freddie and fannie rescue announced!- ny times

[jk]

http://www.nytimes.com/2008/07/14/wa...nieweb.html?hp

Rescue Sought for Fannie and Freddie


By STEPHEN LABATON
Published: July 14, 2008

WASHINGTON — Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday.

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion.

Today the two companies also hold or guarantee mortgages valued at more than $5 trillion.


etc

[Milton Kuo]

Re: freddie and fannie rescue announced!- ny times

Another show of astonishing incompetence from Washington. Does anyone there know anything about economics and markets? I don't see how buying the common stock of Fannie Mae and Freddie Mac is going to help the situation. If the government insists on saving these abominations, at least force them to issue new bonds and then buy the bonds. That way, FNM and FRE will at least get the use of the government money.

Buying the common isn't going to help anyone except the current bag-holders. FNM and FRE won't see the money and the government's (actually, the taxpayers are) going to be holding some paper that will soon be worthless.

[Mega]

Re: freddie and fannie rescue announced!- ny times

Gold is going to rocket!
The $ is DEAD!
Mike

[moonshot]

Re: freddie and fannie rescue announced!- ny times

Another show of astonishing incompetence from Washington. Does anyone there know anything about economics and markets? I don't see how buying the common stock of Fannie Mae and Freddie Mac is going to help the situation. If the government insists on saving these abominations, at least force them to issue new bonds and then buy the bonds. That way, FNM and FRE will at least get the use of the government money.

Buying the common isn't going to help anyone except the current bag-holders. FNM and FRE won't see the money and the government's (actually, the taxpayers are) going to be holding some paper that will soon be worthless.

JK, thanks for the timely catch.

MK, seems to me that by keeping the company alive and non-nationalized saves the government from explicitly adding trillions of FNM & FRE debt to the deficit, with the near-term ramifications for US borrowing costs and the dollar. There is no doubt the government will not allow FNM and FRE to collapse, much as some of us may wish for that.

[Mega]

Re: freddie and fannie rescue announced!- ny times

I have a "You Tube" from the FED Team:-
http://www.youtube.com/watch?v=GEBVVbvUw0U
Mike

[Mega]

Re: freddie and fannie rescue announced!- ny times

Hey, i was wrong.....the $ is getting STRONGER!
http://www.reuters.com/article/newsO...32789320080713
Mike

[downtherabbithole]

Re: freddie and fannie rescue announced!- ny times

That was such a sublime and accurate video to choose to comment on the situation. Had a good laugh but worry about what's next...

[Mega]

Re: freddie and fannie rescue announced!- ny times

Not to worry, everything is FINE:-
http://www.bloomberg.com/apps/news?p...sjs&refer=home
$ recovering strongly!
Mike

[JoeSixpack]

Re: freddie and fannie rescue announced!- ny times

"USD rises on the news"

Hmm im sceptical here, since the USD fell on Thursday and Friday for almost 2 cents against the EUR.

So is the explanation be that in order to service that debt, real rates have to increase, thus strenghten USD ?? Bonds are crashing here, which seems to support this.

And somehow i have the feeling bonds down is NOT due to equities rising (dow was up almost 100 on the globex open).

To me that looks like an recepy for disaster in equites..

We need an expert essay on this asap pls !! Im lost.

Thanks

[jk]

Re: freddie and fannie rescue announced!- ny times

i assume that "buying stock" means buying newly issued preferred to add to phony and fraudy's capital.

from the times:
"The implicit guarantee was a useful device both for the companies and the federal government. It has enabled the companies to get money in the debt markets at rates far lower than other companies and close to the same as treasury securities. At the same time, the Federal government did not have to record on its budget any significant liabilities for the large subsidy it was, in effecting, providing to the companies. Yet it also raised concerns among critics, who said it was unfair to rival companies and that it promoted a management laxity since executives knew that the companies could always count on a hand from the government if they began to falter."

i.e. the gse's have been the treasury's siv's, and now they have to be taken back onto the balance sheet! just like the banks!

[moonshot]

Re: freddie and fannie rescue announced!- ny times

i.e. the gse's have been the treasury's siv's, and now they have to be taken back onto the balance sheet! just like the banks!

Good analogy. But by buying stock and opening the Fed window, the government makes the implicit guarantee just a bit more explicit. This obviates the need to take the gse's assets and liabilities onto the government's balance sheet, at least in the near term.

[Supercilious]

Re: freddie and fannie rescue announced!- ny times

Thanks God for Friday morning buy to cover... These are times to sit on cash over the weekend

I think the story may be more complicated than a simple hosing T-bonds. Not saying that Bernanke doesn't have an obsessive compulsive printing behavior, but it may be more than that. Some interesting charts here.

[nathanhulick]

Re: freddie and fannie rescue announced!- ny times

The article doesnt say if the government is going to be buying common stock or some new preferred shares. I know the story I read earlier this morning (when the bailout was still officially in the planning stages), it said that the gov was going to buy preferred shares.

Obviously either way is a bailout, but I always thought that the stockholders were going to end up getting wiped out on this one. Its bad enough that the government is doing the bailout in the first place, but if they bail out the stockholders and leave taxpayers (and/or people who hold dollars) holding the bag, that is really awful.

I cant see how this could be good news for the dollar. Probably great news for gold, however.

[Milton Kuo]

Re: freddie and fannie rescue announced!- ny times

MK, seems to me that by keeping the company alive and non-nationalized saves the government from explicitly adding trillions of FNM & FRE debt to the deficit, with the near-term ramifications for US borrowing costs and the dollar. There is no doubt the government will not allow FNM and FRE to collapse, much as some of us may wish for that.

There are better ways to help FNM and FRE than buying stock (the New York Times article makes it sound like the government will buy common, not preferred). For starters, why not force FNM and FRE to issue super-senior bonds that the government buys. FNM and FRE can then use the money raised to fix themselves up, if that's somehow possible for these bastions of corruption and incompetence. By purchasing super-senior debt for itself, at least the government is first in line to get paid back if they should decide to let FNM and FRE hang.

I seriously doubt there would be many objections on the part of existing shareholders or bondholders at the issuance of senior debt--they really don't have much of a choice. If the shareholders object, they can enjoy the ride to zero. As for the bondholders, it's either let your rich uncle cut ahead of you in line or get eviscerated.

Personally, I would like to see FNM and FRE liquidated and their shareholders wiped out. However, if they must be saved, it should be done at as low a risk-adjusted cost as possible. It just seems that buying their (common?) stock is arguably one of the worst and most expensive ways to do so, in my opinion.

[moonshot]

Re: freddie and fannie rescue announced!- ny times

There are better ways to help FNM and FRE than buying stock (the New York Times article makes it sound like the government will buy common, not preferred). For starters, why not force FNM and FRE to issue super-senior bonds that the government buys. FNM and FRE can then use the money raised to fix themselves up, if that's somehow possible for these bastions of corruption and incompetence. By purchasing super-senior debt for itself, at least the government is first in line to get paid back if they should decide to let FNM and FRE hang.

I seriously doubt there would be many objections on the part of existing shareholders or bondholders at the issuance of senior debt--they really don't have much of a choice. If the shareholders object, they can enjoy the ride to zero. As for the bondholders, it's either let your rich uncle cut ahead of you in line or get eviscerated.

Personally, I would like to see FNM and FRE liquidated and their shareholders wiped out. However, if they must be saved, it should be done at as low a risk-adjusted cost as possible. It just seems that buying their (common?) stock is arguably one of the worst and most expensive ways to do so, in my opinion.

I like your arguments, and I too would like to see FNM and FRE liquidated, but we both know that's not gonna happen. Hell, I'd like the gov't to rescind the mortgage deduction (over time, so as not to unduly harm those who acted in reliance), but that's a pipe dream too.

The shareholders and bondholders do have a choice - it is in their interest for the company to reduce mortgage buying activity, limiting themselves to only the highest quality mortgages. I suspect that's what they would do right now if the government would allow it. Along with that, they would probably start selling off parts of their portfolio to increase cash on hand. And then hope the market recovers in the next 1-2 years. Expanding the business right now is very risky, and they will only do that if the government offers an incentive to do so, which is exactly what this proposal seems to be doing.