Archive for Monday, September 8, 2008

Analysis: In mortgage crisis, Treasury secretary sweeps in with full force

September 8, 2008


— Hurricane Hank swept through nation's capital Sunday with gale force regulatory winds and a tidal surge of federal cash, upending two of Washington's biggest enterprises and permanently changing the landscape of housing finance in America.

In wresting control of Fannie Mae and Freddie Mac, and in authorizing the Treasury to begin purchases of mortgage-backed securities, Secretary Henry M. Paulson Jr. has taken responsibility for assuring that low-interest loans will continue to flow into the country's hard-hit housing markets. Not since the early days of the Franklin Roosevelt administration, at the depth of the Great Depression, has the government taken such a direct role in the workings of the financial system.

Although the details of Sunday's takeover are complex, the rationale is quite simple: to restore some semblance of normalcy to the housing market. Paulson and other policy-makers think that until that happens, neither financial markets nor the wider economy will be able to regain their footing.

Fannie and Freddie did not go gently into conservatorship. Although their access to badly needed equity capital had dried up and their borrowing costs had increased, they had hoped that they could muddle through by raising fees and demanding higher interest rates from borrowers. But that plan was cut short when Paulson, backed by Fed Chairman Ben Bernanke and their newly empowered regulator, James Lockhart, concluded that Fannie and Freddie could no longer reconcile their sometimes conflicting obligations to shareholders and homeowners without posing additional risks to an already shaken financial system.

Fannie and Freddie could have fought the government in court, but that wasn't much of an option for companies whose business model was based on the perception that they were backed by the government. The market would have shut them down long before the first briefs were filed.

Under the deal they could not refuse, Fannie and Freddie directors and top executives will lose their jobs. Shareholders will lose their dividends, voting rights and most of their ownership stake, while agreeing to pay dearly for the government's money and backing. Left unharmed will be holders of trillions of dollars in Fannie and Freddie debt, or securities backed by mortgages that Fannie and Freddie have insured against default, who will get all their money back, with interest.

Until this weekend, Fannie and Freddie have been unique entities - for-profit, shareholder-owned companies that were required by government charters to provide low-cost capital to secondary mortgage markets in good times and bad.

But in the mid-1990s, things began to change. Rather than being satisfied with modest growth, Fannie and then Freddie began promising Wall Street double-digit earnings growth, which required them to grow their balance sheets well beyond what was necessary to assure liquidity in the mortgage market. Instead of just buying mortgages, insuring them and selling them in packages to investors, they bought more of them for their own portfolios, using ever-increasing amounts of borrowed money. Buying their own securities was profitable, but it left them highly exposed if anything went really wrong with the housing market, which is exactly what has happened.


jmadison 9 years, 8 months ago

Perhaps all the money these entities have lavished on our political class will now be used to provide low cost mortgages for the citizens of our country.

Godot 9 years, 8 months ago

Why The Fannie-Freddie Bailout Will Fail by Martin D. Weiss, Ph.D. 09-08-08With yesterday's announcement of the most massive federal bailout of all time, it's now official: Fannie Mae and Freddie Mac, the two largest mortgage lenders on Earth, are bankrupt.Some Washington bigwigs and bureaucrats will inevitably try to spin it. They'll avoid the "b" word with vengeance. They'll push the "c" word (conservatorship) with passion. And in the newspeak of 21st century bailouts, they'll tell you "it all depends on what the definition of solvency is."The truth: Without their accounting smoke and mirrors, Fannie and Freddie have no capital. The government is seizing control of their operations. Their chief executives are getting fired. Common shareholders will be virtually wiped out. Preferred shareholders will get pennies. If that's not wholesale bankruptcy, what is?.....................""Let's say I'm a foreign investor and I own U.S. Treasury bonds. This implies that I trust the U.S. government; that I loaned you my money for the purpose of running your government. Now you take my money and pass it on to a third party, a private company. So I say to you, 'What did you go and do that for? If I wanted to loan the money to that company, I would have done so myself - directly - in the first place. But I didn't. I didn't do it because I don't trust the company. I trusted you. But now I can't trust you anymore either. Now you're just one of them.' So the investor stops buying our bonds or, worse, dumps the government bonds he's holding, and then we are in trouble. Then we can't sell our government bonds anymore to pay off the old ones coming due. Then we, the United States government, default."

Mkh 9 years, 8 months ago

Corporate Socialism...the new opiate of America.

Godot 9 years, 8 months ago

"The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday."America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich: it's just bailing out financial institutions," Rogers said.[snip]""This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this," Rogers told "Squawk Box Europe."European stocks soared on Monday, led by banks. UBS was up 11 percent, BNP Paribas up 8 percent, Credit Agricole up 11.1 percent and HBOS up 13.8 percent."You certainly gonna see a huge jump in any financial institutions which owned a lot of Fannie [FNM 1.10 -5.94 (-84.37%) ] or Freddie [FRE 1.03 -4.07 (-79.8%) ] : because they don't have to worry about going bankrupt all of a sudden," Rogers said. (Watch the video on the left for the full interview)"Bank stocks around the world are going through the roof, that's 'cause they've all been bailed out. You don't see the homeowners in Kansas going through the roof 'cause they're not being bailed out," he added."

Godot 9 years, 8 months ago

The CEO's of Freddie and Fannie may have been fired for running their companies into the ground, but they will be paid millions of dollars in severance pay, straight out of the pockets of the taxpayers. much for McCain and Obama saying that this bailout will not reward those who caused the mess.

Godot 9 years, 8 months ago

No, Windlass, we have everyone in Congress who voted "yes" on H.B. 3221 to thank for this. They are the ones who gave the Treasury aka Hank Paulson a blank check to do whatever he saw fit. They abdicated their constitutional resonsibility to oversee the budget and gave it to an unelected official. The evildoers in the hedge funds and investment banks industry generously contribute to both political parties, but, in this campaign, they are clearly behind Obama.No doubt, George Soros has a great, big, cheshire cat grin on his face right now.

Sigmund 9 years, 8 months ago

Windlass (Anonymous) says: "We have only the Republicans to thank for these historically massive destructions: some 40-year effort to wipe out regulations and create a we-do-as-we-please economy, which is the capitalist's most cherished monster, the laissez-faire."Those regulations were changed for a political purpose, to encourage lending to low income borrowers who would not have been able to qualify for home loans at risk adjusted market rates."Fannie Mae operates under a federal charter called the Federal National Mortgage Association Charter Act, which confers certain rights and responsibilities on the company. The charter requires that the company increase liquidity in the residential mortgage finance market, promote access to mortgage credit throughout the country and provide assistance to the secondary market for residential mortgages." no where is the concept of making a profit mentioned! It was/is a subsidy program with as many democratic as republican finger prints, both parties are equally to blame. Just in case that was too subtle for you, "Fannie Mae has a special responsibility to facilitate housing for low- and moderate-income families and housing in underserved areas. Fannie Mae's status as a federally-chartered institution also confers certain benefits that help the company fulfill its mission. These benefits include: exclusion from the Securities and Exchange Commission's (SEC) registration requirements exemption from state and local income taxes the availability of our debt as collateral for public deposits* the eligibility of our securities for Federal Reserve open market purchases; and the ability of the U.S. Treasury Department to purchase up to $2.25 billion of our debt. and Fannie were TOLD to make subprime loans (low and moderate income borrowers) and make lots of them (increase liquidity) by Federal Charter with the understanding that if the borrowers defaulted the taxpayers would be on the hook. Privatize the profits and socialize the risk. It is hard to blame an institution for doing what they were told and the banks and brokers that relied upon the Fed's wink and nod that if things go south taxpayers would bail them out.Going forward Freddie and Fannie should be completely privatized and sold. The new companies should NOT have to make subprime loans to the poor or those moderate income with no hint that the federal government would be on the hook. BTW, this is the option favored by former Federal Reserve Chairman Alan Greenspan.

Sigmund 9 years, 8 months ago

What no one wants to talk about is what this means for National Health Services. Every proposal I have seen mimics Freddie's and Fannie's government charter. A quasi-private / quasi-government agency to provide health services for low and moderate income individuals. The only differences I see between any of the plans are in the degree of government involvement. Looking at the history of such schemes in the UK, Canada, or other of the Western Democracies does not give me a lot of hope.Back to the topic at hand, could Windlass or Godot provide links to the legislation they reference in their posts?

Godot 9 years, 8 months ago

Correction, these incompetents projected that it would cost only $4 per taxpayer. Unbelievable.

Godot 9 years, 8 months ago

Sigmund, here it is. I am laughing, already. The first lie is the statement that it will cost just $8 per taxpayer. Fools.

SandyMorgan 9 years, 8 months ago

This needs to be investigated, ala Enron

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