Fannie and Freddie Bailout

How will this play with respect to the election? Can McCain run against the bailout? Is there some way for Obama to use this to his advantage, e.g. by talking about the failure to impose adequate regulatory control under the Bush administration and how that will continue with McCain? I don’t think it matters much for the election except for the overall perception that things aren’t going very well, and that's bad news for the incumbent and for the incumbent's party:

U.S. Rescue Seen at Hand for 2 Mortgage Giants, NY Times: Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac ... that the government was preparing to seize the two companies and place them in a conservatorship...

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend... The executives were told that ... they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt...

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history. ...

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. ...

Comments

[Mark]

Interesting July 14, 2008 article from Chris Whalen arguing, "Time for Hank Paulson to Do the Right Thing and Nationalize the GSEs"
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=293

[Bruce Wilder]

And, the gov't can't give a haircut to the other parties, because . . . ?

[Winslow R.]

Bernanke made a mistake today that could lead to the downfall of the monetary policy tool as we approach the zero bound, despite his protests to the contrary.

Japan bailed out out banks through nationalization and lost the monetary policy tool. The U.S. treasury looks to bailout banks by indirectly lowering interest rates. With one more cycle of the housing market, housing loans will be transferred to the U.S. treasury enabled by a large amount of deficit spending.

What gets interesting is what will replace the credit driven asset cycles as the new economic driver. Japan has chosen to use fiscal policy, but there is another choice.

I’d prefer the venture/vulture capitalists of the 90’s model expanded for the 00’s by giving citizen capitalists direct access to the Fed. Smaller/more numerous investors held accountable through citizenship. Citizen investors with possibly unlimited access to the Fed window, as so few would take advantage of the opportunity.

If the treasury starts buying the mortgages of every citizen Bernanke may be too late to save monetary policy as interest rates will fall to zero. Bernanke has already opened the window to more than just a few commercial banks, demonstrating the ability for monetary policy to start from the ground up.

Opening the Fed window to citizens is the logical next step for Ben (and Japan) as it will save monetary policy from the trash bin of history.

[RW]

Since McCain spent so much time on his biography and sincerity during his acceptance speech it may have escaped notice that there were actually a few policy statements embedded in there including his proposition that we need further deregulation (AKA reduce government bureaucracy) so, yes, the Democrats could probably find it useful to point that out explicitly given the consequences of deregulation thus far (more accurately the consequences of refusing to govern and enforce existing regulation but whatever).

While I find the continuing decay in our financial system more immediately alarming (and frankly depressing) it seems clear based upon what policy statements are publicly available that neither McCain nor any of his people are broadly aware of the growing crisis nor is there any indication they would not make it worse given their apparent preconceptions about how the global economy works.

Less clear is whether even the more realistic and well articulated economic approaches expressed by the Obama camp would prove sufficient to stem this rising tide. I hate to sound apocalyptic but this solvency crisis cum credit crunch is beginning to look more persistent and pervasive than even the most pessimistic scenario my febrile imagination could conjure six months ago although the apparent unwillingness to simply declare Frannie bankrupt w/ all equity worthless does rather tickle my irony bone; my old penchant for the macabre resurrecting itself no doubt.

[Markus]

"I don’t think it matters much for the election except for the overall perception that things aren’t going very well, and that's bad news for the incumbent and for the incumbent's party"

Yep.

Unfortunately the average voter has no idea what Fanny and Freddy do.

They will get a sense that something is very wrong from the headlines though.

[swag]

Privatize profits, socialize losses: Capitalism: the Unknown Ideal!

[Bruce Wilder]

I have seen later reports that the preferred shareholders will not be harmed and the executives will continue in place more or less indefinitely. That sounds more like a Republican plan.

The bank Andrew McCain (adopted son from the first marriage) was associated with, failed today. Maybe, he could alert Dad to the nature of the crisis.

The news that 4 million mortgage holders are behind on their payments or in foreclosure certainly suggests a prolonged crisis of huge proportions. Regardless of whether people understand what is happening with Fannie and Freddie, a great many must understand something of how their own financial situation, and the financial situations of friends and neighbors, has changed. Equity wiped out, HELOCs gone. Life in Suburbia has to look pretty glum to an awful lot of people -- this isn't dim awareness of what is happening to an acronym in Washington, for lots of people, this is the prospect of financial and personal ruin looming over self, friends and family.

This is an opportunity for demagoguery.

[Winslow R.]

Some of the financial guys were looking for a monetary/fiscal redesign, others for a monetary redesign, and still others for an outright bailout.

The fiscal bailout guys won. Bill Gross should be happy!

Bernanke should have used the financial squeeze to elicit more power for the Fed. He should have held out for the ability to redesign the monetary mechanism. I believe this is the first time I've said unfavorable things about Ben.

Bad Ben!

I blame his fellow academics for failure as well. Where were your suggestions/support for a transmission overhaul? Still hung up on simple regulations for a repeatedly failed system? You guys are a miserable bunch in need of new jobs.

Makin just put up his September post, looking for a redesign……

“Maybe the shared stake of the global economic system and financial stability will aid in the design of a superior financial and regulatory framework. Be assured, however, that such a framework is not yet in place, nor is its outline very clear.
Risk is always with us. In modern times, so, too, is intensified systemic risk. We are just more aware of both than we have been for a while. Maybe that is a good thing.”

http://www.aei.org/publications/pubID.28565/pub_detail.asp

Pimco’s McCulley is looking for a monetary redesign…..

“Therefore, I do. Specifically, Mr. Bernanke put squarely on the table the need for “macroprudential” regulatory arrangements, designed to temper the inherent pro-cyclicality of existing regulatory/capital requirement arrangements. If established and successful in implementation, a macroprudential approach would temper the Minsky-esque boom-bust tendencies of banking and the capital markets.
Such an outcome would, in turn, have direct implications for monetary policy. More specifically, if the transmission mechanism between the Fed funds rate, financial conditions and aggregate demand could be made more tightly bound, it would reduce the overall cyclical range the Fed would need to pursue for the Fed funds rate. ”
http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2008/Global+Central+Bank+Focus+McCulley+Sept+2008+In+the+Fullness+of+Time.htm

….while Pimco’s Gross is looking for a fiscal bailout....

“The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise. ”
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Bill+Gross+Sept+2008+Bull+Market.htm

[a]

It's the Dems who voted to give enough authority to Paulson for any bailout (and the Repubs voted against). So I think politically it's a wash.

If it happens, truly a sad day. The American taxpayer rescuing Bill Gross, American asset holders (i.e. the rich), and the Chinese.

[Patricia Shannon]

Widespread home foreclosures are in the interest of the plutocracy. They can afford to buy the foreclosed houses and hold onto them until the market rises, or make them into rental properties.

[Patricia Shannon]

I'm not theorizing that the housing crash is due to some giant conspiracy, just that some people will take advantage of it now that it's happened, and some may even oppose measures that would interfere with their ability to cash in on the situation.

[hari]

Look this was forecast by Dr Doom long ago...and now it's all coming true to fashion...with the credit crunch. I suspect this winter is going to be more gloomy than the election on Nov 4th.

Don't forget the raison detre for *nationalization* of F&F is principally to avoid default with foreign creditors who are currently the mainstay of Treasury.

The malaise has caught almost the entire spectrum of European economy - since the banking sector holds a lot of F&F instruments (guranteed by Treasury) - and bringing down the emerging markets even more precipitously.

Where will it all end? Dr Gloom is also not telling...the market finally will have to bottom out.

[Patricia Shannon]

It was easy to see the financial mess coming quite awhile ago. Anybody who was surprised has no room to talk about other people (such as voters and home buyers) being dumb.

Anybody want to bet that we'll deal adequately with environmental degradation (including topsoil depletion) and global warming before we reach a crisis?

[a]

From an email by James Bianco of Arbor Research sent to and posted by Naked Capitalism:

http://www.nakedcapitalism.com/2008/09/ny-times-fannie-freddie-nationalization.html

"If you’re are keeping score at home we had Sunday night/Monday morning “save the world” press releases in August 2007 (cut of the discount rate), December 2007 (TAF), January 2008 (ease 75 bps), March 2008 (Bear) and July 2008 (first Fannie/Freddie rescue) and now September. Anyone want to believe this is the last one (which will be the sixth in 14 months) will be the one that finally works and saves the world?"

[yamada]

Why we think central bank should not become insolvent, by providing original fund to the banks for write-offs, to save financial systems?
We must remember the way how bubble was made, and build up the system to cope with the bubble, accordingly.

Bubble is caused by peoples’ expectation that the price of asset(real estate) will soar in future, with pouring high-powered money to the asset side of economic units’ balance-sheet. So, to solve this problem, such asset bubble on economic units’ balance-sheet must get ridden of in order, by the new system as below. Though it may be seen contradictory, high-powered money enables to work this new system. Please remember, no one has ever invented the solution in history, which fact that entraps economic dispute into confusion nowadays.

1. Every economic unit’s(including banks) assets that caused the bubble(real estate or CDO et al) on balance sheet should be evaluated on mark to market basis by the authorization of a third party(maybe auditor), which brings about some insolvent(i.e. debt section surpasses asset section on balance sheet) economic units.
2. FRB decide to write off a certain amount of the loans to the banks, which amount distributed to each bank according to the amount of each banks’ insolvency, calculated on 1.
3. Every bank that gets profit from written off should next enforced to, by using the profit from written off as original fund, write off its loans to its each debtor, according to the amount of insolvency of each debtor. If the bank is unable to use all the written off profit it earned, the remainder is taxed all.
4. Other economic unit that gets profit from the written off by the bank should next enforced to, by using the profit from the written off as original fund, write off it’s loan(or trade claim) to its each debtor, according to the amount of insolvency of each debtor. If the economic unit is unable to use all profit it earned, the remainder is taxed all. These processes are to be repeated operationally.
5. In consequence, the bubble portion of the targeted asset is extracted from the economy, and is transformed to tax.
6. It’s up to the Government how they dispose of their above tax claims, considering the situation of economy, of each bank and of each economic unit. Talking about the latter two, as a option the Government should examine the possibility of the bank’s and economic units’ turnaround, together with the other creditors, remaining desirable debt to the bank’s and economic unit(empirically it's ten to fifteen times annual earnings before interest, taxes, depreciation and amortization, known as EBITDA, of the economic unit), writing off the rest debt, with taking into account the value of disposable collateral(that do not accrue earnings), of guarantor and of consolidated basis.
7. Every write off must be supervised and tracable by centralized function of the system. So every write off must be executed through this function. Every write off may be done through this function, which exist on internet for access.
8. For cross-border. For each non-residential economic unit, the amount of write off should also be calculated in the same way as 4. , on the only cause from specific asset depreciation in the resident country. Economic unit that will be written off should next write off in the same booked currency. In case profit of the written off exists on the non-residential economic units, it's taxed and absorbed by the foreign(=non-residential) government and handed over to the sovereign(=residential) government of the currency, based on treaty.
9. In case inflation expectation exists, the system enables FRB to on one hand raise benchmark rate to cope with inflation expectation, on the other hand restructuring the balance sheets of economic units.
10. FRB should carefully watch the rate of the number of insolvent economic units to the number of all economic units in the US, when deciding the amount of the loans(trade claim) written off on 2.
11. As a result, FRB may bankrupt because FRB paid for asset depreciation to save financial system, the new second FRB shall be established which take over the first FRB.

For further details, please see the blog as below:

http://reversewealtheffect.blogspot.com/

[Down Payment]

Stop making loans to people who don't pay back money. Problem solved. 20% down payment solves almost all mortgage payback problems. Allowing smaller homes to be built for the less well to do solves the afford-ability problem.

A generation ago a brand new home could be purchased for the CPI indexed equivalent of about 60K. Saving up 20% of that is doable for the lower half. Expecting the lower half to borrow 500K for a McMansion in over zoned areas is what is causing the problems. 500K is just not doable for the lower half. It never will be.

Affordable prices, and 20% down. That will give people a roof over their heads, and keep the financial system sound.

[Blissex]

«Expecting the lower half to borrow 500K for a McMansion in over zoned areas is what is causing the problems. 500K is just not doable for the lower half. It never will be.»

Why should the Republicans (or the Democrats) care about the lower half?

From their point of view, apart from being lazy, exploitative parasites (and being in a large percentage brown or dark skinned nobodies) who generate almost no GDP, that lower half don't vote much and most importantly almost never make campaign donations.

Light skinned, makes campaign donations, works in marketing or finance, fully vested -- this is the profile of the people who matter, the WINNERS.

America is the land of the WINNERS, not of the LOSERS in bottom half (or bottom 80%) of the population.

[anne]

"Stop making loans to people who don't pay back money," or better, make loans that people, certain people, do not ever have to pay back. Oh, no taxes paid on the rents, either, neither. The new, new lending policy.....

http://www.nytimes.com/2008/09/06/nyregion/06rangel.html?hp=&pagewanted=print

September 6, 2008

Interest Was Waived for Rangel on Loan for Villa
By DAVID KOCIENIEWSKI and DAVID M. HALBFINGER

A mortgage was extended to Representative Charles B. Rangel by a company connected to a campaign donor.

[anne]

Charles Rangel is Chair of the House Ways and Means Committee, and knows lots of ways and has the means.

[Down Payment]

Unfortunately, I suppose you have a point Blissex. Since inexpensive housing is mostly forbidden, it is obvious how little they care about the bottom 50% (80%?). Manufactured homes are forbidden almost everywhere, despite being safe and affordable. Almost all new homes are McMansions that only the top 50% (80%) can afford. No one else seems to matter.

I wish they had mercy on the bottom 50%, but they obviously don't. Affordable housing never comes to pass.

[Andrew Hartman]

A few points:
1.Fannie and Freddie seem to me to be a mostly Democrat show: Franklin Raines, Jim Johnson, Jamie Gorelick, Barney Frank. They have resisted oversight and proper accounting for
years. Let's ask Obama how this happened. I doubt he knows.

2. Pity the poor borrowers? They got the money and lived
in larger houses than they had before or they cashed out
on a refi and bought a new SUV and a swimming pool. That
was oppression?

3. Investors of all stripes-including plutocrats-have taken
big losses on all of this credit destruction. Those who were
in charge will no longer be in charge and the entire financial system will not be the way it was. Is that not
consequence enough?

[RW]

A few responses:
1. "Seem"? Got any evidence for that claim?
2. Yes, like bread and the circus in Rome
3. No, plutocrats will be bailed out and illicit profits will not be disgorged by the ones who depart

[Andrew Hartman]

Hey RW:

I guess Jimmy Cayne is feeling pretty good right now. After
all, he was made whole. Right?

[Bruce Wilder]

Patricia Shannon: "I'm not theorizing that the housing crash is due to some giant conspiracy, just that some people will take advantage of it now that it's happened, and some may even oppose measures that would interfere with their ability to cash in on the situation."

Of course, you could "theorize" that some people actually did promote measures to create the situation. Presumably, if well-informed, you could ditch the theory and report it. Andrew Hartman will do so, even if you don't, and he will never be accussed of peddling a conspiracy theory. It's just that his theory will make the plutocrats out as the hapless victims of Democrats and middle-class conmen.

The Right-Wing is destroying this country. And, no one, apparently, has the memory or critical thinking skills to call them on it.

Sarah Palin lies about opposing the "Bridge to Nowhere" -- does anyone say, "she's a liar"? No, of course not, that would be rude. Besides, only Democrats are liars. And, anne would be upset that we were attacking a poor, defenseless woman. And, John McCain is an honorable man, because he was a POW and broke under torture. See, torture does work! And, we'll soon have a President, who has the scars to prove it. Won't that be dandy! Maybe, not needing another house, he'll sell the White House on e-bay -- very Republican cloth coat of him, don't you think?

[Brian]

This administration is responsible for much of the ills afflicting this country. Unfortunately for the people who post on this board, Fannie Mae and Freddie Mac are not among their sins. These are totally creations of the Democratic Party, which has used them as a source of campaign cash, jobs, policy ("affordable" housing) and earmarks (through their foundations). The lobbying machine is legendary in Washington, and was easily the most powerful in the capital. Barney Frank was the biggest enabler. In a recent New York Times article covering the history of the mortgage giants, he was confronted with his efforts to prevent them from being reined in. He "couldn't recall" his support of them in 1992, when a serious effort was being made against them. Last week, the Wall Street Journal reported in a profile of Paulson that the Secretary railed against his own aides who had been quoted as favoring curbing the two. Why? Because Barney Frank exploded. Rewrite history on your little website, it doesn't change the facts.

Blame Bush for Iraq, torture, incompetence, and lax regulation -- but Fannie and Freddie are Democrats. Your child, you raised them.

It was a tactical error to give Paulson the authority to inject government funds into them. Even if Paulson didn't want to use it, it gave the Bush administration the chance to kill them, once and for all. Now they will be shrunken down into a government agency that packages and insurers, possibly folded into the FHA. Meanwhile, the securitization operations will be parceled out. There will be 5, 6, 10 players created. Never again will a couple of companies dominate this way.

[Ninja Zombie]

Is it really a winning strategy for the party of five of the "Subprime Six" (plus Rangel) to draw attention to the mortgage mess?

http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal

If the media focuses on overall doom and gloom and ignores the corruption, it might work. But this could SERIOUSLY backfire...

[RW]

C'mon Andrew, Jimmy Cayne?

I'm sure that, along with Richard Fuld, he's feeling the bitter humiliation of being dropped from the Forbes Annual List of Billionaires(TM) but he's seen the dumps before and will probably take another toke and settle for the a crummy $6-700 million this year plus whatever he's got stashed offshore (rumoured to be more than a billion but no way to confirm that of course and doubtful that Cayne would risk disclosing it even to garner a seat higher at the table at Steve Schwarzman's next birthday party).

I do wonder though if he'll be able to keep the two adjacent apartments at the Plaza he closed on this March for $28.24 million: 6,000 square feet plus room service, maid service and unparalleled views of Central Park. Jeez, losing that could really smart.

Well, he'll always have bridge, eh?

[Bruce Wilder]

That's right, Brian. Fannie and Freddie were Democrats. And, the Republicans finally managed to destroy them, along with the home equity of half of the mortgage holders in the country. Just like the Republicans destroyed the Savings & Loans before them, but managed to hang Whitewater around the neck of the Democrat, Bill Clinton.

The percentage of home "owners" behind on their payments or in foreclosure is rapidly approaching 10 percent. Ownership society, indeed.

The bottom 90% still have have half the country's income, so Republicans will be able to feed on us for a long time to come.

[Bruce Wilder]

Ninja Zombie: "Is it really a winning strategy . . ."

Are we going to pretend that corruption was not a central player?

How were Fannie and Freddie destroyed? They were corrupted. Drawn toward Wall Street executive compensation and the accounting scandals to support same. Induced to abandon their traditional clientele, the small and regional banks, to become the underwriter for the major aggregators, and then thrown overboard in the big bubble, greed blinded them to the need for restraint.

Gradually, all the institutions, which have long protected the middle class from being fleeced and rolled by the very, very rich have been ground down to nothing. And, Robert Solow will lecture us on intermediation.

Welcome to Casino America!

[Blissex]

«I guess Jimmy Cayne is feeling pretty good right now. After all, he was made whole. Right?»

He gets to keep whatever he has already extracted by giving himself huge bonuses by betting BS capital on fatally risky securities over the last 10 years, and then he also got $60m as a consolation prize from the Fed*mart too for the shares he gave himself and could not liquidate before those bets blew up.

I was reading a tongue-in-cheek article about him in Fortune recently:

http://money.cnn.com/2008/07/31/magazines/fortune/rise_and_fall_Cayne_cohan.fortune

I doubt that he is going to complain.

[esb]

Lots of "folks" in over at GS this weekend.

Word is that credible reports were reaching Paulson that the current managements (FRE, FNM) were starting to behave in an irresponsible, self-serving manner, with tips flowing freely to the bond houses. (A hotline to Newport Beach perhaps?)

If so, then this rushed event is all about getting the senior people out immediately.

Gross' frenetic activity indicates that he is attmepting to influence (or reverse) an unfavorable decision on the preferreds.

Frankly, I hope he gets his clock cleaned (or shattered).

[Ninja Zombie]

Bruce Wilder: *Are we going to pretend that corruption was not a central player?*

If you want this mess to hurt Republicans, then that's what you will have to do.

Make no mistake: Democrats are the party of the mortgage industry. Democrats (and one Republican) got sweetheart loan deals ("friends of Angelo"), and the NY Democrat Chuck Rangel is the one who got an interest free loan. The only thing making this remotely a Republican problem is that Bush was president while it occurred.

The media has mostly ignored this. If mortgages become an election issue, that won't continue: the internet and Fox News will get the story out.

[Winslow R.]

"Make no mistake: Democrats are the party of the mortgage industry.

So many Republican's don't need mortgages, we already knew that?

Do Democrats/Republicans need investment bankers, or hedge funds?