can’t stress too much that this is a trader’s market and these ETFs are designed to be trading vehicles. They can have a good run but when it’s over – it’s over for a while, and sitting in these short ETFs is not a good way to make money long term. Go short, make money, go to cash, and wait. Repeat.

    So we assume the banks will rally – now here is the thing, banks own the GSE preferreds so if that is wiped out they will have more pain. If they are made whole or almost whole, the banks will rally at least 10% (BKX 75, XLF 25?). So if that is the case, you can expect SKF to fall into the 80s, as Noah suggests. After that, it will be business as usual. I agree with Noah that gold will take off and the gold mining stocks as well, on a 3-year low. I got my gold and I am smiling.

    Good luck and be careful out there.

  45. stanleyb commented on Sep 6

    Um, wouldn’t it be cheaper, and far better for the market, to let these two turkeys sink and create a new replacement mortgage company instead?

    Why not create “Residential Mortgage Company”, with new oversight, new bylaws, new management, and new staff, backing new mortgages with new, tougher standards?

    This is just throwing good money after bad. And it’s not like Fannie May and Freddie Mac aren’t redundant to eachother already.

    Close them down as bankrupt now. It’ll take 20 years to sort through all their bad mortgages and sort out all the poor accounting. It’s a legacy neither the market nor the new team should have to face.

    Better to have an entirely new company with a clean slate not burdened with their legacy. And easier for investors to understand: GNMA/Freddie Mac = bad, New Mortgage Company backed mortgages = good.

  46. Flash Traffic commented on Sep 6

    FLASH TRAFFIC!!!JUST IN- FREDDIE COOKED THE BOOKS!!!!!!! I AM NOT SURPRISED.

    NY Times:Gretchen Morgenson et al:

    The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced as early as this weekend, came together hurriedly after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

  47. lala commented on Sep 6

    It appears (according to the NYT’s story) that Freddie pulled a Wells Fargo (circa Q208) and changed the “past due” definition from ninety days to two years.

    Did other people know that?

    Here is the quote:

    ” For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.” For some reason this amuses me because it is so absurd.

    So Morgan Stanely went and look at what Freddie and Fannie were hiding and low and behold found out that freddie had overstated the size of its capital base.

    The financials will probably rally huge on Monday which is also absurd. If anything this bailout indicates that there is much more risk in the system than anyone knew/knows. What the heck is LEH, MER, AIG ect. hiding? And no matter what the fed does one of these entities is going down the drain.

  48. karen commented on Sep 6

    My turn to chime in, I suppose. I’ll begin with Michael Santoli’s final words in “Who’s Afraid of Big Bad Inflation?” Barron’s Sept 8, 2008:

    The time to really worry would be when the government cooks up another rescue plan and the market can’t muster any upside from it.

    I’ll end with my words: That time might be Monday.

  49. leftback commented on Sep 6

    I think that we have all suspected that there was accounting malfeasance at the GSEs and I believe it was flagged when Raines was involved (remember him?).

    I suspect it started small, there was a cover-up and then it got out of hand as housing crumbled – if you have ever worked for US govt or a large org, or perhaps seen someone make a big bad trade with leverage, you will know what I mean.

    It seems likely that there will be a criminal investigation at some point, and perhaps this should be a quid pro quo for the bailout, if only incompetence were a crime, we might get a perp walk from Mudd and Syron..

  50. Jim Haygood commented on Sep 6

    From the same article mentioned by Flash Traffic:

    “For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value.”

    Ninety days to two freaking years!

    Welcome to Hank, Ben and Barny’s banana republic. Two freaking years! Enron to the tenth power.

    If Fannie and Freddy were playing such outrageous accounting games, just imagine what USGOV is doing. After all, the Financial Report of the US says — year after year — that trillions are missing in the Defense Department, and no opinion can be issued on its gonzo statements scribbled on the backs of lipstick-smeared cocktail napkins.

    Well, what the hell, says I. It’s only paper money — here today, gone tomorrow. Go, Hank, go! America number one!

  51. Olivier Giovannoni commented on Sep 6

    Not long ago Barney was openly asking out loud if this housing crisis would have any important repercussion… I still like him.

  52. leftback commented on Sep 6

    Karen – thanks.

    Your description of “certificates of confiscation” (nice turn of phrase) was on my mind Friday as I watched the 2-year sell off from 2.09, and I bailed as much as I could. My trading instincts had already been alerted when the banks didn’t follow the market down. I will buy treasuries again, but it’s gold for now.

  53. flenerman commented on Sep 6

    For another good laugh, I recommend the letter to the editor in the Sept. 8 edition of Barrons from Anthony (Buddy) Piszel, Executive VP and CFO of Freddie Mac. It’s headlined Weathering The Storm. Ya gotta love the irony.

  54. HooCoodaNode commented on Sep 6

    “We have no plans to insert money into either of those two institutions,” Mr. Paulson said in an interview on NBC’s “Meet the Press” broadcast Sunday from Beijing.

    Either he’s a liar, or he can’t plan two weeks in advance. Which is it? If #1 is true, he should be in jail for making false statements. If #2 is true, he should be working for McDonalds, instead of as Treasury Secretary of the most powerful nation in the world.

  55. cynicalgirl commented on Sep 6

    The plot thickens..

    http://www.nytimes.com/2008/09/07/business/07fannie.html?hp

    Loan Giant Overstated the Size of Its Capital Base

    The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

  56. dave c. commented on Sep 6

    Barney Frank’s only concern is where his next beef injection is coming from. He is as knowledgable about finance and econonmics as I am about neurosurgery. dc.

  57. dave c. commented on Sep 6

    Barney Frank’s only concern is where his next beef injection is coming from. He is as knowledgable about finance and econonmics as I am about neurosurgery. dc.

  58. A Hodge commented on Sep 6

    Well good wishes to all my mortgage paper holding compatriates. you are part way, though by no means all the way, home to a 100% bailout. they know that if they cant get a formal guarantee of their fannie freddie paper and insurance, the current legislation will expire in a year and they will be toast.
    So this “crisis” was 100% manufactured for the public.This justifies moving to stage two of the rescue. From Bloomberg
    “Paulson was prompted to step in after Morgan Stanley, which had been hired to analyze the companies’ financials, concluded that Freddie, and to a lesser extent Fannie, relied on accounting maneuvers to meet their capital requirements, according to people with knowledge of the findings. The accounting overstated the value of their actual reserves, the people said.”

    Yes we are shocked, shocked to learn that there were accounting maneuvers. Reserves overstated?
    THERE ARE NO RESERVES, they are 100s of billions in the hole after selling $3.6 Trillion, thats with a “T” of pool insurance, where they never put aside any reserve.

    So wait till the stock market falls and wind up Gross first, then have another weekend crisis announcement. But now get full liability coverage done. this will probably need legislation, before the public figures out their tax bill. I see W chooses so far not to take any credit for this, with multiple unnamed sources leaking the MS finding, foreordained if a study ever was. A historic low point in manipulating and misleading the public about government finance, beginning with the Guarantee so big it need never be used…..

  59. Billy commented on Sep 6

    So,

    Since an infusion ain’t an absolute bailout, and a cnsrvship ain’t no rcvrship, how long does it take everybody to figure out that this is still really really messy. I mean does anybody really know what this will look like in three months?? Another mess? Drawn out, with promises made to who?

    Are financial’s long? For how long?

  60. Billy commented on Sep 6

    Just one last thought.

    What are our overseas investors(diff culture) going to think when they hear that a gov’t backed entity(in their minds THE GOV’T) has cooked the books on their loaned money!!

    Can’t wait til tomorrow night!

  61. JimJ commented on Sep 6

    Government injecting capital? The government is BROKE! I guess it’s time to crank up the printing presses again and further debase our currency on our way to Third World status.

  62. LaLa commented on Sep 6

    This is NOT a manufactured crisis. I almost wish it was.

    I don’t believe that Paulson is looking to create a crisis – he is elbow, knee, and whole body deep in one that keeps escalating.

    Nobody can get a handle on this thing, i think because nobody really wants to. Every Sunday, every negative quarter, every writedown is the last….

    Everytime a talking head states that LEH or MER is a screaming buy because all the bad news is in the stock i want to ask how it is that they know that because nobody else does least of all LEH or MER or whatever other financial name we are talking about. “MER is trading at an all time low P/E ratio” – i want to scream a P/E ratio assumes earnings.

    I think emotions and hope will rally the market on Monday. However, looking under the hood of Freddie and Frannie should cause people to really question any confidence they have about the government or the bailout’s being able to solve this crisis.

    Further the economy is just really starting to accelerate to the downside. U.S. mortgage foreclosures, delinquencies reach 29 year highs and the unemployment rate is at the highest in 5 years.

    How any of this news can possibly be portrayed as postive is beyond me but then i am not kudlow or crammer.

  63. ludwig commented on Sep 6

    Well it looks like our weekend warriors Paulson and Bernanke are going to save the
    world yet again before the markets open on
    Monday.

  64. Spud commented on Sep 7

    All markets are free, some are just more free than others.

  65. jz commented on Sep 7

    Sorry, I just do not get the anger. This is not a big deal. The $5 trillion worth of mortgages are not debts the U.S. government has to pay. This is more about co-signing debt than owing it yourself.

    Right now, I believe 1% of these mortgages are bad. 1% of $5 trillion is $50 billion, but even that is too high.

    When a person does not pay on a mortgage, the creditor seizes the property. Minus transaction costs, the only way a loss occurs is if the property value goes down by a greater amount than the down payment and principal paid.

    So with a 3% default rate and 20% average loss in property value, the amount lost by the federal government would be $30 billion not $150 billion, and I think even that $30 billion number estimate is sky high.

    And isn’t that like the cost of one month fighting in Iraq? I just do not get why this is that big of a big deal.

    I like the fact that the mortgage market is now in government hands, and that Fannie and Freddie are now gone.

    These were hugely profitable companies for a long time, and once order comes back to the mortgage market, this business model will be cash flowing again. Isn’t it possible that this business may cost taxpayers a bit up front but be hugely profitable in the long run?

  66. montaigne commented on Sep 7

    So what does this all mean for lending?

    Mortgage rates going up or down? Down-Payment requirements going up or down?

    Thoughts?

  67. Muzie commented on Sep 7

    9% of families in the US are behind on mortgage payments.

    How many late payment situations become full fledged foreclosures in a recession? I bet that’s a pretty high number.

    I don’t think it’s going to be 1% of the mortagages that go bad.

  68. Mad investor commented on Sep 7

    From Boomberg this night. about FRE/FNM
    “Critics including former Federal Reserve Chairman Alan Greenspan and Richmond Federal Reserve Bank President Jeffrey Lacker have called for the companies to be nationalized.”

    So this sociopath called Greenspan is for the nationalization of his own mess.

    The US is getting surrealist.

  69. DavidB commented on Sep 7

    Critics including former Federal Reserve Chairman Alan Greenspan and Richmond Federal Reserve Bank President Jeffrey Lacker

    Critics?! Talk about literally shooting yourself in the foot. He doesn’t recognize his own carpet soiling. Like a dog he has made a mess, gone away and forgotten what he has done!

    Does Greenspan start shouting, “CROOK!” when you hold a mirror up to him?….I suppose he doesn’t see his reflection at all.

    @Posted by: show me a free market | Sep 6, 2008 3:58:10 PM

    Let the people decide what they want to use for money; they will choose whatever element best serves their economic interests. Historically this has been gold, but if a better element comes along the free market will switch to that. In any case, most importantly: take our monetary system completley out of the hands of the government. Separation of State and economics — in the same manner and for the same reason as separation of Church and State.

    I think you’ll see that the most egregious part of the FRB system is the FR part. Once you take banker’s ability to turn a $1 deposit into $9 in funny money most of the insane leveraging problems will disappear. Loan qualifications will be better scrutinized at that point and our productivity enhancements will once again return to us in the form of greater buying power.

    That will never happen of course. There is just too much power to be given up

  70. pmorrisonfl commented on Sep 7

    > Minus transaction costs, the only way a loss occurs is if the property value goes down by a greater amount than the down payment and principal paid.

    Here in South Florida, houses that went for $165,000 in 2000 sold for ~450,000 in 2005 and are around $325,000 now. 325/450 = .72 ~= a 28% loss, if you measure 2008 vs. 2005. But it’s a 63% loss measured against 2000, the last time prices reflected income realities here. You might also consider that many of these places were bought with small down payments (down to 0%), and that there were any number of principal-payment deferal schemes in operation.

    I believe the picture is not as rosy as the one you paint.

  71. Tom commented on Sep 7

    In little over a year, we have gone from “contained” to “tsunami”. Incredible.
    Our government has last most of its credibility, and once the remainder is gone, legitimacy comes into question. Do I hear secession or revolution ?

  72. BobC commented on Sep 7

    JZ said:

    “Sorry, I just do not get the anger. This is not a big deal. The $5 trillion worth of mortgages are not debts the U.S. government has to pay. This is more about co-signing debt than owing it yourself.”

    In part the anger is about moral hazard. If the government steps in to shore up a business that made bad decisions then what incentive is there to manage risk? If I can get ‘big enough’ then I can assume larger and larger risks knowing that the government will step in if it all comes crashing down.

    The people that made the bad choices should be responsible for the consequences.

  73. jz commented on Sep 8

    I do not think the government is standing behind any of the no down payments loans. I think all the Fannie and Freddie debt required a down payment. Fannie and Freddie held assets on their books that were subprime loans, but those assets/loans have already been marked down. The government is infusing money to increase the capital ratios as part of a bailout loan, but it is not backing any subprime or no down payment loans.

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