Fannie & Freddie Heading for "Conservatorship"
This was originally posted Thursday evening 07-10-2008 at 10:33 PM, but since it obviously resonated with so many people, I am moving this to Friday morning. Some great comments, too.
~~~
Gee, that didn't take long:
"Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.
The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt."
Bloomberg adds:
"The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, of Arizona, and Democratic Senator Charles Schumer, of New York.
The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms' shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies from failing and threatening a deeper housing recession."
I smell an ugly, taxpayer-funded bailout coming -- and I am utterly aghast at what its going to cost . . .
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Sources:
U.S. Considers Takeover of Two Mortgage Giants
STEPHEN LABATON and STEVEN R. WEISMAN
NYT, July 11, 2008
http://www.nytimes.com/2008/07/11/business/11fannie.html
Fannie, Freddie Are Too Big to Fail, Lawmakers Say
Dawn Kopecki
Bloomberg, July 10 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=avnMyKESZ2qk&
Friday, July 11, 2008 | 06:00 AM | Permalink
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Comments
Too big to fall.
Posted by: Hangtown | Jul 10, 2008 10:50:59 PM
It was real warming to hear all the assurances on CNBC from the same ol' talking heads...."these companies are too big to fail"...."they will not fail." As if the fact they they will be bailed out makes everything "O.K."
There are no free lunches.
What a massive bailout of Fannie and Freddie means is even larger Federal deficits and another run on the U.S. Dollar. Of course this will lead to the continued and anabated flight out of equities into hard commodities.
Observe the last several months of price action to get a feel for the next several months of price action.
These are the sort of developments that support the S&P 500 targets below 800 in the next few years.
- AT
Posted by: Andy Tabbo | Jul 10, 2008 10:52:21 PM
Phil Gramm would just say that you're a whiner.
Posted by: Mike in NoLA | Jul 10, 2008 10:54:02 PM
Gee...almost exactly as I spelled out here about an hour ago:
I really wasn't implying BK for F & F...the Government would likely step in before that. The companies would probably be nationalized and the shareholders will be for all intents and purposes wiped out. They probably won't raise taxes to pay for this, just create some electronic entries somewhere that add to our debt and make it harder to attract the capital we need to keep the dollar a viable currency, which will make...oil rise (seems all roads lead to that).
Posted by: Steve Barry | Jul 10, 2008 10:55:25 PM
Unbelievable... ugly, and yet inevitable.
Having avoided mortgage debt, many renters and taxpayers are about to own small slices of millions of mortgages - now that is asset structuring and securitization distilled to its essence.
Posted by: leftback | Jul 10, 2008 10:57:04 PM
The fiscal recklessness of the banks and the government in this country will force those who do not agree with these measures to pursue and and all methods of investing assets outside of this country as the gevernment of this country has no regard for the taxpayer in any way, shape or form. I'm pissed.
Posted by: TheGuru | Jul 10, 2008 10:58:24 PM
Well. If this doesn't qualify as 'blood in the water', what does? Now that word of this plan has leaked, how long before it's put into being? What does gold do? Is the winner of the CNBC Portfolio Challenge determined in one day based on playing the currency market?
Posted by: Chief Tomahawk | Jul 10, 2008 10:59:40 PM
So, let's see if I got this right. Big business runs themselves into debt with the help of our government. The debt is then transfered through legislation to what have always been two government agencies anyway until they become infected then our money becomes the cure. Why is it that the tax payers are always the one's sacrificing?
Posted by: Pat G. | Jul 10, 2008 11:01:24 PM
You guys seem so sour...just remember, this is the bill for arguably a 20 year debt fueled orgy, including stock, housing and commodity bubbles. Easy Al walked out on the bill.
Posted by: Steve Barry | Jul 10, 2008 11:04:15 PM
The dollar is going to tank a lot more, oil will go to $200/barrel, if not more and gold will go to $1,500, if not more. The big question is, will the Chinese and Japanese buy any more debt? Things are going to get real fuggin' ugly!!
Posted by: Joe Klein's conscience | Jul 10, 2008 11:07:16 PM
I smell an ugly, taxpayer-funded bailout coming -- and I am utterly aghast at what its going to cost . . .
----------------------
Aghast? I'm more like furious that we've been placed in this position in the first place. The financial debacle we're experiencing almost daily isn't the
result of vicissitudes in the economy or market. It's due to sheer
ineptness - all preventable - that we will all end up paying dearly for.
Posted by: James | Jul 10, 2008 11:08:02 PM
and to think George Bush was worried about his legacy.
Posted by: rexl | Jul 10, 2008 11:15:40 PM
James,
It wasn't all for nothing was it? Some of us will keep our McMansions, flat screen TVs and gas guzzling SUVs.
To Summarize: This was all very predictable to those who bothered to read a chart of total credit as % of GDP.
Posted by: Steve Barry | Jul 10, 2008 11:16:43 PM
On the bright side, the taxpayer won't have to pay much for the equity after Bill Poole's comments.
Posted by: John F. | Jul 10, 2008 11:22:11 PM
So is it too late to short FNM into the ground? Puts maybe? Or is now the time just right time? I just don't have any knowledge of "Conservatorships".
Posted by: CU | Jul 10, 2008 11:25:51 PM
Oh c'mon Barry I'm used to better than that. You are aghast at the cost of the government saving Fannie an Freddie? Do you really think the alternative is better? Puh-leeeez.
I'm not even surprised, I'm pleased.
Posted by: Olivier Giovannoni | Jul 10, 2008 11:28:41 PM
"and to think George Bush was worried about his legacy"
You mean George Herbert Hoover Bush?
Oh he'll have a legacy.
They're gonna put his head on the new penny.
The one made from wood.
Posted by: Bob A | Jul 10, 2008 11:29:20 PM
Add this to the savings McCain promises from cutting taxes, and we're going to have a HUGE surplus!
Posted by: Ereshkigal | Jul 10, 2008 11:31:43 PM
Who will be the first idiot on CNBC to say Fannie and Freddie will see write-ups?
My bet is on Dennis Kneale.
Posted by: Steve Barry | Jul 10, 2008 11:36:16 PM
How much of the $5 trillion is acutal bad debt, and how much will become bad debt? Will the government foreclose? What will be done with foreclosed properties.
I think Paulson should get Bill Seidman on the line, stat, because he helped the US government turn a profit on the S&L crisis.
Posted by: adam | Jul 10, 2008 11:43:10 PM
If this is true, McCain should fold his tent, after castrating Phil Gramm, and putting his balls up for sale on EBay. So we have as party dedicated to small government taking on a $5-11 trillion obligation, while at the same time machoing up to a war with Iran that will raise the price of oil to $200 a barrel and cost another $50-100 billion a year. Unfortunately, even if the Dems were smart enough to figure a way out of this, there are no funds to get there. for someone who played the game the right way and saved enough for retirement, I feel like I was raped on this one.
Posted by: larster | Jul 10, 2008 11:46:26 PM
The bailout or takeover of the GSE's by the gov't will only create more problems and more problems, which has been the unfolding financial actions since last year. Many will welcome the gov't takeover but the side effects beyond current view may prove to be worse than we can imagine. The USA as a world fiancial leader will have offically ended and the 21 trillion dollar SFH market exposed as a fraud. Not a good situation for a country dependent on foreign dollars to pay its daily debt.
Posted by: ron | Jul 10, 2008 11:55:27 PM
Futures soaring on the news right now...
Posted by: ndk | Jul 11, 2008 12:03:24 AM
you b@stard ndk, you made me look ;)
Posted by: Troy | Jul 11, 2008 12:06:03 AM
The problems with Fannie and Freddie are overblown. Pool's technical insolvency call is probably related to the changes of FASB accounting rules (FASB 140) for the GSE's. This accounting changes have caught investors off guard and big losses in Q2 are expected.
There are still options available other than a government bail out to minimize the impact from these accounting changes. The excellent real estate blog HousingWire submits that FASB is quietly working on an option to avoid consolidating the GSE's MBS in other words to seek exemption from FASB140 for the GSEs. HW sees ample precedent for regulators to soften the blow of accounting changes on regulatory capital requirements.
Posted by: Alfred | Jul 11, 2008 12:08:08 AM
