"The" Big bale out (Fanny & Freddie) Is weekend?

[Mega]

http://business.timesonline.co.uk/to...cle4688214.ece
Get ready space cer-dets!
Mike

[icm63]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

Dont worry its contained to sub prime ! - Bernake

There will be no bailout ! - Paulson

[Rekutyn]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

Any guesses as to how this will affect the dollar/stock market Monday?

I don't think the Chinese nor the Europeans are in a spot where they can re-position themselves. In fact, they're probably more likely to be the parties responsible for fronting us the cash.

[GRG55]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

Any guesses as to how this will affect the dollar/stock market Monday?...

Good question. On the announcement of Treasury's new powers to spend unlimited amounts of taxpayer money to save these critters, a well orchestrated CB effort boosted the US$ into its current bounce. Although this should ultimately be dollar negative, could be the market bids up the housing sector and Fannie and Freddie preferred shares, on the belief that everybody can now live happily ever after? Bill Gross must be having a wonderful weekend knowing J6P just made him wealthier.

I don't think the Chinese nor the Europeans are in a spot where they can re-position themselves. In fact, they're probably more likely to be the parties responsible for fronting us the cash.

How true...

[GRG55]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

Good question. On the announcement of Treasury's new powers to spend unlimited amounts of taxpayer money to save these critters, a well orchestrated CB effort boosted the US$ into its current bounce. Although this should ultimately be dollar negative, could be the market bids up the housing sector and Fannie and Freddie preferred shares, on the belief that everybody can now live happily ever after? Bill Gross must be having a wonderful weekend knowing J6P just made him wealthier.



How true...

Just found this interesting commentary on same topic by Barry Ritholtz:

WTF is up with PIMCO ?

Strange things are afoot at the biggest bond fund in the world. A weird sense of panic seems to be emanating from the West Coast fixed income specialists.

I suspect it may have something to do with with the fact they are loaded to the gills with paper from Fannie & Freddie (FNM & FRE) -- a trade that has worked out exceedingly well. Despite this -- or perhaps because of it -- the latest noise from the boys from Newport Beach is increasingly odd, even desperate sounding.

I do not know if they are genuinely terrified of a major meltdown in the global economy, or worried about their book. Maybe they are looking for an exit, and not finding one.

The WSJ noted about PIMCO:

The bond-management firm has posted good gains since the credit crunch began last year, in part by betting big on mortgage debt tied to Fannie Mae and Freddie Mac -- whose implicit government backing and relative safety compared with other securities has helped keep their bond returns in the black.

Now as both entities show continued financial weakness and many parts of the bond market remain pressured, a main challenge for Mr. El-Erian, 50 years old, will be sustaining Pimco's winning returns.

Then came the very strange commentary Bill Gross posted at the PIMCO site -- a weird, quasi-homage to Cramer, which then reiterated the expected pain of a deleveraging and asset liquidation.

Here's Gross:

What Happens During Delevering

1. Risk spreads, liquidity spreads, volatility, term premiums – they all go;

2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium;

3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down;

The above might seem simplistic to us at PIMCO but it is not necessarily clear to all readers. Term premiums? Risk spreads? Volatility? What do they have to do with bull or bear markets? Well, what

Step 1 really says is that as GSEs, banks, investment banks, global hedge funds and even individual households delever their balance sheets by shedding assets, they lower the prices of not just what they are selling, but other securities that are arbitrageable within the marketplace.

Odd.

Maybe this is part of the problem: China Pulls Back From Fannie, Freddie

Amid jitters about the future of Fannie Mae and Freddie Mac, China's four biggest listed banks have pared back their holdings in debt related to the two U.S. mortgage giants. At the end of June, the four banks held a combined $23.28 billion of debt issued or guaranteed by Fannie and Freddie. That's a small fraction of the trillions of dollars outstanding, but the reductions attracted interest as a possible gauge of broader sentiment toward such securities.

In an interview with Bloomberg, Gross all but pleaded for a Federal bailout of Fannie/Freddie (U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says):

The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.

"Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.

OK, I'm game for a Federal bailout -- but what's a fair haircut for Stock holders? Preferred holders? Bondholders? In exchange for the US putting the 5 trillion dollars worth of exposure back on the US books, I propose haircuts of 100%, 25% and 10% respectively.

Perhaps there is no natural exit, and they are fearful of holding this to term, as some of the marks will be quite negative between now and when the paper is due.

Their solution? You and me and that guy behind the tree !

The rescue of Frannie PIMCO is proposing risks hyper inflation, as the government would be on the hook for another 5-6 trillion in liabilities, of which less than 10% are likely to default...

[World Traveler]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

New York Times confirms.

"WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

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. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

http://www.nytimes.com/2008/09/06/bu...nted=1&_r=3&hp


The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

[Supercilious]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

Hmmmm... This can prove more profitable than Bear. (Disclosure: I have 31% of my portfolio short on FNM )

[c1ue]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

Unfortunately, the desire to see the 'physics' of bad finance be allowed to function has again been trumped by good old crony capitalism:

http://seattlepi.nwsource.com/busine..._fannie06.html

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies' new regulator. The executives were told that, under the plan, 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, people briefed on the discussions said.

Virtually wiped out is not completely wiped out, the question is going to be what the 'virtual' means.

Also separately Mish is saying the bailout is going to be a gradual process: i.e. government injections of capital will be by quarter and on an as-needed basis.

The Chinese Water Torture method of rescue.

US of Bananamerica here we come!

[icm63]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

if i read this certificate correctly FNM debt is not covered by the USA taxpayer.
source: http://market-ticker.denninger.net/a...d-And-You.html

Q: Can you find anything in that bold, black, ALL-CAPITALS text that leave any wiggle room of any sort?


Fannie_serendipityThumb.jpg

[Supercilious]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

if i read this certificate correctly FNM debt is not covered by the USA taxpayer.
source: http://market-ticker.denninger.net/a...d-And-You.html

Q: Can you find anything in that bold, black, ALL-CAPITALS text that leave any wiggle room of any sort?

Sorry but that is a state of denial. It's sad. You can see more here:

http://finance.google.com/group/goog...343917b5dffd93

Or see this message:

From: chen...@yahoo.com - view profile Date: Sat, Sep 6 2008 2:33 pm Email: chen...@yahoo.com Rating: (1 user) show options Reply | Reply to Author | Forward | Print | Individual Message | Report Abuse | Find messages by this author FNM will open at 10$ on Monday. No common shares will be impacted. The CEO will be removed but FED will just pump more money into it.

Guess who gets wiped out and who skates free ? That's the oldest story (scam) on Wall Street.
Anyway, probably they will make the official announcement on Sunday and then we will find out all the details. Till then everything is still up in the air.

[rj1]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

I read some things on this yesterday.

Based on what I read, Fannie Mae and Freddie Mac have $5.3 trillion in mortgages they back. Obviously, not all of that $5.3 trillion will go bad. However, it's reasonable that a good-size percentage of it will.

1% of $5.3 trillion = $53 billion
2% = $106 billion
4% = $212 billion
5% = $265 billion
8% = $424 billion
10% = $530 billion

(To give you an idea on the size of that $5.3 trillion, President Bush on February 4th proposed a national budget of $3.1 trillion.)

Now to what I was looking up yesterday:

http://www.nakedcapitalism.com/2008/...-failures.html

Reader Steve A has been on the Friday night FDIC bank euthanasia watch, and in the last two weeks, he has discerned a disturbing trend. If this pattern persists, it seems a sign that things in bank-land may be much worse than is widely acknowledged.

From last week's post, "This Week's Bank Failure Surprisingly Costly," on the demise of the faith-based Integrity Bank of Alpharetta:

$250 to $300 million of losses for a mere $1.1 billion in assets bank? As reader Steve A noted:


Quote:

Today's failure of the amusingly named Integrity Bank of Alpharetta, GA, confirms two very ugly trends: once again, FDIC was only able to pass cash and cash-equivalents to the assuming bank, and the FDIC's loss estimate is extremely high ($250M - $350M on $1.1B of assets). I don't have hard numbers handy but I seem to recall that receivership losses in the range of 25% - 35% were unusual in the commercial bank failures of the late 80's. I could be wrong, but the numbers this year are extremely high. FDIC's expected losses certainly make me wonder what on earth the bank examiners were doing for the last year besides critiquing the bank's coffee and color scheme.

Now to this week's FDIC prepack, Silver State Bank of Henderson, Nevada:


Quote:

As of June 30, 2008, Silver State Bank had total assets of $2.0 billion and total deposits of $1.7 billion. Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3 percent.... Silver State Bank also had approximately $700 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.... In addition to assuming the failed bank's insured deposits, Nevada State Bank will purchase a small amount of assets comprised of cash and securities. The FDIC will retain the remaining assets for later disposition. The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is between $450 and $550 million.

The losses are stunning. and proportionately almost identical to the levels last week. a range of 22.5% to 27.5%. One wonders why the same loss estimate ranges are being applied to banks in two different states. Regardless, the estimates raise questions as to how these banks could have gotten in such bad shape without anyone taking notice.

The reason the range of losses matter is that yes, the FDIC insures all banks if they go bust, but the FDIC does this on a fractional reserve basis. The charge they give to banks is something along the lines of 0.05% for every FDIC-backed dollar. This is the best I can do as far as giving an idea of how money the FDIC actually has in backing the American banking system. It was written in late July shortly after Indymac Bancorp went under:

http://globaleconomicanalysis.blogsp...ound-when.html

There is roughly $6.84 Trillion in bank deposits in the American banking system. $2.60 Trillion of that is uninsured (the amount in bank accounts greater than $100k). There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Later in the first article in the comments section regarding the two small failed banks, an anonymous poster follows up with this:

I'm in [commercial real estate] in [Los Angeles], and banks are sending me more and more C+D [subprime] or land loans they want off their books. The reason that no market exists for these loans is that, even under the most optimistic scenario in which I could foreclose on these loans quickly and cheaply and then lease up res/retail or "blow out sale" some condos, the loans pencil out to being worth less than 50 cents on the dollar. Of course, the banks can't sell at this price, as the FDIC would quickly take them over. I have seen over seventy term sheets come across my desk in the last two weeks. These are the best loans out there. I asked the banks what they are holding back with C+D loans, and they said nothing. Think about it. What a phenomenal mis-allocation of resources. Not only was all the equity wiped out on these deals, but the debt part is worth less than 50% of the principal. In a hard asset like real estate! I have generally eschewed development deals, but even I was a small player in two local condo deals that started in 2005 and were basically given back to the bank. The reason these bank losses are so large is that the banks don't write them down until it becomes clear that the condos won't sell or the res/retail can't be leased up. This is all coming to a head right now as the developers are finally giving up their "call options" (they know they've been dramatically under water for a year) and just handing the keys back to the bank en masse. If my experience is at all representative (and it appears from these two bank failures that it might be), this is just the beginning. We are talking about huge losses on C+D loans, all coordinated to hit the banks in the next 9 to 12 months.

It's happening everywhere. If we take those mortgage losses and apply it to not only the banks but also the two GSEs, there just isn't enough money out there, even for the federal government.

[GRG55]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

New York Times confirms.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

Let's start a pool on how many $millions the severance packages will be for the boyz...:rolleyes:

[c1ue]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

It's happening everywhere. If we take those mortgage losses and apply it to not only the banks but also the two GSEs, there just isn't enough money out there, even for the federal government.

RJ,

There isn't enough money only if the government chooses not to print.

And that isn't very likely.

The dynamics of the situation is going to be a function of how fast the loans in Fannie and Freddie go bad.

From FNMA's 2nd quarter report (6/30/8):

11% of portfolio is Alt-A
(11.5% of Fannie's portfolio as of 8/8/08 is Alt-A: $307B)

0.3% is subprime

$947M of portfolio is jumbo conforming

If Alt-A delinquencies are 25% with losses in the 25% range (using Mish's WMALT-20070C1 as an example, and assuming LTV 90 and normal REO turnaround fees), then the $307B portfolio is holding about $19B in losses.

However, prime mortgage foreclosures are also going up.

Overall delinquency rates are now 6.35%

So it may be that the Fannie and Freddie losses aren't that great in the short term, but then again...

[rj1]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

RJ,

There isn't enough money only if the government chooses not to print.

And that isn't very likely.

"There's no such thing as a free lunch." If we choose to do that, at some point, there are going to be severe repercussions.

[c1ue]

Re: "The" Big bale out (Fanny & Freddie) Is weekend?

"There's no such thing as a free lunch." If we choose to do that, at some point, there are going to be severe repercussions.

Absolutely true.

I merely believe that given a choice between inflation induced by a weaker dollar (due to printing or whatever) vs. a collapse of the US banking system - the bankers in the government will always choose the former.