Roundup: Fannie & Freddie Bailout

Barry, have you seen Armando Falcon’s comments? It is interesting: http://voices.washingtonpost.com/washbizblog/2008/09/former_regulator_move_on_fredd.html?hpid=topnews

“I would force the more accurate accounting of their assets and liabilities, and that would show them to be insolvent,” Falcon said in an interview.

“The reason you have to do it now is to reduce the cost of resolving the two companies,” Falcon said “We know from the savings and loan crisis that forbearance in dealing with insolvent institutions only increases the cost of resolving the failed institutions,” he added.

On a very related topic (via the FDIC — so caveat emptor), here are other bank rating services with a variety of ratings products, including on-line electronic reports: http://www.fdic.gov/bank/individual/bank/index.html

BTW, in New Zealand they don’t have an FDIC — by choice. It forces the bankers to invest like they’ll all be out of a job (perhaps permanently) if the bank goes under, and forces the depositors — people & companies alike — to watch over how the bank tends its funds.

In my view, this is the vastly better circumstance than letting things get out of hand from a lack of *everyone’s* oversight through the fantasy belief that the gov can always step in and make everything better. Government IS the problem, not the solution, in all too many cases.

Ayn Rand’s “Atlas Shrugged” makes for good (re-)reading these days.

We live in interesting times, to be sure.

Does the following sound accurate to you follks?

The Congressional Budget Office on Tuesday estimated that a government plan to stabilize mortgage giants Fannie Mae and Freddie Mac could cost government coffers an average of $25 billion.

The CBO said it thinks there is probably a better than 50% chance that the Treasury would not need to step in. It also said there is a 5% chance that Freddie and Fannie’s losses would cost the government $100 billion.

CBO’s $25 billion cost estimate is an average based on “the path of housing prices in the next several months.” They considered three scenarios: prices stabilize, grow modestly or decline steeply.

I will be outraged if they give a penny to existing share-holders! I want to get my few thousand $$$ from my short FRE position so that I can offset the tax burden levied on me by these wall street mafias and FNM/FRE CEOs who made lavish $$$ while things were great.

I spoke — rather distinctly — about New Zealand, John(2)…not the socialist countries of the UK and Germany. If you can’t keep up, take notes.

Government has clearly proven itself to be the problem here. You might want to process that information.

One more thing: with effectively nationalized housing finance, USGOV as the dominant lender is going to want rising house prices. Rising nominal prices are the best protection against losses on underwater, short-sale mortgages.

With ongoing foreign conflicts (which ensure continued borrowing and monetization) plus the new political mandate for rising house prices domestically, inflation in the mid to high single digits is a lock — REGARDLESS of who’s chosen to impersonate the president. Cuz there won’t be jack that he can do about it.

Mark

You have marked your self as a objectivist, meaning that your thinking is flawed and should be ignored.

Personally I’d say any book where the protagonist gets to be the hero by being an jerk-should not be a foundation for a philosophy, or a economy.

My .02$

I hope that fellow lovers of freedom and prosperity also realize that the Fundamentalists and the Neo-Cons would be “incentivized” to dispatch a President McCain in order to have an unabashed puppet in the Oval Office.

This nightmare scenario would be all their dreams come true.

After sowing the wind of anti-intellectualism and misanthropy in rural America, we may soon reap the whirlwind of a world plunged in Darkness.

The economics we discuss only describe the process numerically; the process of shaking off the shackles of Civilization is a bloody and murderous affair. Just ask Sigmund Freud.

following on Mark’s decent recommendation, I think, the following:
“Western nations including the United States have gradually implemented virtually all of Marx’s 10 key steps toward creating a dictatorship. What are some examples can you find? Americans would be wise to study the “Ten Planks” and demand that the President and Congress abolish all laws, regulations and agencies which govern these (and all other) unconstitutional seizures of power. Communism was never intended to free man, but to enslave him; indeed the Communist Manifesto promised a “dictatorship of the proletariat” and history proved it always ended up slaughtering millions of the proletariat.

Karl Marx’s “10 Planks” to seize power and destroy freedom:

Abolition of Property in Land and Application of all Rents of Land to Public Purpose.

A Heavy Progressive or Graduated Income Tax.

Abolition of All Rights of Inheritance.

Confiscation of the Property of All Emigrants and Rebels.

Centralization of Credit in the Hands of the State, by Means of a National Bank with State Capital and an Exclusive Monopoly.

Centralization of the Means of Communication and Transport in the Hands of the State.

Extension of Factories and Instruments of Production Owned by the State, the Bringing Into Cultivation of Waste Lands, and the Improvement of the Soil Generally in Accordance with a Common Plan.

Equal Liability of All to Labor. Establishment of Industrial Armies, Especially for Agriculture.

Combination of Agriculture with Manufacturing Industries; Gradual Abolition of the Distinction Between Town and Country by a More Equable Distribution of the Population over the Country.

Free Education for All Children in Public Schools. Abolition of Children’s Factory Labor in it’s Present Form. Combination of Education with Industrial Production.”

makes for interesting reading during times such as these.

I suppose that makes me a Communist, Tom?

Interesting…but I read Atlas Shrugged and liked it…didn’t think it was tedious…(tedious is Moby Dick)..

Rand came from a communist background..and the book isn’t a novel…it is social commentary and should be viewed as such…

Books like Animal Farm, Atlas Shrugged, The Prince…why would you criticize someone whose has digested these novels? They can offer insight, and then you make up your mind about the worthiness of what was offered…

It is about discourse, not personal attacks.

So what if John Galt is your anti-hero, and not your hero? At least he remained true to his values..Has Paulson?

Bruce in Tennessee

Can I ask a naive question – what do people think will happen in the markets on Monday? On the one hand I could see the market interpreting this as very bad, on the other, I could see it as the equivalent of a Fed move.

“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning” – Henry Ford

“Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States” — Sen. Barry Goldwater

“We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it”. — Congressman Louis T. McFadden

Barry,

I don’t know if anyone else has posted this, but on the Mises Institute website is an article, authored by Don A. Rich, on the “Real Cost of a Full Bailout”:

http://mises.org/story/3062

@Tom: Sorry, but your 2-cents are about to get diluted.

I may be many things, but an objectivist-thinker I am not. And I don’t hate government…certainly not democratic government, and more particularly not the U.S. Government. I just substantially distrust it based on its performance record when it comes to matters involving capital, finance, business…and corruption.

And I do suggest “Atlas Shrugged” for anyone — from those who have ever stood in a Dept of Motor Vehicles waiting line, to those who have found themselves in a government-fostered line of “business” (e.g., ethanol), to those who understand the ramifications of the Fed’s and Treasury’s latest attempts to be the market maker for CDOs and U.S. mortgages, respectively.

JimH. & others make good points. Note how Wall Street has convinced the media to say ‘financial system meltdown’ as a substitute for “Wall Street Losing 100s of Billions More” (esp. via exotic credit default swaps, now ‘worth’ 35-51 $trillion, that cascade downward and don’t deliver $s). So the media prefaces govt bail-out actions as ‘preventing a financial meltdown’. What bailouts prevent are immediate mega-losses by parties who possess wildly inflated assets & securities.
In the bigger picture, a healthier more sustainable US could methodically arise from a long, painful, thoughtful slog upwards from the ‘crater bottom’ reached once today’s Leverage Unwind Cycle finally completes itself. Also already underway is a likely ‘L’-shaped Roubini-esque recession, and the wholesale devaluation of hard assets & securities to more realistic valuations. That ‘L’-recession could last 5-7 years. A well-stewarded financially-sustainable economic rise (after 2-3 years of meandering on the crater-bottom) could take just as long, maybe a full decade more. Guess who won’t be in leadership positions 15+ years from now?

The Key Log in understanding today’s political picture is knowing this deflation (credit crunch plus devaluations) is unfolding 1-2 decades earlier than the policy & business leaders of this nation (all Baby Boomers or Older) were promised. Paulson, Bernanke and all the well-heeled from their generation (including many web readers here) don’t just fear a ‘financial system meltdown’. They also fear not escaping this self-created boom-BUST without having all their wealth intact. But the ridiculously high valuations of their private wealth (homes, vacation homes, 401Ks, stocks, securities and yes, private & govt pensions too) comes via irresponsible over-leveraging, and subsequently mortgaging that debt to ‘unsuspecting’ future generations. Yes, many worked hard; but today’s asset valuations are bloated and greatly over-leveraged.

And sadly, the oldest of this younger generation remain clueless & mired under the ‘Jedi Mind-Trick’ directives to simply chant: ‘Hope & Change’.
The cluelessness of these under-35 folks almost makes me want to root for Paulson/Bernanke’s side to prevail….but that’s bad karma: these young-ins may be clueless, but they didn’t create & sustain this mess.

@JustinTheSkeptic: I saw Jim Cramer’s presentation of his logic and investment advice (buy selected financials and brokers).

Here’s my take — based on current, real information — on what will happen with the markets in general: It Depends.

In particular, it substantially depends on what happens with FNM and FRE common and preferred stock. Cramer doesn’t know the answer to that right now any more than (as BR points out) the NYT or WaPo knows.

If both common and preferred are essentially zeroed out (I find this as highly unlikely as it is highly deserved), then all hell is going to break loose with the principal investors: foreign governments, U.S. banks, etc.

In the more likely scenario that F/F preferred is protected (at God knows what expense), and common is not fully destroyed (which would have people marching in the streets if they knew what that meant), then I agree with Cramer that we’ll likely see “the banks” get a shot in the arm stock-price-wise for some irrational period of time.

In the latter scenario, the overall indexes will likely participate as well. As will $VIX and $VXN…in spades.

BUT…once all the hoopla has died down…there is the small matter of the U.S. and global economies to pay attention to. Giving a backstop to FNM & FRE guarantees and loans doth not fix outright the current deflationary scenario and recession.

As someone was ranting yesterday, “is the Treasury’s action inflationary?” Well, yes, of course it is. So is my paying $2 more for a bag of groceries than it deserves. That doesn’t mean that _inflation_ results.

The big ticket items in most people’s wallets are home and investments…and houses, commodities, gold, emerging market ETFs, the stock market, etc…are all declining.

And yes, the Fed will likely lower interest rates sometime soon, also per Jim Cramer’s latest, planned rant. They’ll do it for one reason: the global economy is already in deflation, and backing up U.S. mortgage failures will not fix that overnight…otherwise, the Fed would be raising rates.

And that’s my 2-cents (revised from 10 due to the power of deflation).

Justin, you’re skepticism is deserved, Jim Cramer is over-simplifying. Credit standards are vastly tighter and the bank regulators show no signs of easing up. Assume that mortgages return to 10%-minimum down, with 20% needed for a good rate. Assume banks & card issuers continue to deactivate $12,000 in credit per household (towards their $2 trillion regulatory goal). Assume that wages & salaries stay basically flat after inflation.
Now…assume whatever you want on when this recession ends…because it doesn’t matter; the preceding trumps recession & all tepid recoveries. Credit-contraction keeps the housing market in free-fall UNTIL prices are within 2-3-times of annual wages for local markets, AND buyers have had enuff time to save up for 10%-20% downpayment. Maybe by 2018? How long does it take a household to save up $50,000 for a $250,000 house?

Cramer’s smart enuff to know and say all of this…but his ‘religious’-faith that “America’s Free Markets Don’t Self-Inflate and Then Self-Crater” continues to vex & blind him. It will be agonizing for him, but he’ll ‘see the light’ on his show eventually and admit that mortgage finance/securitization was a ponzi-like scheme since Greenspan observed the 1995’s Irrational Exuberance.
Jim’s asking: “where will I be in 2018?”

Bruce in Tenessee
What about the « Future choc « of Alvin Toffler where the third wave is the power of money as a third wave, a power of purchasing as opposed to production.
I guess we may read later that when streched to extreme the new equilibrium may be found in barters or through the first wave agricultural production.

@AvlDao: Kudos, my brother, for telling it like it is.

@JL: Dude, do you live in an Ivory Tower on another planet, or what? WE got into this situation VIA regulations like creating FNM and FRE in the first place, permitting an over-stimulating Fed, and encouraging utterly corrupt political-hog-slopping & lobbying on the part of F/F management.

If you want to create regulations and policies that fix the situation, focus on:

* Getting rid of F/F over time, and
* Prohibiting politicians from receiving monies from F/F in the meantime.

@John: Talk to the hand, my friend. The point remains that *having* an FDIC is more problematic — and logically flawed — than having one…not regulations, and you know it.

The real cost of the bailouts will easily exceed $1.3 trillion. In fact, the real cost is likely to range between $1.3 trillion to $1.6 trillion, and is not unlikely to reach $2.5 trillion.

For those with a sense of history, it is worth remembering that the S&L bailout had a $160 billion price tag. The numbers diverge so far from reality as to be laugh-out-loud funny.

Between 2001 and 2007, Fannie and Freddie purchased or guaranteed $700 billion of ALT A and subprime loans. Given the default rates on these loans — and the fact that the price of the housing that is the ultimate security of the loans will, for reasons demonstrated below, fall by at least thirty percent — this alone implies a loss for Fannie and Freddie on the order of $210 billion

Fannie and Freddie acknowledge already-impaired loans on the balance sheet of $19 billion, which they have used creative accounting to avoid deleting from the shareholder equity account.

Given the inevitable losses on the Alt-A/subprime portion of their portfolio, it must be the case that if the federal government, as it is doing, guarantees Fannie and Freddie’s solvency, the difference between the loss and the capital to be made up by the government (i.e., the taxpayers) must equal, not $25 billion but $147 billion

The real story is simple. We have witnessed the largest asset-price bubble in US history, making the tech-stock bubble seem like an overdone weekly rally.
When you look at the graph of the Case-Shiller residential real-estate index, an index dating from 1890 to the present and an index which measures the cost of housing in comparison to other goods, the first thing you see is that the 2001 to 2006 bubble stands out like a fifty foot saguaro cactus in a patch of daisies. There simply has never been anything like it before.

When you know what you are looking at — the biggest bubble in history — it is scary.

To be precise, the Case-Shiller Index in its entire 110-year history had never crossed 140 until the recent bubble. In 2006, it reached 210. Every single real-estate bubble in the past has at best been followed by a fall back to at least the 110 level in the postwar era, although the bubble preceding the Great Depression witnessed a fall to 60.

What this means is that in the best-case scenario, real-estate prices have to fall in the medium to long run by almost half.

Now consider Fannie and Freddie. Just looking at their portfolios on the balance sheet without the guarantees, let us accept (for no particular reason other than a desire that the reader sleep better at night) that real-estate prices only fall by thirty percent.

Well, since Uncle Sam is now committed to “doing whatever it takes,” that is a loss right there of $1 trillion. This committment to keep financial markets open as usual is made in spite of the overwhelming evidence that what we have been taught is usual is in fact delusional, given that Fannie and Freddie own $3 trillion and change of mortgages.

The more realistic scenario is actually worse. Fannie and Freddie own and guarantee a total of more than $5 trillion in mortgages.

Given the long-run historically plausible equilibrium values of residential real estate as embodied in the Case-Shiller Index, that means that the taxpayer loss definitely reaches $1.3 trillion, easily ranging up to $1.6 trillion.

Unfortunately, that is the good news. The bad news is that if real-estate prices were to replicate the Great Depression (as would surely occur in the case that hedging instruments of Fannie and Freddie were to catastrophically fail due to counterparty failure — and given the absurdly low risk premiums on credit-default swaps at the height of the bubble, such an event cannot be considered unlikely) the Case-Shiller Index tells us that the loss to the taxpayers could exceed $2.5 trillion dollars.

I don’t know what those people in Washington are taking to sleep at night after all their electorally driven accounting and finance exercises, but I can tell you what they will be doing to keep the government open for business: printing a whole lot of money.

Chairman Bernanke has the discount window open to any collateralization not worth the paper it is written on, so in effect he has the helicopters ready to drop hundred-dollar bills over Wall Street — as he once famously described the ultimate policy instrument of a fiat-money system

Of course, if he does that, we will have to change his nickname from Helicopter Ben to Hyperinflation Ben, which answers the question of who picks up the tab of bailing out Fannie and Freddie: anyone owning dollars.

Produce a lot of something, and it becomes worth less. And given the losses at Fannie and Freddie, the taxpayer guarantee, and the ongoing initiation of Boomer retirement, only the inflation tax will work to pay for keeping Fannie and Freddie afloat.

Like it or not, we are about to enter interesting times, and it is too bad our supposed professional civil servants at the Congressional Budget Office have failed to tell the emperor the truth: that he is buck-naked bankrupt and getting ready to take a lot of people with him.

Our only hope is to (1) accept up front a twenty-percent fall in American living standards for a people living beyond their means for the past twenty-five years on the delusions made possible by fiat money, and (2) simultaneously discipline the creature from Jekyll Island, a.k.a. the Federal Reserve System, not to create new money just to prop up asset-price bubbles.

Crammer is an idiot.

It does not matter how cheap something gets when you have NO money to buy it. The labor market is unraveling. I see unemployment rate heading towards 9%. And the USA has a negative savings rate. Which people does Crammer think have a 20% downpayment to buy these houses. The average credit card debt the families are carrying in the USA is just under $10,000. So, take a $100,000 house – how many people have $20,000 saved for the down payment?

9.7 % of all mortgages are overdue currently. What the heck is going to happen when another 1 million people lose their jobs? We aren’t going to have more purchasers of homes we are going to have more foreclosures!

As far as the market goes, when it comes to something like the S&P at 1290 to 1300 that is pricing in a 62% gain in earnings for S&P companies Q4/08 vs Q4/07. What happens when you price in a contraction of 15%?

As far as the US dollar goes, as the economy slips into a deeper recession the dollar will actually start to rally. Intrest rate expectations start to fall elsewhere and we get a sharp fall in US current account deficits. This is not GOOD. See japen circa 1994. The only way international companies have been making money is off of their exports. What now? As companies try and defend their profit margins by cutting labor this leads to a cut in employment which leads to a cut in consumption. So as companies try and defend profits/growth revenue dry up and …….

So lets go back to the question of WHO THE HELL IS GOING TO BE BUYING THESE HOUSES?

The only way to come up with a viable solution to this problem is to start recognizing that the talking heads are just that. The problem is real and deep. The solutions at this point are not

If loose monetary policy and rapid asset price inflation was the route to econmic prosperity, Argentina would be the richest country in the world!

Just a little ‘repricing of risk’. No big.

Add $10 Trillion housing mess to $32 Trillion dollars in total liabilities and unfunded commitments for future payments and you get The cost of Bush to America since 2000

In a speech a few months ago at the National Press Club, former GAO Comptroller General David Walker said:

“If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and some people would be talking about whether the company’s management directors needed a major shake-up”.

“The federal government’s total liabilities,” Walker explained, “translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage. In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”

RIP America’s Debt-Based Monetary system
1980’s – 2007
Done in by the extreme greed of capitalist pigs feeding at the obscenely leveraged debt liquidity trough.

And it explains why Americans should kick the living shit out of every Republican who stood up at the podium in St. Paul and talked about how they were the party of fiscal responsibility. In a pig’s eye!!!

“No generation has a right to contract debts greater than can be paid off during the course of its own existence.” ~ George Washington

I say that the private capital markets have proven that they cannot handle the job of financing houses in an efficient and stable manner. So get them out of that business and let the government take it over. To those who call that xxxx-ism, I say get unstuck from the 80’ies. I don’t care about your outdated buggyman-ism-erism. The question is how we best take care of finaincing peoples privately owned houses in a stable, low-cost, and efficient way (and the private sector has completely failed at that). The toxic brew of stupidity and greed in the private sector has proven itself worse than the stupidity and politics of the public sector (yes government also created failing mortgages, but not at nearly the rate that private companies did). So it is time to move that part of the economy over to where it is best done for the benefit of society (and lets move health care and utilities now we are at it). The private sector can keep the things it actually have proven itself better at, such as production of goods and many services.

For those that say “it” will be much worse if the government run the show, I ask you to provide some solid fact-based evidence for that empty ideological statement. And I am not asking for some lame-brained cherry-picked example of a government fxxk-up in some other area; this is a serious blog, not a high school cafeteria. And I would not prohibit private companies from offering the same services for less money, let them prove that they can do better than government – and if they do, let them put government out of business. Let the reality of market forces, not theoretical ideology, decide who is best – the costumers would be the winners either way.

“We the people” are the owners of the government and if it can create bonds to provide us mortgage loans cheeper than the private sector, then it certainly should do that. There is no moral or constitutional justification for asking “we the people” (and our government) to provide teats for greedy capital owners to suck from. And that is equally true for those that are sucking on the “longs” teat or the “shorts” teats. You have a right to make money in a constructive way that benefits society, but not by sucking more money out of people with a real job, for simply providing the same or worse services.

Mark posted:

“Many Americans today wrongfully believe that the Federal Reserve is somehow part of the federal government, possibly even the Treasury Department. Many do not know that the Federal Reserve is actually a cartel of private banks”

A continuation of the confusion between the “Federal Reserve”, which is part of the Executive branch, and the “Federal Reserve Banks”, which are in the private sector.
.

Awesome post by New Deal democrat that should be here so I took the liberty of posting since he has not done so upstream.

Major implications of the Fannie
http://www.dailykos.com/comments/2008/9/6/102748/4967/30#c30

I’ve been asked what my thoughts are about the Fannie and Freddie bailout leaked by the Treasury to the NYTimes and the Washington Post late Friday afternoon.

Since the actual details haven’t been released, and you can click over to Tanta and Barry Ritholtz as easily as I can, I suggest you go there for the best exposition so far of the proposed details. In fact, Ritholtz’ “The Big Picture” has a pretty good multi-point presentation, which forms the basis for my comments below.
This story is MAJOR, in multiple ways, and almost none of it good, particularly for the long-term. Some points below.

1. The bailout seems to boil down to (1) the government explicitly takes over the mortgage giants (2) largely wipes out their shareholders (3) injects perhaps $500 BILLION into them, and (4) guarantees their debts.

2. The biggie by far is the guarantee of $5 TRILLION of mortgages. You and me, fellow taxpayer, are on the hook. It doesn’t matter if we’re renters, or are fiscally prudent, never took out a HELOC, never leveraged up to the hilt: too effing bad for you, you are guaranteeing the debt of the people who did. The only good thing here is that Fannie and Freddie were relatively prudent during the housing bubble, and so perhaps only 5% to 10% of their debt may blow up. But that’s still $100s of billions you and me and our descendants directly pay out.

3. So much for the government only injecting a few $10s of billions. Only a month after receiving a blank check from Congress, it is being cashed for the first time at perhaps 10x the promised amount!

4. Fannie and Freddie are now under the direct political control of the Unitary Executive Bush Administration. They can reorganize them however they wish. You may wish to brush up on how the Bush Administration has handled Iraq and Katrina, and recognize that this Bustout is maybe 10x as large as both of them combined, to have an idea how that will play out.

5. The aforesaid blank check was handed to the Bush Administration after about 2 days of foreplay (not investigation, not oversight) by a DEMOCRATIC House of Representatives and a DEMOCRATIC Senate. These people, collectively, have shown not the slightest interest in actually protecting average Americans (most of whom were not caught up in the housing bubble), or ensuring even the slightest bit of oversight. Both political parties are in hock to the plutocrats, the middle and working classes are friendless.

6. Our new Chinese creditors have demanded their first payment. Several times in the last week, Chinese officials have stated in no unceertain terms that they would be VERY UNHAPPY if their Fannie and Freddie bonds weren’t honored in full. Forget the Fed: US economic conditions are now dictated by the People’s Bank of China.

7. This is what happens to debtor countries. Read my prior dairies explaining the book “Bankruptcy 1995.” This is only a harbinger of national debt peonage to come.

8. Disaster Capitalism and “The Shock Doctrine” have come to Wall Street. Readers of Naomi Klein’s book recall the thesis that Chicago School type right-wing privatizations happen during real or conjured economic emergencies, and are usually enacted by executive fiat. With the exception of New Orleans and Katrina, until now the recipients of those “shocks” have been third world nations. With this crony capitalist bailout, for the first time Main Street America is the recipient of the Shock Doctrine treatment, treating average Americans exactly as American plutocratic overlords treated Argentinians, Brazilians, South Africans, Russians, Poles, Peruvians, and countless others in the last several decades. You should expect much more of this in the next several years. (Just wait until the World Bank and the IMF demand the dismantiling of Social Security and Medicare in order to approve a bridge loan to the US government).

9. It is good to be Bill Gross. Bill Gross of PIMCO has been nakedly “talking his book” for the last couple of months, insisting that the Feds must bail out Fannie and Freddie. Yesterday on CNBC he explicitly said he was unable to comment on this bailout (meaning he had inside knowledge). It must be nice to get Uncle Sam to bail out bad investment decisions. You and I can’t do that.

10. Libertarians are Stupid. They always trumpet free market capitalism on the way up, but they never see the bailout for billionaires coming when the sh*t hits the fan, do they? And the bailout ALWAYS comes.

I’m sure there is more, and I’ll comment more once the actual terms of the bailout are released (although I suspect even then there will be escape clauses allowing for Treasury secrecy). In the meantime, drowning your intellect with the intoxicating beverage of your choice is not a bad thing. Sometimes abject despair is the appropriate reaction.

“When the going gets tough, the tough get ‘too big to fail’.”

Now that Bush and the GOP administration has nationalized these private firms with so much of their debt and equity in the hands of foreigners, do you think Cuba will embargo us?

Posted by: formergop | Sep 6, 2008 12:34:55 PM

I sometimes wonder who are nuttier here. The free market conservatives yelling about govt failures, even if it’s their govt. or apparently “all capitalists are bad” democrats like this one. Given that this is supposed to a financial blog there is often a startling lack of realism and pragmatism.

To use the phrase du jour; It is what it is. The govt has NO alternative but to take over F/F because if they didn’t the availability of domestic mortgage finance would dry up. Secondly all that mortgage backed paper which is sitting in Mutual Funds all over America as well as the strongrooms of Beijing would crater. Why else in the world would a deep dyed Republican administration take the socialist remedy of nationalizing F/F. Once they’ve taken it over it will not be privatized because it exists to fulfill a need, namely the provision of liquidity into the domestic mortgage market when times are hard. This is Economics 101 guys. The causes of this situation are legion and I don’t have the time to go over them all but it can be boiled down to two phrases: inadequate regulation and lax monetary management. It is what it is. Bill’s going to clean up but that’s capitalism for you and it’s entirely secondary to the central issues here.

Barry, your post is somewhere between disingenuous and flat-out wrong.

The agencies have over $1 TRILLION of Alt-A “stated income” loans.. purchased in the secondary markets.

Well Mark

I’ll align myself with Scott in Chicago,

something along the lines of “the gov is

broken”-I’ll agree but it is the whole

lazses-faire(sp) philosophy that has broken

government, which includes all that

objectivist drivel.

There is no such creature as “A truly free

Market”- markets are created by gov-think

contract law- think prohibitions of fraud.

Conservatism is nothing but a selfish

morality pretending to be a political

philosophy

maybe I pounced on you to quickly, but my

point being anyone talking Rand,freidman,

The whole laffer curve/supply side econ is

foolish and should be told to sit at the

children’s table.

kind of strange that there are several different versions floating around, but i do want to clarify a couple of facts: fnm does have a bunch of alt-a and subprime mortgages. on pg 47 of their recent 160 pg 10q (enjoy reading it, not) they list 24bn of subprime and 22bn alt-a. in addirion they mention, later, that they have 12.5bn sub/alt-a “wraps” which i understand to mean that they bought these things as part of some kind of mbs packages. not sure about that, but they do have direct and probably guarantee risk in subprime and alt-a. also amazing how fast their defaults/reserves/foreclosures etc have risen since year end. keep up the good work1 clipb

It was a huge game of chicken between FNM/FRE shareholders and everyone else.
But that is going on at all the banks.

Obviously the news leaked out on Friday.

I’m sure Bush will do a great job running these companies.

Does anyone really think this is going to make home prices go back up?

In February 2009, we’re going to start hearing about how large the Federal deficit is.

(Then we’ll start hearing about how we must act “responsibly” in the face of that).

The common is totally irrelevant at this point.

As many have commented the most important issue is going to be what the treasury does with the preferred shares. All the big fiserv’s own a ton of these.

I would bet (that’s what I do) that the preferred holders get a haircut off par but these preferred shares have already gotten pummeled. So the question is how the haircut compares to the current price they are trading at?

They could also stop paying dividends on the preferred instead of wiping them out.

I think the first poster (Maj Tom) in this thread has it right.
Why not a regulated bank that takes in passbook savings and only makes home mortgage loans below a cap and local small business loans and is required to keep the loans on it’s own books? Is that what an S&L used to be?

If all the Randians walked away like in the books it would be different. Instead they expect the government to bail them out, then complain when their taxes are raised to lift the burden of that bailout off the backs of the worker bees and complain about paying them fair wages and health care.

Alan Greenspan, the person with the most individual responsbility for this financial calamity, was a disciple of Ayn Rand.

The world might be a better place if he had been reading Marx instead of Rand! -).

Anna Lee

Congress has routinely increased debt limits. The next increase will also be done with a yawn and so will the increase after that.

Michael Panzer

Not only has PIMCO and others earned a windfall but the markets will now believe that every powerful Wall Street firm will be bailed out. Banks will now mark all Fraudy securities to show nice gains. CNBC will go non-stop about why all risk has been eliminated and its happy days are here again. Wall Street money managers more worried about career risk will be more worried about missing a rally than losing OPM.

Dow 50K!

Unreal. Latest WSJ article says preferred dividend and common dividend will be suspended!! Big friggin’ deal. The equity holders should be wiped out since we taxpayers are taking this deal up the caboose. Why raen’t these stockholders being held repsonsible?? Looks like Bear Stearns Redux…all the morons who caused it get their debt guaranteed and John Q. Public gets to indemnify them for their screwups!!!

Of the $5 trillion, we know that about $700 billion is Alt-A and Subprime and another $1 – 2 trillion plus could act much closer to Alt-A and Subprime in the future. This is due to faulty automated underwriting systems called DU and LP respectively, set to ‘way too easy’ mode during the bubble years. $5 trillion is equal to the entire public float of the US Treasury with $1 trillion owned by foreign central banks.

This $5 trillion is and was never guaranteed by the Gov’t. If it suddenly is retroactively backed US Treasuries will get crushed.

Source: http://mrmortgage.ml-implode.com/2008/09/06/fanniefreddie-mbs-have-you-ever-seen-one-bill-gross-must-not-have/

Source: http://mrmortgage.ml-implode.com/2008/09/06/fanniefreddienow-we-wait-for-help-or-hell/

Thanks leftback,

Are you telling me my gut just won’t cut it. My common sense tells me that the gov’t is not about to start dishing out Alt-A loans and the like. My gut is also telling me that there are not a rash of folks sitting on $50,000 waiting for the gov’t to take over Freddie so they can buy a house. My gut is telling me that the government is not going to help the hundreds of thousands of people sitting on mortgages worth more than their house. My gut is telling me that other countries are not going to rush in to start buying Bonds when they have no idea what the final structure and economy of the US -not to mention their own economies – are going to look like. I could go on, but thee are way to many tentacles for my small mind.

Thanks for the info I will look up the folks you recommended.

Shit. I’ve been MIA — 80-hr work weeks lately means I can’t monitor TBP — and missing the good stuff (and not monitoring my portfolio). I feel like I’ve been missing a really important championship game.

So…Pimpco’s ahead? We the taxpayer’s are behind? What’s the score? … Whadda you mean you don’t even know?

Ouch.

The root cause of these bad loans is the unwillingness of the elites in this country to face the reality forty years of lazy unfair capitalism is a failure.

To extreme for your neo-liberal outlook, here’s a quick rundown for the lazy that have not been paying attention:

When the United States embarked on de-industrialization in the late 1970s no one thought of the long term consequence, of destroying all those bothersome union jobs right-wingers love to hate. That industry after industry was downsized no problem.

That then, the mega-merging of countless companies during the 1980s with further downsizing of jobs only was an insult to the further injury of the following outsourcing and further downsizing in the 1990s, throw in the additional 3 million manufacturing jobs Bush drove to China since 2000 and one might admit if they had a grain of honesty this trek was lie from day one.

Against this backdrop over the same decades in order for elites to sleep better at night the fool’s gold of easy credit was invented to keep the notion the American economy could still function alive. It is any wonder then that the last three decades has seen not only the speculative bubbles of hapless business managers, but a never-ending rise in consumer debt to replace lost income of millions of working and middle class people forced into two and three low paying jobs no self-respecting mouthpiece of the investing class would ever look twice at.

Go on drag out some more stats about how great the GNP has been the last thirty years, just be honest and remind your readers or fellow bloggers that the vast majority of that ‘growth’ was financed by foreigners until the last few years willing to buy the paper to support the illusion. Now they may not want to anymore, but they will force the investing class to run where they always run: a federal bailout.

The mortgage meltdown is just a symptom of a deeper self-deluding laundry list of failed policy and political decisions perpetrated by fools too rich and stupid to give a rat’s ass.

Go on vote for McCain; stay in Iraq another year or two – it will finish off the American economy as far as millions of middle and lower class Americans will experience it.

I guess we know why now the Patriot Act was really passed and why Blackwater is getting contracts to help police departments across the United States to ‘police’ American cities.