They say when the Titanic hit the iceberg, most passengers didn't even feel it.
The Fannie Mae and Freddie Mac are like that. Tectonic shifts that we don't feel locally. If WaMu went belly up, that would be alarming.
The biggest bail-out in history?
Not so much.
But it does prove the old adage; owe the bank a little, they own you. Owe the bank a lot, you own the bank.
"Supporters, however, argue the government had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages — almost half the nation's total." USA Today.
Well, we own the 'bank.' The government, the taxpayer, you and me...
I feel really wealthy owning so much debt.
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18 comments:
Bilbo, just got this note on my blog:
Am looking to talk to the author of this blog and/or bilbobend. Please contact me at annesaker@news.oregonian.com
*
Ned Flanders, Given that you have a huge ego, and you are our leader, and you have been in Bend long enough to 'educate' Anne, would you please call this women? She wants to do a story on the effect in Bend RE blogs on a national level. She wants someone to educate her on Bend RE developers.
***
I've been following your blogging on the developers and the RE situation in your fair city. Now I need a further education from you. Could you talk by phone?
Best,
Anne
Anne Saker
Staff Writer, The Oregonian
503 294 7656; annesaker@news.oregonian.com
"This news is old enough,
yet it is every day's news."
("Measure for Measure," Act III, Scene II)
"I feel really wealthy owning so much debt."
Just enter it in Accounts Receivable and your balance sheet will suddenly look much better.
I mean, this seems like really, really big news. But the way it's being handled, it's as if you got a notice of your car payment and at the bottom it says in small letters, "Your car cost twice as much as you thought, but don't worry about it, we'll give you extra time to pay..."
And if this is a good solution, why wasn't it the solution in the first place? Weren't these once government entities that were privatized because the private sector is so efficient?
Efficient at scooping up money but not in paying it back?
So NOW the government steps in?
Keep in mind that the purpose of this is to provide stability to the mortgage market, by eliminating the uncertainty about the bonds issued for the two entities. Otherwise the entire system for making mortgage loans in the US will come to a halt.
You want to see a housing crash, you would really get one if they fail. Now economically taking them over will be a short term loss but is likely to be a long term gain for the government. As far as the tax payer goes it will be far far better than letting the system collapse.
Now as far as your comment about scooping up money. The shareholders, both common and preferred will probably be wiped. The bond holders will most likely be kept whole.
The scooped money would be bonuses for inept managers, a minor outrage at best since everyone seems to be doing it.
Still. I find it ironic that "The Government is the problem!"
Until we have a complete meltdown, and then the government somehow becomes the solution.
Actually just about everyone is at fault. The people that took out loans they could not afford, the brokers that made them, the banks that loaned the money without checking the quality, the investment banks that turned them into CDO's without properly evaluatig risk, the regulators who did not make sure that the financials reflected the risk, the Congress who passed the laws that let Freddie and Fannie get by with less capital on hand then a bank would, etc.
It looks like they are going to use the approach that was used with on of the larger bank failures in the 80's. As far as I can tell they will probably give existing stock holders some percentage of the restructured companies (20% was what they used last time), and then dilute that percentage everytime they put money in (they trade the money invested for stock diluting existing shareholders).
My expectations is that if shareholders end up with 10 cents on the dollar they will be doing well.
It appears that they are taking this approach because a lot of preferred shares is held by other financial institutions, including small and medium size banks. Thus a total immediate wipeout would put some small and regional banks into failure themselves.
Calculated Risk is a good blog with many useful links. Comments are often entertaining and enlightening. This conservatorship has delayed impact written large on the envelope and mailed to the next generation.
http://calculatedrisk.blogspot.com/
National blogwise, I check Calculated Risk, Big Picture, the Housing Bubble Blog, and Mish's Global every day.
Actually I expect that this will be profitable for the government in the long term. Just as with the Chrysler bailout.
The governmet will be getting warrents for the money they put into the buyout.
In the short term it will cost, but the government will get warrents for the money to cover the losses. The Government will start with 80% ownership and will go up from there as more money is put in. Keep in mind that the majority of the loans they hold are still good. By restoring stability they can reduce the number of failures. Also at some point the government will redeem its warrents back to the companies, just as they did with Chrysler. In the case of Chrysler, the warrents generated a profit straight up for the government, even without considering the tax impacts of the stabilization effect. In this case it is not clear if they will turn a direct profit or not, but clearly the delta value in taxes paid to the government in a more stable environment coupled with the warrents will certainly show a better return compared to the cost of the bailout than the other costs and lowered tax revenue if they are allowed to fail.
rdc,
I'm just a simple inane non-finance doofus but please explain to me how this socialization of MASSIVE loss is good for the taxpayers?
You mention that its sort of "everyone's" fault. Is it my fault RDC? I bought a house I could easily afford and I live WELL below my means. I have cash-on-hand for years and have a nasty aversion to ANY kind of debt (including mortgage). I don't fart around (risk) with financial instruments that I don't understand (99% of stocks/bonds etc). Sorry but I get a little prickly when people start painting me with those whom I see as financially unwise in a very basic sense.
Everyone keeps pulling the same string saying that the system would collapse if we didn't rescue it. Well, what IS the fallout??? Would it not be well deserved? Where is the incentive for these "crooks" to NOT repeat the mistakes of the past?
The everyone, was basically referring to across the range of functions of the purchase process. Not each individual within the process. Culpability is pretty widespread and hits all of the areas.
Ass far as incentive lets take the specifics of tihs action. The management teams of both organizations are gone, replaced. The common stock holders will be basically wiped out (the value of the common shares will be zero or a few pennies by the time this is done, the preferred stock holders are basically wiped out. The "bailout" basically protects the ability of the two organizations to continue to sell bonds and continue to do their job in mortgage generation, while also having their size reduced down to about 1/3 of what they are today. Their ability to lobby Congress eliminated.
I would not call that letting people off free to repeat the same mistakes. Mistakes in that case that were encouraged by Congress to allow them much more leverage than a standard bank, and by trying to get them to accept more loans.
The benefits to the US economy and taxpayers, are far more, in my opinion, than the cost (which may be recouped as in the chrysler situation by the eventual sale of the warrents on the market once the current crises is passed). Especially compared to the cost if they had totally failed, in which case not only would the equity positions be wiped out, but the bond holders would have also been severely impacted. If that happened you would have seen mortgages come to a sudden and screeching halt. It would have made what we have seen to date seem minor and made the worst case scenerios that some like to say is the future, a real possibility.
Not arguing here, I'm genuinely interested.
If this is good for us in the short run, why isn't it good for us in the long run? I mean, why not just make it a government agency again?
Because if you make it a government Agency then you lose the ability to get the money back by selling the warrents. Instead all of the money paid out becomes a permanent payout instead of a payout offset by the warrents. Now one could argue that the government could treat the money as a capital investment and yield an operating profit, that would eventually pay back the funds. However, do you really think that the government would be able to run it yielding positive cahs flow if it was a government agency?
I'm just thick about this high finance stuff.
If the government is capable of making Freddie Mae healthy, why isn't it capable of earning a profit?
Conversively, if the private sector made Fannie Mac unhealthy, why give it back when it's healthy?
Here's what I assume.
This is like Chapter 7 bankruptcy protection: that there is value in keeping the company alive and it just needs to reorganize and get is feet.
That in the best of worlds, it would be run competently by the private sector, adequately regulated, and turn a profit.
Whereas, run by the government it would have an unfair competitive advantage, and would eventually be run to the lowest common denominator.
Or something...
In the best of all worlds.
But is that the way it's happened. Before it was completely privatized, didn't they run pretty well?
And they certainly couldn't have been run worse by the private sector.
Just testing premises, here.
(Take this line of reasoning too far and we get....gasp....socialism. You know, like Social Security.)
If I had any doubts about privatizing S.S., this fiasco pretty much removes them.
It is kind of like a modified bankruptcy with the bondholders remaining intact and the government getting ownership in return for keeping the bondholders intact. Usually in a bankruptcy the bondholders/creditors get equity in the restructured company in return for the debt.
Keep in mind that prior to 1968 Fannie Mae was part of the government. It was spun out to remove it from the budget. It was certainly a money loser and not a money maker when it was run by the government before. It was also much smaller, though it had a vertual monopoly over the seconday mortgage market. It did not have to make a profit so nobody that did competed with it.
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