FredP, I was listening to Dave Ramsey, and he mentioned the fact that the "liar loans" (low doc or no doc loans) were partly to blame for the Fannie Mae/Freddie Mac/banking crisis we are now facing. Mortgage decisions were made on a FICO score and not normal thingies like employment background, income, landlord history, assets, and other debts. You have a good point, in that the market may go back to the private sector. Fannie Mae/Freddie Mac are government-sanctioned private companies that guarantee mortgages from banks and other lending institutions, where they can be sold on the secondary market in easy packages. Personally, I don't see a need to do this in the first place, as all we need for mortgages are banks and other lending institutions. I think the mortgages should be kept in-house, and if someone wants to invest in these mortgages, they can simply purchase shares in a bank.

Interestingly, Fannie Mae and Freddie Mac are now stablizing for some weird reason, and the market is reacting positively.

To resolve this problem, I feel that the option to have the government step in and wipe out the equity of the stockholders does not seem viable.  When the stock of these two companies was sold to foreign buyers, including central banks, as well as to pension funds, it was done so on the implied belief that the companies were backed by the full faith and credit of the U.S. Government.  They obviously can not be treated different from other stockholders.

There is no easy solution to resolving this matter.

It was reported on CNBC that Morgan Standley is preparing a recommendation for the Treasury Department on how to proceed and that it will be completed in about two weeks.  Two weeks will seem like forever.

 

Shovel, Implied is no guarantee. I have also heard the term Quasi-Government agency which also means nothing. Gamblers are buying common shares hoping for a Treasury or Fed bailout which ironically could bring down share value to near zero.

"Congress originally created Fannie Mae as a government agency in 1938 to establish a national secondary market for government-insured mortgages. Since then, the company has evolved into a shareholder-owned, private corporation supporting the secondary market for conventional and government loans. It continues to operate under a congressional charter with oversight from the U.S. Department of Housing and Urban Development and the U.S. Treasury".

"When Fannie Mae guarantees a security, it is important to note that the guaranty is based on the financial health of the corporation and is not backed by the full faith and credit of the U.S. government."

Source Fannie Mae Web site:

http://www.fanniemae.com/mbs/understanding/index.jhtml

In my opinon, government take over of both is now inevitable.  The only question is what form it will take. 

I don't see the common shareholders getting anything more than a bone thrown their way, maybe a couple bucks a share.  To my knowledge, central banks have not been buying the equity, and if they were that stupid, they deserve a loss.  So I see the government assuming control, putting both in a form of trustee-ship, and beginning the process of breaking them up.

The debt is another matter.  The U.S. government CANNOT allow even a loss of 1% in principal or interest here.  That would cause the following in short order:

1. An international incident, as many central banks did buy these securities.
2. A run on treasuries and the dollar, as no one can be exactly sure what the U.S. will do in terms of its considerable outstanding obligations.
3. A total crash of the housing market, as these two pathetic dodos account for over 80% of financing in home sales today.  They are the housing financing market right now!

So the only way forward is to make good on every penny of debt with these idiots.  That means WE will pay for any shortfall.  Get out your checkbook, its going to happen.  Yes, we could continue to stupidly borrow to fund this shortfall, but I am not so sure this game can go on much longer. 

I think we have a more serious issue really.  The problem as I see it, is that the Fed and the Treasury still don't "get it".  Saying you will put in more equity if needed (but don't think it will be...implying ambivalence) does not really address the problem here.  Both fannie mae and freddie mac cannot make any money on spreads between what they are lending out at, and what they are borrowing at.  This means their viability as financial intermediaries is highly questionable.  If they cannot do even this successfully, they are doomed as going financial concerns, and that is that. 

That is why I believe the only way forward is for the government to just take them over, and get all-in on this thing.  Any half measures will only make the losses greater down the road. 

Wow...what a heck of a mess. 

 

 

Freddie (FRE) recently fell to $2.86 (-9.49%) on massive volume of 147 million shares. The broad market doesn't seem to care. Will the government intervene and halt trading before FRE goes doughnuts? I think the preferred stock of Freddie and Fannie was downgraded by Moody's to D+ earlier today. Methinks the CEO of Freddie faces a pile of lawsuits.

closer:

Freddie (FRE) recently fell to $2.86 (-9.49%) on massive volume of 147 million shares. The broad market doesn't seem to care. Will the government intervene and halt trading before FRE goes doughnuts? I think the preferred stock of Freddie and Fannie was downgraded by Moody's to D+ earlier today. Methinks the CEO of Freddie faces a pile of lawsuits.

The volume of trading on FNM and FRE today is mind boggling. It does appear that the broad market shrugged this whole mess off for the time being and went in its own direction. We seem to have a two-part market: (1) financials, and (2) everything else. Everything else seems to be distancing itself from financials. Will the US equity market stay afloat if financials go bust? Hopefully, yes, even with the strong possibility of many more banks going bust and consolidating down to a handful of survivors. This process of consolidation could take years instead of being a single event like the 1987 stock market crash. This is sort of like peeling off a band-aid slowly with a lot of pain, instead of ripping it off quickly and getting the pain over with.

I agree with much of what I've read about this situation, in that the equity holders will likely lose, while the debt holders will likely be made whole in some manner. I don't know how the preferred equity holders will fare, but preferreds are still equity. They may have to wait in line behind the debt holders but ahead of the common stock holders.

As far as the CEOs are concerned? I heard the CEO (I think it was him, but it might have been another exec) of FNM speak yesterday on NPR. He said they were still solvent, with sufficient cash on hand to handle projected future losses. He, of course, sounded positive and upbeat. There will likely be some shareholder class action lawsuits, as is normally the case when a stock collapses.

I also agree that there is no easy solution due to: (1) foreign stakeholders who want to ensure their investments are still there in this global, intertwined economy, and (2) stability of the US mortgage market. I hope there is a private solution without a government bailout. Government bailout  = we all pay for the mistakes of the few idiots who should be the ones to fix the mess they made. Private solution = only a few suffer, and we the people make it work on our own using the free market system.

The market is doing surprisingly well. Who'd have thunk it?

Dan

I'm not smart enough or knowledgeable enough to begin to understand what went wrong here.  What I do know is how I feel: They're private companies created by the government for a purpose.  It didn't work out.  Sorry. The key word here, in my opinion, is private.  The fact that many people have some implicit belief that the government has any obligation to save them is naive.  If they were backed by the government it would be in their charters.  If they're insolvent, then they're bankrupted.  If they're bankrupted, declare it and begin  reorganization.  Maybe someone will buy them.  Maybe they'll simply pay what debts they can and go away.  I figure most of the existing mortgages will continue to be paid.  Will there be pain?  Sure.  Will lots of people lose money?  Absolutely.  Will I lose money?  Probably since my mutual funds hold bookoo common and preferred shares, debt, and MBS.

What about new mortgages?   Who guarantees them in a world w/o freddie and fannie?  We're back to the good old days when you saved your money and went to the bank and paid 20% down.  The bank felt pretty good that you wouldn't walk away from your equity and if things got real bad you could come in and maybe work something out.  But if foreclosure became necessary they could get their 80%.  That's how I bought my house.  Probably a lot of you did too.

This notion that the government should step in and make everything all right is a slippery slope my friends.  Should they save Lehman too if necessary?  How about Wachovia?  If they're going to be propped up, saved, whatever we want to call it, then just go all the way and nationalize all mortgages and basic banking.  Let the banks offer investment services and watch over them like a hawk.  Make them toe the line like the bozos they are.

Playbook. 

I havent read FNM and FRE charters but it goes without saying that they have the implicit backing of the US govt.

There is not even remote chance that the bondholders wont be taken care of by the US govt. The alternatives are just too scary.

If the US govt. fails to make whole the bondholders what do you think happens very next day to other GSE's. Besides it would be outrageous for the govt. to do that. FNM and FRE have had lower cost of capital for years compared to other financial institutions just with implicit backing. does that seem fair?

As for the previous poster's example of LEH, i dont think there is going to be any further bailouts. I am surprised soverign funds arent jumping in with buyouts. maybe the depth of the problems are too much to evaluate the damage to these bank's balance sheets.

 

 

fredP:

It can't be good for the market and IMO the real estate market and the banks would be in the dumps for many years. The end result may be good in that most home loans will go back to the private sector. 

Didn't the "private sector" get us into the state we're in?

It was not government agencies or bureaucrats that misrepresented information, kited house prices, packaged lies as truths, etc.

It WAS the private sector.

We need to put back the regulation that was once in place.  And fund some government watchdogs!

 

Would we have as much housing.  Would only the rich that could save a big D/P be able to buy.

Would there be any builders?

Would we live in Apts?

 Thanks

Here are a few updates on the Fannie/Freddie fiasco:

Bernanke: ‘Financial storm’ not yet subsided (AP/MSNBC article)

Here is a quote from this article:

"Bernanke's remarks come amid renewed worries on Wall Street about the financial health of Fannie Mae and Freddie Mac. The mortgage giants' stocks have gotten hammered this week as investors became increasingly convinced a government bailout is inevitable."

Jim Cramer rant (YouTube)

Warren Buffett interview