As wee discussed Saturday, the details of the Fan-Fred bailout will be announced early Sunday at 11 am.
In my opinion, this is very consistent with the Fed focus on asset prices. I believe that focus is an error the Fed has consistently made since Greenspan took rates down to 1% to bailout the tech wreck of 2000-03. When the US announces a major piece of government legislation on a Sunday afternoon in order to goose Asian markets before they open, you have to question just what the priorities of the nation’s leaders are.
WSJ:
The U.S. Treasury is expected to announce early Sunday afternoon details of a plan under which regulators will effectively take temporary control over government-sponsored mortgage investors Fannie Mae and Freddie Mac.
The Treasury won’t necessarily make a large injection of capital immediately into the ailing companies, which provide the bulk of funding for U.S. home mortgages. But people familiar with the plan said the Treasury will stand ready to provide capital as needed, depending how quickly losses deplete the companies’ meager capital holdings.
More later . . .
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Source:
Treasury to Outline Fan-Fred Plan
By DEBORAH SOLOMON, JAMES R. HAGERTY and DAMIAN PALETTA
September 7, 2008 12:42 a.m.
http://online.wsj.com/article/SB122073255846107191.html
high fiven over at Pimpco this weekend. this
guy has more power than greenspan and bernake combined. how did this happen?
Billy Gross knew this was coming and got on the networks pronto to make it look like he’s calling the shots.
If he’s not talking his book, he’s not breathing.
“””When the US announces a major piece of government legislation on a Sunday afternoon in order to goose Asian markets before they open, you have to question just what the priorities of the nation’s leaders are.”””
Well, our “leaders” (and Wall Street) unfortunately have their priorities straight. They mortgaged the country to the Chinese, so now they need to make sure our new owners are happy with what they bought.
Losers at the SEC ought to stop wasting their time on the naked short sellers and look at the market manipulation currenlty being conducted by the biggest bunch of market crooks of all time — the U.S. government. The Fed and the Treasury are considered solely with asset prices and nothing else. This will bite us all in the ass yet again. How many contrived asset bubbles can market participants be asked to endure before individulas just walk away from these markets?
So why hasn’t this happened before the “solution” to the Fannie/Freddie problem was announced? It’s partly because of the $300 Billion or so of Auction rate securities that are still “out there”.
At a 6% yield, a 30 year 4.5% coupon would be worth about $800. Almost all of the Auction rate securities are backed by long term stuff that trade at some spread off of the treasury markets. Liquidation of this stuff needs to be done at levels that do not inflict too much pain on their originators. This requires low long term rates.
The auction rate market is busted. Probably forever. All of the $300 billion of assets backing these things must be liquidated. Somehow the Treasury and Fed has kept long term rates at levels that helps price the underlying assets higher than they would otherwise be priced. (This applies to all other long debt also.)
The assets underlying this paper, some of which is of dubious quality, are going to get “bid down” under any circumstances. If long term treasury yields were at 6% they would get bid down another 15 – 20%. Bankers can not absorb another $40-60 Billion hit in addition to all the other problems they have.
The halls and walls in NY are full of people working overtime to place the underlying securities with long term investors (where they should have been sold in the first place).
This process is probably moving at a good pace, thanks partly to the low level of interest rates and the recent strong dollar. After this process is finished, and as soon as more of the other bogus shit is moved offshore, I believe rates are due to make a big run. This means bond prices drop, maybe significantly.
Can anyone tell me why I should not buy TBT, the UltraShort Lehman 20+ Year Treasury ProShares ETF? This is an Inverse interest rate ETF that I have been watching since its introduction and I think it tracks treasuries as good as can be expected.
goosie-goosie, or ugly duckling?
First two paragraphs not poster above.
What happens to treasury yields when the Government now explicitly, not implicitly, guarantees all this shit that Fannie and Freddie have issued? The logical conclusion is that Fannie and Freddie paper gets bid up – dramatically! Really, let’s look further.
By any measure we all know that with inflation at the highest levels we have seen in decades and with our balance of payments deficit showing no signs of abating, that both the ten year and the long bond should be priced to yield at least 6%. Maybe more
Doesn’t it make more sense to step in at once to shore up a failing enterprise rather than wait until it starts collapsing in full view?
It’s important to note that the Fed’s and the Treasury’s goal is NOT to goose asset prices anywhere. If the Fed’s intention was to boost asset prices it would be adding to liquidity via Open Market Operations. Instead, the Fed contracted its balance sheet by a net $10.9 billion last week. This was likely a preemptive move to offset the liquidity injection that was coming to the market in the form of the GSE bailout over this weekend. The Fed has been scrupulous in offsetting all liquidity transfers from its ‘Alphabet Soup Operations’ via OMO since April.
The Fed and the Treasury are instead successfully starving the investment banks of trading capital while channeling liquidity successfully to where it is needed most: the mortgage markets. They are very successfully managing the tail risk of bank insolvency by accepting low-grade collateral in exchange for Treasuries, but this does not add liquidity. When they do provide liquidity to help banks meet short-term calls on Tier-1 capital, they offset this with OMOs. And the stimulative measures by the OFHEO and Congress do NOT add to liquidity unless the Fed monetizes the debt.
The reason they announce these bailouts on weekends is that there is still a very large bank and GSE short position via options and swaps among global hedgies. An announcement on Sunday night is the worst scenario for these hedgies because one side of their portfolios will drop (commodities and emerging market positions) overnight, but they can not cover the other side of their trade until Monday morning in the U.S. because the options and swaps on U.S. equity positions do not trade with any liquidity overseas. So the hedgies walk in to margin calls on Monday morning.
This serves the purpose of global central banks, as these same hedgies are adding to global inflationary measures at the margin. When they are forced to sell, commodities sell off (in the short term), which gives the central banks more flexibility in monetary policy.
The Fed has been masterful in applying this technique. In true RoBEN Hood style, the Fed has orchestrated a massive transfer of wealth from the rich hedgies to the poor homeowner.
“The Treasury won’t necessarily make a large injection of capital immediately into the ailing companies, which provide the bulk of funding for U.S. home mortgages.”
Yeah. Like they said that Fannie and Freddie were fine. Then they passed some legislation ‘just in case’ the might need some help.
IMHO, this is a rudderless ship in a storm that can see the rocks coming. I suspect that the inner circles have known for a long while how bad this is, but in a classic example of crisis management have slowly moved to the point of intervention in order to prevent a panic.
What really disturbs me is that, so far at least, every worst case scenario put forth by the Fed, SEC and other top level economic tinkerers has been surpassed when reality takes hold.
What are they NOT telling us about this “assistance” plan for Fannie and Freddie?
Wayne – Im glad you brought that up. I have been watching PST and TBT since their intro’s and I think they will have their time in court.
Not yet though. Prob a 2009-2010 story. I expect rates to go lower and to drag treasuries with it, continuing what some call the next bubble to burst.
However, I am definitely going to be buying some of those shares in the near future and want to own a nice position in both as we enter 2009
Maybe with the market’s giddy eupohia over this long-anticipated bailout, the powers that be will feel more complacent about pulling the plug on someone else’s tenuous life support system. WaMu, Lehman?
Fed Rescue of Lending Giants Imminent
The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to th
TPTB are trying to save the world. I think they acted now because of the recent sharp global sell-off, especially last Thursday. The same thing happened prior to the BSC weekend “bailout”. The really serious selloffs have been occurring in concert with global markets. And they know if TROW crashes, we crash with it; so the Sunday afternoon announcement is an attempt to stop a global meltdown.
Likewise, the leak on Friday was a successful attempt (once again) to stop our markets from crashing after falling 340 points on Thursday – led by financials – and another 125 on Friday morning.
But it appears to me, markets around the world have become so fragile and volatile recently that a crash may still happen as a result of sheer exhaustion! How many panicky sell-offs can be instantly transformed into rallies by news (sometimes only rumor) of pending injection of borrowed fiat currency, only to have more bad news and market weakness follow within days or weeks, before the world collectively throws up their hands and walks away from the markets in disgust, frustration, and an unwillingness to endure the manic / depressive sentiment swings any longer?
When will they get fed up with being manipulated like marionettes reaching for their wallets to buy whenever Hank or Ben pulls the string?
Or perhaps the final capitulation will come when it becomes clear that the size of our economic problems are too big to be healed with Band-Aids applied to BSC, Freddie and Fannie, etc. (Besides, was there really ever any doubt that the government would backstop Fannie and Freddie? Other than short-term traders, I can’t imagine who would have really been surprised by this rumor on Friday and suddenly concluded that now was the time to go long stocks.)
How long before it becomes apparent that the technically bankrupt US government cannot bailout the entire financial sector with borrowed fiat currency?
I thought the “will divide” analysis was very interesting. What do other people think of it? My view of it is, if correct, I would still think it wrong because I think proping house prices is wrong, as well as doomed to failure.
This appears to be a stopgap measure to stop the foreign Fannie/Freddie bond redemptions. The other issue is that our/Fed support is unlimited in that unless the share of GSE purchasing of mortgages declines, the Fed will own a majority of the housing debt. Cramer can fantasize about 45 yr mgt’s, etc. but I am not so sure that our capital starved financial institutions will all of a sudden open up the flood gates for housing debt. The fact that they are not forthcoming with a total package scares me, quite frankly.
So, will the departing Executive Officers and Board Members of Freddie and Fanny get their million dollar Golden Parachutes as they are heaved over the edge? Will their severance packages now be on the Taxpayers’ bill as well?
As long as we’re appalled that this is actually happening, that it all has come to this, should we also expect to be outraged?
Just a simple question, as IIRC, it’s not been discussed as yet.
–mf
Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds
$376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts
As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.
The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury’s most recent “Report on Foreign Portfolio Holdings of U.S. Securities.”
FreedomWorks President Matt Kibbe commented, “The prospectus for every GSE bond clearly states that it is not backed by the United States government. That’s why investors holding agency bonds already receive a significant risk premium over Treasuries.”
“A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors.”
“A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”
Mortgage Reits — The one conclusion that is a given in the story is that MBS spreads will narrow and mortgage rates will decline somewhat. This is great for the senior agency paper and Mortgage Reit book values and the Reits’ ability to lever and to step into the void left by the GSE’s growth being reined in by the Treasury. (As I forwarded last nigth, there is a good lead story in Grant’s for Monday covering why mortgage reits should be the beneficiaries of the GSE’s demise and rescue due to tightening MBS spreads). So, since the government is going to slow the growth (if not reverse it) of the GSE’s balance sheet (as both candidates and Congress are whining about reducing the risk to taxpayers and how these behemoths were allowed to grow too much) -the mortgage reits step in to the role of MBS buyer. Wall Street will latch onto that and pump these stocks and do serial capital raises for them. At these wide MBS spreads and the stocks at a premium to book, it becomes an accretive virtuous cycle for a while. These could become market darlings.
Housing Will Remain Moribund — Though the psychology towards housing/retail will be elevated in the initial euphoria phase on Monday as mortgage rates to consumers will be viewed as coming down a bit, high interest rates were never the primary (secondary or tertiary) problems that faced housing. Lack of affordability has been the driving force that corrupted housing. Housing prices divided by household incomes moved several standard deviations above historical trend line and a marked reduction in credit availability with the removal of the affordability products including option arms, alt-a, no doc and lo doc that helped drive prices too high to begin with. Going forward there are other hurdles that the FNM/FRE rescue doesn’t resolve – like the $160 billion recast of interest rates in 2009-11, a weakening economy, a record level of unsold housing inventory, rising foreclosures/delinquenciesetc. Therefore, 35-50 bips lower rates will provide a modest lift but only to those who are credit worthy and in a position to refinance. But interest rates will be nowhere near low enough to trigger a refi boom. Lower rates will not provide credit to those on the margin. The only thing that will accomplish that greater affordability is further declines in home prices and the sopping up of all the excess supply built up by high prices and over-building. Credit will continue to deteriorate lagged to falling prices whether spreads fall or not and credit sensitive financials will suffer.
Anticipation — The timing might have been a surprise but the actions were not – FNM/FRE’s shares have plummeted in anticipation and Paulson recently asked for and got a Congressional vote and a Presidential signature to do exactly what has been announced.
Fresno Dan,
Well, it some ways his comments make sense, but you could also say you are throwing good money after bad…
People on these blogs who are fiscally conservative aren’t oblivious to the problem, it is just the lack of sound fiscal policy year after year after year guarantees these sorts of things will recur, and that is what galls most of us..
And if, when you read “governement relief” or something other in the future, those more vocal of us who call these ideas “hairbrained” or even more descriptive terminology, they are really saying “stop making such awful decisions for the TAXPAYER…for that is who is really Uncle Same anyway..
Paul Volcker said Friday that the next decade will be the worst since the great depression and that the current US financial system was broken…that is what galls us…
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw4J8Ty2h3fE
Bruce in Tennessee
“…very consistent with the Fed focus on asset prices…”
Which assets? Certainly not those denominated in US dollars.
“US Treasury bails out Fanny Mae” etc…unfortunately no one seems to have cottoned onto the root cause of the major disease which is rotting the golden apples on the trees in most Western Countries and that is- the absolute greed for money ( and truckloads of it) by most of the senior executives of the banks, finance companies and assorted big businesses.
Here in New Zealand..up to-date about 27 finance companies have fallen over…the size of the pay packets and perks that many of the associated company directors awarded themselves is nothing short of astonishing…
Say what you like..but sheer greed for unearned money is driving the current downfall of the US and other countries. As is predictable…its the peasants who will pay the price and suffer for the excesses and financial gluttony of those in high places.
Democrats in Congress and Bill Clinton relaxed lending stardards in the years ago so low income people with bad credit could buy houses with no downpayment, poor credit and no proof that there income was enough to afford the house.
Just Google old newspaper articles or the Congressional Record.
“A brief history of the Fannie Mae and Freddie Mac mess is in order. Back in the days when a Bank or Savings and Loan approved a home loan, they did so with lending standards that had historically led to only safe loans. They had to because they kept the loan and were responsible if it failed. These standards included 3 major parts.
First, the mortgage payments could be no greater that a set percentage of your income, usually about 40 percent.
Second, a down payment was required of about 10 percent or above so the new owner would immediately have some equity in the home.
Third, A good credit rating was required to prove you had a history of paying your bills.
Some adjustments could be made, for example people that had poor credit could get a loan with a larger down payment so if the loan failed, the bank could still resell the house and cover the loan.”
http://strategicthought-charles77.blogspot.com/2008/09/democrats-created-fannie-mae-and.html