Roundup: Fannie & Freddie Bailout

Last evening, we asked what are the costs and consequences, as well as the market reaction to, the imminent bailout of Fannie Mae (FNM) and Freddie Mac (FRE). Your responses were inspired and informative.  (For a brief history of the GSEs, see this earlier commentary).

This morning, its page one news. Here’s what the major papers are suggesting is the likely outcome:

Conservatorship: Fannie Mae and Freddie Mac will be brought under government control; The assumption is this is a temporary measure (12-24 months);

Management: will be kicked out, starting with Fannie Mae CEO Daniel Mudd as well as Freddie Mac CEO Richard Syron.  (No word if Charlie Gasparino is defending the two on CNBC). The current Board of Directors would also be fired;no word on other senior management;

Shareholders: Speculation is that most (but not all) of the common stock would be diluted but not wiped
out; Company debt and
preferred shares are likely to be protected according to the Washington Post. A variation comes The New York Times, which stated that both the common and the
$36 billion of outstanding preferreds "would be reduced to little or nothing."

In a typical recapitalization, preferreds, which are equity, receive little if anything.

Mortgages: held by FNM/FRE would be guaranteed by taxpayers. This is approximately $5+ trillion dollars, the vast majority of which are sound. (Remember, Fannie was not allowed to buy subn-prime). If 3% of these go bad — a historically high estimate — that would amount to ~$150 billion dollars;

Legislation: President Bush signed the law that gave the government the authority to inject billions of dollars into the companies through investments or loans. At the time, Treasury Secretary Hank Paulson said there were no plans to actually use the money, it was to help the firms raise capital.

Foreign Holders: NYT: "With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital" forced the government’s hand;

Foreign central banks are key investors in Fannie and Freddie paper, and they have been losing confidence in the GSEs. Barron’s reports that "Fed data offer circumstantial evidence of, if not of a run, then of a steady walking away from Fannie and Freddie securities."   

Financial sector: With losses of about $500 Billion, and quite a few billion more to go, the hope is that the relief to FNM/FRE eventually finds its way to the entire sector.

Note that the Preferreds of both companies are primarily banks, many of which already are already suffering from the
effects of the credit crunch and mortgage debacle. A bailout of the Preferreds would amount to a $36 billion bailout of the entire financial

Politics: With both conventions now over (were the GSEs even mentioned?) the Presidential election starts to heat up. The closer we came to November 4th, the greater the risk of political complications.  Hence, the bailout sooner rather than later;

Timing: Any Decision is likely to be announced Sunday, before Asian markets open. Some are speculating that this is an attempt to get out in front, rather than waiting for a "financial tipping point, as happened with Bear Stearns;" Delaying a rescue might also increase the "risks and costs."

Insolvency: Armando Falcon Jr., who from 1999 to 2005 headed
the agency that oversaw the companies’ financial stability, believes the GSEs are already insolvent.
"I would force the more accurate accounting of
their assets and liabilities, and that would show them to be
Falcon said in an interview. He added that
additional delay to receivership "only digs taxpayers into a deeper hole."

One more note: Anytime the government obtains authority to do
something — go to war, spend money on bailouts — it is identical to
actually authorizing the act. Meaning that yes, it will eventually occur. Claiming you are merely granting authority only serves to make the act more politically palatable, but don’t ever kid yourself — it is no different than the actual act.

In practice, the act of authorizing a fill in the blank (war, bailout, whatever) is the same as declaring  (war, bailout). The two are identical.

More on the bailout to come . . .


As you add sources and links in comments, I will cull key data points and add above.



Full source list after the jump . . .

Fannie + Freddie = Frannie ?   (September 2008)

His Name is Mudd (August 2008)

Freddie’s Risk Officer: CEO Ignored Warning Signs (August 2008)


U.S. Near Deal on Fannie, Freddie
Plan Could Amount to Government Takeover; Management Shakeup Is Expected
NYT, September 6, 2008; Page A1

Paulson Plans to Bring Fannie, Freddie Under Government Control
Alison Vekshin and Dawn Kopecki
Bloomberg, September 6, 2008; Page A1

U.S. Rescue Seen at Hand for 2 Mortgage Giants   
NYT, September 5, 2008

U.S. Nears Rescue Plan For Fannie And Freddie
Deal Said to Involve Change of Leadership, Infusions of Capital
By David S. Hilzenrath, Neil Irwin and Zachary A. Goldfarb
Washington Post, September 6, 2008; A01

Questions, and Hope, on Plans for Mortgage Giants
NYT, September 5, 2008

Pulling the Trigger for Fannie and Freddie?   
Barron’s SEPTEMBER 8, 2008

Former Regulator: Move On Freddie, Fannie Now
David S. Hilzenrath
Washington Post, September 5, 2008

An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac
Elisa Parisi-Capone
RGE, Sep 5, 2006

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What's been said:

Discussions found on the web:
  1. Maj Tom commented on Sep 6

    The fact that they now own 5 trillion in mortgages should be disconcerting. If neither exist anymore – the suggestion is that Banks will freeze the housing market.

    How about this, let’s freeze the “securitization” of the housing market and let Banks make money the old fashioned way, by keeping the mortgages on their books. Yeah, people will need 20% down, stable income, and good credit and the Bank can’t lever up. Just exactly what is wrong with that. If people don’t have the money to put down – guess what, you are a credit risk.

    The money quote and the reason for the bailout is from your NYT picture – “virtually every wall street bank and many overseas financial institutions, central banks and investors do business with Fannie and Freddie.”

  2. SM commented on Sep 6

    Barry, have you seen Armando Falcon’s comments? It is interesting:

    “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.

  3. Mark commented on Sep 6

    On a very related topic, here are other bank rating services with a variety of ratings products, including on-line electronic reports:

    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.

  4. Mark commented on Sep 6

    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:

    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.

  5. John(2) commented on Sep 6

    Maj Tom | Sep 6, 2008 7:37:09 AM

    With due respect are you crazy. “Freezing the securitization of the housing market” would dry up the supply of retail housing finance almost completely. Hence the roughly five million homes expected to be sold this year wouldn’t be sold. Mom wouldn’t move into her condo, the Sixpack family wouldn’t move to Atlanta, etc. It would cause a crash of 1929 proportions. This takeover is necessary, it’s what govt’s do to protect their economic systems,
    it should have been done months ago, and F/F are neither going to disappear or be privatized.

  6. Common Cent$ commented on Sep 6

    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.

  7. John(2) commented on Sep 6

    Mark Sep 6, 2008 8:08:54 AM

    NZ, nor the UK or France or Germany for that matter, may have an exact equivalent of the FDIC but the notion that the banking systems in these countries is not at least as tightly regulated as the US is bizarre in the extreme. A bit like a lot of the thinking in Atlas Shrugged which is one of the most tedious books I have ever read not to mention most irrelevant in understanding the mixed economies which are the mainstay of the globalized world economic system. It is no accident that one of the prime architects of the current mess is a confessed follower of this strange author.

  8. free markets commented on Sep 6

    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.

  9. Jim Haygood commented on Sep 6

    Barry’s earlier comment — “I suspect this will be another hugely expensive and ultimately unsuccessful attempt to bailout our prior irresponsible profligacy” — is true on multiple time scales.

    This decade will be remembered for the epic Housing Bubble and subsequent bust. Now that particular bit of profligacy is being bailed out. And one shouldn’t doubt their ability to do so, and launch the next stunted economic expansion.

    But on a larger macro view, Oil Shock I in 1973 tolled the bell for the economic miracle of the 1960s. It was then that real wage growth hit a wall, and what seemed to be a small Asian land war toppled the Bretton Woods fixed exchange rate regime. Since then, weaker and weaker expansions have been fueled by two-earner families, ever heavier levels of debt, and in the final Bubble phase, reckless financial innovations such as black-box CDOs carrying AAA ratings from bribed rating agencies with no liability for being wrong, wrong, wrong.

    In every recession and financial crisis for the last 35 years — since Oil Shock I and floating exchange rates — the pain of debt default has been treated with the “hair of the dog” — more debt. Now that corporate AAA credits have almost disappeared, USGOV is one of the last AAA credits on the planet. It can still borrow hundreds of billions for 10 years at the absurdly low rate of 3.66%. Not until this yield soars into double digits will the pain of excessive gov’t borrowing (including paying “interest on interest”) begin to be felt.

    So, exactly as Bill Gross suggested, gov’t AAA credit will be substituted in massive quantities for impaired or defaulted junk debt. It’s the “hair of the dog” routine, all over again. You can almost hear another click of the gargantuan debt ratchet. And the leveraged speculating community is gearing up to put that government booty to work in Bubble III — oh, yeah! Pimp my house, Hank! I’m a nothin’-down NINJA, baby!

    But … who’s going to bail out USGOV in the NEXT crisis? Nobody. Thus, as Barry R. projected, “soft default” via escalating inflation is the only road out of this suffocating slough. This is how empires die — slowly. The Brits are still around, but they aren’t an empire no more.

    When you see all them flags waving in the political conventions — they’re waving goodbye to a prosperous America. Boomers will still get their $1,500 SocSec check, but it will hardly buy a pack of gum. Some will have to sell their bodies to science. Mmmmm, Soylent Green for breakfast! Enjoy!

  10. Mark commented on Sep 6

    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.

  11. Mark E Hoffer commented on Sep 6


    he wouldn’t know, he hasn’t been told.

    John(2) sounds like a client of PIM(P)CO.

  12. Jim Haygood commented on Sep 6

    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.

  13. Winston Munn commented on Sep 6

    Dr. Zeus Teaches Kids About China and U.S. Finances

    I’m Uncle Sam
    I’m Uncle Sam
    Sam I am

    Will you bail me from this jam?
    I will not bail you from this jam
    I do not trust you Sam I am

    But I have home loans
    and loans on cars
    and I have nukes that shoot near and far

    So will you bail me from this jam?
    It’s all AAA
    from Sam I Am

    I will not buy your lousy loans
    on cars and nukes and empty homes
    This is you own mess, your own jam
    You’re on you own
    Sam I Am

  14. Tom commented on Sep 6


    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$

  15. jc commented on Sep 6

    Congress gave teamBush a blank check for Iraq and they promised us a quick easy war that would pay for itself with Iraqi oil, look what we have a trillion dollars later (all borrowed of course)

    Disregard whatever they say about the cost of the F&F takeover, it will be monumental.

  16. Paul Jones commented on Sep 6

    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.

  17. JustinTheSkeptic commented on Sep 6

    Does the government now bail-out commercial mortgages? Where does it end?

  18. Mark E Hoffer commented on Sep 6

    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?

  19. jc commented on Sep 6

    TeamBush doubled the national debt in their first 7 years and it’s going out with a half trillion dollar deficit.

    Now they take another 6 trillion onto the government books plus Fed rate loans to banks, brokers and soon $50B to the almost insolvent Big 3.

    The current $300B debt servicing cost is going to explode, it’s already the third highest expenditure, what happens when both the principal amount and the interest costs move up in tandem? A trillion a year in debt servicing?, what institution can survive with debt servicing cost as their largest expenditure. Welcome to Weimar Amerika! The choice will be US federal borrowing default or hyperinflation to pay off the debt with largely worthless dollars.

    It’ll be hyperinflation because its largely en train, and inflation can always be blamed on vague “others”, it’s takes a “buck stops here” type of President to default and they’re hard to find.

  20. Bruce commented on Sep 6

    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

  21. larster commented on Sep 6

    The upcoming election creates problems in trying to pull this off, but does anyone believe that they are going to inject money quarter by quarter? Under this plan, every quarter that they inject capital will create rumors of insolvency, shake markets up, etc. The only way to make this work is to be as forthright as possible and inject enough capital to give them a shot at success. I remember Paulson sitting in China saying that there were no plans to inject capital. Now, three months later here we are. Does anyone have confidence in this crowd.

  22. Damian commented on Sep 6

    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.

  23. me commented on Sep 6

    “With due respect are you crazy. “Freezing the securitization of the housing market” would dry up the supply of retail housing finance almost completely.” (John (2))

    The sister-in-law works in a car dealership. She said there is no business. 60% was leases and there are NO leases. For the balance, the buyers are NOT qualified for a loan on those expensive models so they are trying to push USED cars.

    It is already happening in autos so why is housing different? Just like used cars there are plenty of apartments available.

  24. km4 commented on Sep 6

    “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

  25. me commented on Sep 6

    “what do people think will happen in the markets on Monday? ”

    Damian I think it is an admission of how bad things are in the economy, ergo buy, the market will skyrocket. It always does the opposite of what I expect.

  26. Strasser commented on Sep 6


    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”:

  27. Anna Lee commented on Sep 6

    I shuddered as Congress gave them a blank check but I thought the blank check stopped at the debt limit. Am I wrong or is everyone assuming Congress will raise the debt limit without debate?

  28. Mark commented on Sep 6

    @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.

  29. JustinTheSkeptic commented on Sep 6

    BR, or anyone for that matter, have you read Jim Creamers take on the bail-out. He seems to think that this is going to put an end to the free-fall in home prices. I just don’t see it. His arguement is that there are so many more people living in this country now then 20 years ago, so the historically high home inventory will be eaten up by the larger population numbers. Seems like a very simplistic arguement to me when the unemployment numbers are just beginning to get bad and will take another 10 to 16 quarters to bottom. Yes, mortgages may become more available, but will that matter?

    Someone smarter than me…help me out on this one!

  30. AvlDao commented on Sep 6

    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.

  31. Mark commented on Sep 6

    @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).

  32. JL commented on Sep 6

    Much like Marx, Ayn Rand is nothing more than fiction and fantasy. No more useful for setting policy than Asimov or Winnie the Pooh (both of which can be termed “social commentary” too).

    The current condition of our financial markets is perfect example when “free” market forces are allowed to reign. Only problem is that markets are never truly free. The more powerful players will ALWAYS be able to game the system. If you think anything else – such as by removing any and all rules things will somehow will function thanks to “virtuous egotism” or some other bollocks you are naive or plain dishonest.

    The US has been through this so many times now from the run-up to The Great Depression, the S&L crisis, Dot-Com bust to today’s crisis fueled by an unregulated and reckless mortgage market (which may very well lead to The Greater Depression.

    As Einstein said “The definition of insanity is doing the same thing over and over again and expecting different results”.
    But as could be expected, the free marketeers/Rand crowd blame what few laws are still being enforced and instead keep demanding less and less restrictions and regulations – although of course many them still want the bailouts (as B.R. has noted many times).

    It’s time for facts and data to drive actions and policy, not ideology.

  33. AvlDao commented on Sep 6

    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?”

  34. John commented on Sep 6

    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.

    Posted by: Mark | Sep 6, 2008 8:46:24 AM

    Mark; if you’d take the trouble to read instead of jumping on your political hobby horse, I said neither NZ, the UK or Germany HAS an exact equivalent of the FDIC but that all rigorously regulate their banking sectors. Are you telling us that NZ does NOT regulate the banking industry there?

  35. Philippe commented on Sep 6

    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.

  36. Mark E Hoffer commented on Sep 6


    to your point: “It’s time for facts and data to drive actions and policy, not ideology.”
    Money, Banking, and the Federal Reserve: the Complete Transcript

    “In Article I, Section 8 of the U.S. Constitution, the people of the United States granted Congress the power “to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” The people never gave congress the constitutional power to delegate this money-creating and regulating responsibility to any private group. Yet this is exactly what the Federal Reserve Act of 1913 did. The bill was publicly promoted as a plan to reform the nation’s monetary system and stabilize the currency by taking control of it out of the hands of big bankers. In reality, of course, the Federal Reserve Act was written by the big bankers for the purpose of solidifying their control over our currency.

    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 that was given the power to be the sole issuer of U.S. money, with full control over its quantity and thus its value. Since this group of private bankers (the Fed) provides credit to the U.S. government when we spend money we don’t have, the Fed also is able to profit handsomely from the ever-increasing national debt. Because the Fed makes more money when the country goes deeper into debt, there is no incentive for the Fed to support any reductions in federal deficit spending. The more credit we need, the more money this cartel of private banks will make.

    The actions the Fed takes can drastically affect the economy simply by making decisions about the money supply and interest rates. The president, congress, big business, investors, home buyers and anyone else with an interest in our economy waits with baited breath every time the Federal Reserve Board meets. If they decide to raise interest rates, politicians and industries could fall, homes might not be purchased and jobs could be lost. If the Fed decides to lower the interest rates, politicians, industries, investors and consumers may prosper. There is too much power vested in a handful of people whose names would not be recognized by most Americans.
    Why do we allow such a small group of people on the Federal Reserve Board to wield so much power over our country’s economic well-being? As average Americans strive to earn a living, cope with rising costs of food, fuel and hopefully save or invest for the future, Congress and the Federal Reserve Bank are working insidiously against them. On a daily basis, every dollar they have is being devalued.

    Even though most Americans seem unaware of the current plight of the US dollar, especially in relation to the Euro, there is definitely a dollar crisis in the world economy because of the immense size of the international debt of America. America has now become the largest debtor in history, owing somewhere between $70 and $100 Trillion. The reckless deficit spending by our government, coupled with Federal Reserve currency devaluation, has become one of the greatest threats facing America today. Because Congress is routinely spending more than it can tax or borrow and the Fed is routinely printing “Fiat Money” (Dollars backed by nothing) out of thin air to make up the difference, this classic “one-two punch” threatens to further destroy the value of our dollars.

    The actions of both major political parties would seem to indicate that they want the Fed to print more “Fiat Money” to support their extravagant and unchecked spending habits. Most politicians want the printing presses to run faster and faster, create more credit, issue rebate checks, etc., so that the economy will somehow be magically healed by this dangerous financial potion, or so they believe. The President and members of Congress may love a system that generates more and more money for their special interest projects and earmarks, but the rest of us have good reason to be concerned about our monetary system and the future value of our American dollars.

    Issuing “Fiat Money” has allowed our government to live well beyond its means, but that practice cannot continue much longer as it is slowly destroying the value of our dollars. History shows us that when the destruction of monetary value becomes rampant, as the actions of our congress and the Fed would indicate, nearly everyone suffers and both the economic and political structure becomes unstable. The Federal Reserve System has been the tool used by the major bankers to allow them to gain control over the smaller regional and local banks. The Fed has also acted as the financing agency for Congress’ unprecedented deficit spending on an ever growing, more intrusive federal bureaucracy and the expansion of the welfare state. Some people believe that the private bankers in the Federal Reserve wield so much power that they can intentionally manipulate the economy in order to influence the results of our presidential elections.

    Our government and the American people do not need the help of any private banking cartel to manage our monetary system. We need to repeal the Federal Reserve Act and return control of our currency to Congress where it belongs, as was the intent of our Founders. We also need to have a serious national discussion about how real currency reform can be achieved. As long as the private bankers in the Federal Reserve have control over our nation’s money, Congress’ control of the purse-strings will not have the benefits the country’s Founders intended.

    I support legislation introduced by Congressman Ron Paul, of Texas, entitled “Federal Reserve Board Abolition Act (H.R. 2755) that will restore financial stability to America’s economy by abolishing the Federal Reserve.

    REF: H.R. 2755: Federal Reserve Board Abolition Act

    Published: March 16, 2008 7:38 PM

    –John Wallace

  37. Mark commented on Sep 6

    @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.

  38. Mak commented on Sep 6

    [typo]: …than *not* having one…

  39. House of Cards commented on Sep 6

    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.

  40. VennData commented on Sep 6

    Bush is socializing Fannie and Freddie after socializing TSA a few years back. That’s three.

    Clinton socialized zero industries. In fact he allowed private business to be done on the Internet over GOP objections (That’s worked out OK.)

    So if anybody tells you Obama is a “socialist” or “will socialize America” that’s patently false, since there are few private businesses left to socialize.

  41. Lala commented on Sep 6

    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!

  42. jc commented on Sep 6

    Whose ox gets gored?
    from mortgage insiders blogsite of Bob Blake. If Paulson zeros out the preferred stock then he pushes a lot of medium & regional banks underwater with their capital. He says F&F preferred is $36B (their total common is about $10B).

    Fannie Mae and Freddie Mac Stockholders

    Paulson and the Fed’s biggest decision is what to do with the preferred stock pegged at $36 Billion in outstanding shares since many regional banks already on the brink themselves, hold those shares. If they can legally find a way to make preferred stock holders whole while wiping out the common share stock holders they will. If Paulson does this, he’d better watch his back. Joe Sixpack has a lot of money through pension and mutual funds still in Fannie and Freddie.

    Religion is what keeps the poor from murdering the rich.
    ~ Napoleon

    Since Napolean is right, Paulson better be glad this is a God fearing Nation.

    Regardless, Fannie Mae and Freddie Mac will not be same after Sunday.

    Good Luck!

  43. Bob A commented on Sep 6

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

  44. JC commented on Sep 6

    Is it just me or does Paulson seem more concerned with Chinese investors than US investors?

  45. km4 commented on Sep 6

    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

  46. VJ commented on Sep 6


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

    It would be more useful being burned for heat.

  47. DeDude commented on Sep 6

    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.

  48. John(2) commented on Sep 6

    * 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.

    Posted by: Mark | Sep 6, 2008 11:34:05 AM

    They are never going to get rid of F/F as either GSE’s or entirely public corporations because they exist to fulfil a need: namely the injection of liquidity into the retail housing finance market when private sources of finance dry up which, as it happens, is exactly the case now. Hence this bit of bailout socialism as you’d call it by this extremely conservative administration. Didn’t someone once say reality has a liberal bias?

    As for the FDIC, it has worked just fine for seventy years. If it didn’t exist the streets would be lined with people trying to get their money out of the 117 institutions the FDIC says are in trouble. What would that do for the stability of the financial system. In Britain when a similar situation developed at Northern Rock the govt was forced to take emergency action to protect depositors. Essentially your argument seems to boil down to a claim that neutralisation of moral hazard by the FDIC has eliminated a deterrent to reckless behavior by banking execs, well it wasn’t even a factor in the investment banking community and they still displayed massive greed and recklessness.

    You are however correct in saying there has been a failure of govt. A complete failure to properly regulate an industry that has engaged in dangerous financial engineering that it didn’t clearly understand itself. And of course a failure of monetary policy by the Fed which was led by a leading economist of decidely conservative views.

  49. VJ commented on Sep 6

    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.

  50. leftback commented on Sep 6

    I posted this about 5pm yesterday, and it has been really interesting to read all of the comments from Barry and everyone else:

    “If the Freddie and Fannie bail out is for real, then what happens Monday?

    FRE and FNM common stock tanks. Treasuries sell off. The $ tanks and gold takes off. Do the rest of the financials rally on reduced counter-party risk, increased stability? Market rally, short squeeze?”

    A tremendous amount of people who post on this blog seem to be very focussed on interpretations of various economic theories. I am not – I am a complete amateur, but I am interested in how the people of this country are going to survive, and I care especially about those who were not responsible for blowing the bubble, rich and poor. I am also interested in how to trade my way through this extraordinarily interesting economic nightmare in which we find ourselves.

    So let’s ditch the theories and talk about what we can see. There have been alternating waves of ‘inflation’ (falling $)and deflation (rising $) this year. This pattern of alternation is likely to continue, and this bailout will obviously cause the $ to fall again. I am ultimately not that interested in the inflation v. deflation debate except to note that the debt load is so massive that deflation must prevail, but we are not going to get there in a straight line. The hyperinflation scenario has to be off the table as our leaders, however misguided, are not insane.

    Now, from the trading perspective, what happens depends a little bit on the details, although there may well be a mindless knee-jerk rally in stocks. The GSE common stock will go to zero. It’s what happens to the preferred that is important in the short term here, since a lot of regional banks own a ton of the preferred. If the preferred goes to zero, this is bad for banks. If the preferred AND the debt is bailed out, then this thing is a monster and treasuries will be killed even more than they will anyway. It would be like Paulson to announce the bailout but withhold some of the details for a while.

    So Monday might be a good day to stand back and watch. My way of playing this is to note that gold stocks like ABX are at three year lows and gold has put in a floor, so I think the risk:reward ratio is good there.
    If there is a big rally next week then this will once again provide great shorting opportunities, especially in retail which is massively overvalued. The banks remain a treacherous but very tradeable area, if there is a euphoric rally it doesn’t change things much, they cannot all be bailed out.

  51. formergop commented on Sep 6

    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

    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’.”

  52. Scott in Chicago commented on Sep 6

    I’ve read Rand, Orwell & Marx to name three of the referenced tomes discussed previously. All valuable reads. The problem with Rand, Marx, and I’ll toss in Milton Friedman (go ahead, genuflect, sheep), is that they have no sense of human nature. Greed, emotion, avarice trump the rational. Markets are simply not rational things; they are the creations of men and thus cannot be.

    The bailout of the F-bombs while predictable, is another sham; another worldwide Davos cronyistic pay off.

    All these free marketeers, these Friedmanites, when the shit hits the fan, run straight to Keynes. Pussies and liars. Free market capitalism: Privatize profits, socialize losses. A sham and a scam.

    Livin’ la Vida Kudlow,
    Scott in Chicago

  53. VennData commented on Sep 6

    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?

  54. Philippe commented on Sep 6

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

    Agree with Bob the merit of this bail out plan is to clarify a legal flaw, avoid a post mortem crisis involving many investors.

  55. John(2) commented on Sep 6

    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.

  56. Unsympathetic commented on Sep 6

    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.

  57. Edmund Freeman commented on Sep 6

    So the Bush Admin is going to take over Fannie and Freddie? And the GOP is desperate to win in Nov and wants a economic boost?

    You know, worrying about things like credit history, home value, income history — it just shows a lack of faith in the American consumer. If it’s a mortgage, Fannie and Freddie should securitize it.

    Let No Mortgage be Left Behind.

  58. Tom commented on Sep 6

    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


    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.

  59. Frank commented on Sep 6

    John (2), I agree. Government exists (or should exist) to deal with the big stuff…the military protects us from foreign threats, the FDA protects our food and drugs, etc. I’d say the potential meltdown of the $12 trillion mortgage market falls in that category as well. For those who believe a bailout will add an onerous burden on the U.S. taxpayer, consider the income side of the ledger as well. What do you suppose would happen to the government’s tax income if the U.S. economy, and perhaps the global economy, were to crater due to a meltdown in the mortgage market while the government sits idly by watching it all happen?

  60. clip bartow commented on Sep 6

    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

  61. s0mebody commented on Sep 6

    “As for the FDIC, it has worked just fine for seventy years. If it didn’t exist the streets would be lined with people trying to get their money out of the 117 institutions the FDIC says are in trouble. What would that do for the stability of the financial system.” -John(2)

    Well that sounds like a brilliant use of government funds. Create a subsidy so even jackasses can “manage money” at their insolvent bank. I can’t understand why you think that makes a system stable. It just shifts the risk to the people while bank management can do whatever they want with your deposits/taxpayer bailout money.

  62. Vermont Trader commented on Sep 6

    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?

  63. s0mebody commented on Sep 6

    To the people defending the bailout:

    To me, arguing whether or not the gov’t should bailout F&F misses the point. The mortgage bubble was a gov’t sponsored bubble. Turning a blind eye to fraud and massive abuse of/by the Federal Reserve and the U.S. dollar. The people who profited most in this enterprise are the ones running the show. They are the ones bailing themselves out. If you didn’t profit from the housing boom/bust, you are the ones paying for it.

    What would be nice to see is the market react in some way on Monday that is counter to the governments intentions. Do commodities start the next bull leg up? Do treasuries start sliding aggressively? If the market doesn’t do something in response to tell the government that this kind of shit is not acceptable, I will be disappointed.

    “Government exists (or should exist) to deal with the big stuff…the military protects us from foreign threats” -Frank

    Generally I would agree that the government should organize the military, but I don’t think today’s U.S. military necessarily acts in the best interest and to defend the country anymore. It’s the U.S. offense in the global game of Risk, and the people in charge don’t have benevolent intentions when dispatching an army.

  64. DL commented on Sep 6

    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).

  65. speedlet commented on Sep 6

    The voices of shock and protest here are a little baffling.

    Everyone knew this bailout was coming. At this point it’s almost a non-event.

  66. Vermont Trader commented on Sep 6

    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.

  67. Mark E Hoffer commented on Sep 6

    crosspost from the Ted Rall thread:

    “I just read something by Paul Craig Roberts where he asserts that a rather influential group of blood thirsty war lovers are still very much influencing ALL our government policy. The connection to the present state of the economy is that these types thrive on social anarchy. They don’t just profit from war. They yearn for an impoverished mass to be willing to do anything for crumbs. These PR vampires have probably seen Ted Rall’s cartoon and are planning to set up cameras and mikes in impoverished areas and charge the rich to watch the poor suffer. No, I’m not kidding.
    This crazy group of fascists has tha same “private hobbies” that Hitler’s entourage had. It seems despotic power always brings with it the love of depraved activity. These sick bastards have got to go.
    Don’t blame the bean counters at the Government agencies. They are just “following orders”. No, if you’ve got an incumbent senator or congressman that doesn’t support impeachment, vote him out. The impeachment thing is moot but the balls of a legislator to deny the constitution says it all. This is NOT a republican or democrat problem. It goes way beyond that.

    Posted by: AGG | Sep 5, 2008 6:57:48 PM


    No doubt. So many are playing, still, the Left/Right game, distracted from the fact that they’re the Game to be stilled..

    Posted by: Mark E Hoffer | Sep 6, 2008 2:28:23 PM

  68. ttop commented on Sep 6

    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?

  69. Michael commented on Sep 6

    Saying that taxpayers are going to pay for this is wishful thinking. The US already has a $10 trillion debt. Most middle class families are overburdened and cannot afford a tax increase. Neither will our children pay for this. People that are unemployed or employed in domestic services cannot bail out giant banks. China probably said “if you don’t bail us out we’ll stop paying for your wars.” Or something like that. The US will do what Weimar Germany did to pay off it’s debts – print money, a lot of it, creating mass inflation.

  70. donna commented on Sep 6

    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.

  71. jr commented on Sep 6

    W, in New Zealand they don’t have an FDIC — by choice.

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


    Interesting theory. Didn’t work out too well when last practiced in the US (1929). Can you say run on the banks?

    Another great read for syncing up with the times is _The Great Crash_. History doesn’t repeat itself, but it does rhyme.

    Ayn Rand had some interesting ideas, but played them out to the extremes in novels. Novels are fiction. Real life requires a system of multiple checks and balances. Investors are one check. Government is another. Consumers are a third and are often poorly informed.

    I think we can agree that the consequences for banks and their owners should be greater.

  72. godot10 commented on Sep 6

    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! -).

  73. Michael LittleBig commented on Sep 6

    Who was it that said the worst is over?

    Who was it that said cheer up, things could be worse,so I cheered up and things got worse.

    Thank God that Congress has all the answers.
    Only one question, whose side is Congress on?

  74. bailoutsRus commented on Sep 6

    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!

  75. lala commented on Sep 6

    The question of whether the FDIC should exisit is moot, as is the question of a freddie and fannie bailout.

    What isn’t moot is how the hell we get in front of this train wreck. Of course this would mean recognizing that we have a train wreck which is what we need everyone to start doing.

    I would love it if the market dropped 500 points on Monday due to the massive consequences of the bailout but i bet is goes up 250. The talking heads on CNBC will all talk about how this is good this will mean the stabilization of the housing market.

    We will not hear about how August saw record foreclosures, record numbers of people behind on mortgage payments and the highest unemployment rate in 6 years. We most definaltely will not hear about the fact that regardless of how cheap houses become the majority of the middle class households have a negative savings rate and $10,000 in credit card debt.

    There are many that say we are in the most serious downturn since the great depression. Yet most forecasts call for a mild downturn.

  76. Tony K commented on Sep 6

    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!!!

  77. Billy commented on Sep 6

    So really, all I want to know as a true American investor, “don’t care how many workers your layin’ off just want to know if your stock will beat the S&P is – When will my SKF see 150 again.

    For all this talk about the governments role in business, and who does our government govern for, it all started in 1980 folks, when Ronnie told us we need not pay a price for everything, the whole ride was for free. We have been voting that way ever since. Long as I don’t need to pay for it sounds good to me, energy, deregulation, spending, WAR. Including Bill (Republican) Clinton, we are a generation of me first.

    So do I have a hope with SKF??? Please, make those Preferred shares worth nothing.

  78. Mr Mortgage commented on Sep 6

    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.



  79. leftback commented on Sep 6


    Patience… Many banks are holding a pile of shit and are completely insolvent. This bailout fucks the taxpayers up the rear but it just kicks the can down the road. When it comes to medium sized banks it just will not be possible to rescue them all.

    They can’t print enough to reflate this bubble, and sooner or later this thing will crash. Take your time and learn to read charts, then you can buy into SKF again.

    Pay extra attention to Steve Barry, Karen and Vermont Trader, not only are they sharp about macroeconomics, I am betting those guys don’t make too many bad trades.

  80. Billy commented on Sep 6

    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.

  81. Gregor commented on Sep 6

    The analog to the events of 1998 continue, as I have been watching the comparisons all year. In 1998 a bull market in tech stocks was taking place in the US, just as a financial crisis continued from the previous year, in Emerging Markets. Asia kicked off that crisis in 1997, and its resolution took place the following year, when Russia blew up. I don’t know if people remember some of those details, but, South Koreans turned in gold to the government to try and shore up the SKWon, and the Hong Kong Govt bought stocks on the Hang Seng. The balance sheets of the Emerging markets were not so good.

    Now it’s 2008 and we know where the center of the financial crisis lies. Despite the current self-serving and inward looking declarations from New York that “the rest of the world is at least as bad off as us” nothing remotely supports that view, factually, or fundamentally. So in 1998 a bull market was taking place tech stocks, as the rest of the world was blowing up. After correcting a brutal 33% from July to late September, the COMP went on to put in its final move over the next 18+ months. That’s probably when the bubble actually was defined. Just like the Nikkei in the previous decade, a crisis in the 7th or 8th year–before the final advance.

    The bull market now of course is in oil, and select commodities. Wall Street, like the famous New Yorker cartoon from 20 years ago, looks out on the world from Manhattan’s grid, and is of course unaware that the rest of the world exists in any sustainable form, outside of our own well being.

    There’s a global industrial expansion going on, that has alot to do with demographics and urbanization of regions with enormous populations. The FRE/FNM deal pours embalming fluid on the US financial system. It pushes systemic risk way, way down. The price is debasement of the currency. It’s not a good day for the Deflationists. I would remind that Bernanke’s speciality in his academic work was the Credit Transmission System.

    The US needs a weak, but more stable USD for another few years. The last thing we need is purchasing power, enabling us to consume stuff. We need to make stuff, and ship it out. We’re a significant commodity producer. We’ve got lots of wheat to grow, coal to export. And we can make lots of movies.

    Final question: is the wad of cash the government will ultimately blow on shoring up the financial system going to be really any larger than the wad of cash we’ve blown on 5 years of war? There is no return on investment for the wars, either. Everyone acts like this is new, you know, the US government printing money and blowing it on stuff. I know people who have been worried about the Dollar and the US financial system and our debt for 10, 20, 30 years. Seems to me we are living in a time very similar to LBJ’s Guns N’ Butter period.

  82. wunsacon commented on Sep 7

    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?


  83. Strasser commented on Sep 7

    House of Cards

    … should you not give credit for what you have posted above to the author, Don Rich…
    the “Real Cost of a Full Bailout” as was given here (Sep 6, 2008 10:30:46 AM)?

  84. Smithy commented on Sep 7

    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.

  85. Fred S. commented on Sep 8

    Sounds like they have opened a door for law suits if the accounting has been so opaque. I hope someone besides the shareholders and employees get slammed. Mudd and the other dud should not cross go and collect the multi-millions in severance. They should be put in jail.

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