MiTurn writes:
Great day. . . second? Can't trust Haloscan.
MiTurn | 07.14.08 - 9:49 am | #

barkingtribe writes:
Gives me a warm fuzzy, "Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago", nothing like oh say 60:1 on the leverage. I suppose they just played follow the leader being supplicants and stupid, and another well founded and efficient government agency to boot!
barkingtribe | 07.14.08 - 9:50 am | #

Anonymous writes:
Well that shows that this market is totally screwed. Didn't even get a chance to add to my puts since the bid/ask spread was and remains ridiculous.

Totally futures driven and it will collapse like a wet taco...

Fun to watch however.

Ciao
MS
Anonymous | 07.14.08 - 9:50 am | #

Kp writes:
What's really ironic is that the banks would ship the mortgages out only to later buy back blocks of them in the form of MBS....after paying the middle men transaction fees ofcourse.

The loans never really left the balance sheet, they just relocated!
Kp | 07.14.08 - 9:56 am | #

MaxedOutMama writes:
SUPERB POST, TANTA!!!

This is absolutely accurate.
MaxedOutMama | Homepage | 07.14.08 - 9:56 am | #

jo6pac writes:
I agree with MaxedOutMama.
Thanks Tanta
jo6pac
jo6pac | 07.14.08 - 9:58 am | #

Anonymouse writes:
Tanta write: I'm going to take issue with a fair amount of it, but not with the basic argument that the uproar over the GSEs is "overblown."

I can respect his opinion that it's "overblown," but then he's a freaking hypocrite for writing, "And let’s be clear: Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole."

Oh, okay Mr. Idiot, I'll hold two contradictory assertions in my head at the same time. But Mr. Idiot doesn't believe such crises should fall in the lap of those who created/instigated them, "Still, isn’t it shocking that taxpayers may end up having to rescue these institutions? Not really. We’re going through a major financial crisis — and such crises almost always end with some kind of taxpayer bailout for the banking system."

Jokes on him, and all those who can't smell the deflation stink wafting across America.
Anonymouse | Homepage | 07.14.08 - 10:00 am | #

Sniglet writes:
Whether or not a GSE bail-out is a good idea, the end result will be to make these agencies both the first and last resort for mortgage finance.

With real-estate prices continuing to fall who, in their right minds, would want to invest in mortgage securities that weren't backed by the government? Particularly, when private mortgages have to compete with artificially loose GSE lending terms. Investors might be ok with underwriting private mortgage securities if the interest rates were 9% with 30% down, but who would want that kind of private loan when Fannie Mae offers much easier terms and conditions?

The US tax-payer has now become THE mortgage lender of America.
Sniglet | 07.14.08 - 10:02 am | #

jim writes:
Jim Rogers of Soros fame says that FNF should be allowed to fail and that to rescue them is a "disaster." I agree that the stupid shareholders who didn't pay attention should eat sh)t and end up peniless. That's a start. Then nationalize the thingies and be done with it.
jim | 07.14.08 - 10:02 am | #

Kp writes:
The very existence of the GSEs is a floor on housing prices.

Eliminate them and you eliminate any their proposed "mission".
Kp | 07.14.08 - 10:03 am | #

Anonymous writes:
I have this picture of "dubya" opening up an A-trade account and buying FRE and FNM stock today.

"I like those names......sounds like BBQ or 'sumthin"

Ciao
MS
Anonymous | 07.14.08 - 10:04 am | #

over_educated writes:
My apologies if this has already been posted:

http://www.theonion.com/content/ ..._nation_demands
over_educated | 07.14.08 - 10:04 am | #

RacerX writes:
Excellent post

How does the weakness of the originators (may have problems buying back loans)and MI companies affect the GSE's need for liquidity? Don't they displace some of the risk and need for liquidity.
RacerX | 07.14.08 - 10:09 am | #

bacon dreamz writes:
It is a fact that their market share dropped like a brick in the early years of this century, except of course for years like 2003, when fixed rates dropped to cyclical lows, refis boomed, and GSE market share shot up again, only to plummet in the years following during the purchase boom.

GSE market share (%):

2001: 65
2002: 65
2003: 68
2004: 46
2005: 38

i don't know about "shot up again" but still: very nice post! gold star for Tanta.
bacon dreamz | 07.14.08 - 10:10 am | #

SS writes:
You know I wrote a long response on this one and by the end I was just too disgusted with the whole situation to post it.
SS | 07.14.08 - 10:10 am | #

tyaresun writes:
Tanta,

First, thanks for the posting. Agree mostly. What do you think about the premium that the agency bondholders have been collecting over treasuries, should they get a haircut?
tyaresun | 07.14.08 - 10:11 am | #

Milkman writes:
Good column, except for:

"they didn’t do any subprime lending, because they can’t."

What if subprime is rated AAA?

Correct me if I'm remembering this wrong, but I thought subprime and AAA mortgages we combined into CDOs --- and sold as AAA.

Moody's simply gave the toxic waste the rating Wall Street wanted, transforming them from 'junk' to 'safe as houses.' (On paper.)

Krugman is always worth the time to read (on economics) but I think he's way off when he says this is overblown.

In fact, it's probably even worse than its been reported so far.
Milkman | 07.14.08 - 10:13 am | #

Bob_in_MA writes:
Tanta,

Are all your comments about loan quality aimed at loans which the GSE's securitized?

What about the portfolios of loans they held? Isn't this over $1T?

Did they use the same criteria for those loans?
Bob_in_MA | 07.14.08 - 10:14 am | #

Kou Jie writes:
Just last night mp was bravely trying to direct a newbie towards resources to answer just the questions illuminated this morning by Tanta. If the new guy is still around, patience is rewarded.

Now, what specifically to advocate or going forward? What to resist?

As if...
Kou Jie | Homepage | 07.14.08 - 10:16 am | #

bacon dreamz writes:
wait, i had FHA/VA in those numbers. the Fs market share:

2001: 57
2002: 59
2003: 62
2004: 41
2005: 35

frowny face for bacon dreamz.
bacon dreamz | 07.14.08 - 10:16 am | #

David Jackson writes:
Let me be clear: If the goverment inevitably will bail out large scale speculative excess then the governemnt absolutely has a role in reigning in identifying and reigning in speculative excesses.
David Jackson | Homepage | 07.14.08 - 10:17 am | #

SS writes:
Looks like the "rally" is sputtering already.

What's the next step when Paulson's jawboning doesn't do the trick for even a day? He shot his credibility with FNM and FRE are fine last week as did Lockhart.
SS | 07.14.08 - 10:19 am | #

jmf writes:
Thanks from Germany for this great post
jmf | Homepage | 07.14.08 - 10:22 am | #

Tanta writes:
Are all your comments about loan quality aimed at loans which the GSE's securitized?

What about the portfolios of loans they held? Isn't this over $1T?

The only real exposure to true "subprime" the GSEs have is in the retained portfolio. But it's important to recognize that this doesn't take the form of whole loans. What they did was buy the AAA rated tranches of privately-issued subprime securities. That was supposed to be about supplying some "needed" capital to the subprime market while limiting the GSEs' exposure to it (since they bought only the senior tranches).

Yeah, well, we all know how that worked out.

They can take a lot of write-downs on those holdings and still be OK, in my view. M2M losses aren't the same thing as negative income. Still, that's not how I would have preferred them to get involved with the subprime market. As I said in the post, if they really needed to do that they should have bought subprime for the guarantor programs--at "vanilla" terms.

This is part of my "if you are going to take risks, take the right risks" theory of GSEs. They could have had more credit risk on subprime loans in one sense, but less in another, since the loans wouldn't have had these toxic terms that added to the risk of a subprime borrower.
Tanta | Homepage | 07.14.08 - 10:25 am | #

Tanta writes:
What do you think about the premium that the agency bondholders have been collecting over treasuries, should they get a haircut?

It's hard to argue that there should be a risk premium over Ginnie Maes at this point. I'm not sure I understand cutting the hair down to TSY.
Tanta | Homepage | 07.14.08 - 10:27 am | #

Jim A. writes:
The very existence of the GSEs is a floor on housing prices. Yes, but... the idea is to place the floor slightly above the one set by rich prospective landlords. THIS is what people who advocate letting the GSE's cease to exist and having house prices free-fall to a level where median people could buy without a mortgage don't understand. The price floor in a world without the GSEs isn't set by owner/occupiers. It's set by landlords. The goal is to make credit available enough that the net advantage of owner/occupation exceeds the cost of the implied subsidy.
Jim A. | 07.14.08 - 10:29 am | #

Fair Economist writes:
What's really ironic is that the banks would ship the mortgages out only to later buy back blocks of them in the form of MBS....after paying the middle men transaction fees of course.

Well, they were high-risk mortgages and came back with a quasigovernment guarantee, so it's not so ironic.
Fair Economist | 07.14.08 - 10:29 am | #

Nemo writes:
Thanks for the reality check, Tanta.

People with my ideology would like to see the GSEs nationalized and then slowly wound down... The problem is not that they are private companies, but that they are "too big to fail".

One thing this decade has demonstrated is that we do not need GSEs to have a securitization market. (We do need that market to be better regulated, obviously.)

OK you and Atrios would disagree. But despite our opposing ideologies, I think we can agree that bailing out these entities with an equity injection is ridiculous. Of course they should be nationalized at this point, shareholders wiped out, and (IMO) bondholders subjected to a haircut. Whether they remain as government agencies (as you suggest) or ultimately shut down (as I would) can be discussed later.

Reasonable people can argue about the merits of welfare for the poor. But does anyone who is not a paid shill (or bought politician) honestly believe in welfare for the rich?
Nemo | Homepage | 07.14.08 - 10:30 am | #

JimPortlandOR writes:
Fine Post, Tanta! I'd not only re-socialize FRE and FNM, but I'd consolidate ALL of the federal government's housing/land assistance programs, plus getting the tax subsidy (interest deductibility) out of the picture. There should be a 'standard deal' on mortgage availability (not twenty alternatives)and people can either save/afford it or not. Let the private sector (with no governement backup take on whatever risk they care to, but with strict regulation, particularly with regard to leverage limits. No off-balance sheet accounting, no hanky panky, and capital requirements much higher than anything we've had before for this kind of fin. institution. Our housing should not be a speculative business, but instead the highly conservative biz deserving of the name 'bank'.

The Gov. should run this like a biz, with as close to no taxpayer support as possible. There should be no social preference for 'owning' a home as opposed to renting/leasing - and that would have a saluatory effect on many urban/suburban/exurban issues.
JimPortlandOR | 07.14.08 - 10:35 am | #

Alec writes:
And to thnk I asked question only a few days ago
-------------------
Does the market share of the GSEs force other banks out of meat & potatoes loans and into exotica?
Alec | 07.12.08 - 10:32 am | #

-------------------

Answered much betterer than my asking.

Thank you very much, Tanta.
Alec | 07.14.08 - 10:35 am | #

cars writes:
Tanta is a national treasure.
cars | 07.14.08 - 10:37 am | #

Shnaps writes:
both GSEs were major culprits in the growth of the mega-lenders.

This is a great post. My favorite part begins here. I haven't seen anyone else make this particular point yet, and even if they did, who could make it as well as Tanta?

Gold starz all around!!

Tanta, would you consider being someone's running mate? Please!?!
Shnaps | Homepage | 07.14.08 - 10:37 am | #

BB writes:
Fannie Mae, Freddie Rescue a `Disaster,' Rogers Says

http://www.bloomberg.com/apps/ne...4lr8& refer=home

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview.
Rogers said he had not covered his so-called short positions in Fannie Mae.
BB | 07.14.08 - 10:39 am | #

Tanta writes:
What's really ironic is that the banks would ship the mortgages out only to later buy back blocks of them in the form of MBS

I don't exactly think of that as "ironic." It's the "liquidity" function thingy in action.

For all of their history, the GSEs did most of their business with lenders as "swaps." The lender swaps a pool of whole loans for an MBS backed by those loans. The idea being that MBS are more liquid and rationally valued than a pool of whole loans.

Once you owned the MBS, you could either sell it or hold it. "Swap and hold" is an old, old banker strategy. The thing is, if you needed to stop "holding" because you needed to raise capital, you had MBS to sell, not whole loans. MBS are way more liguid.

The GSEs weren't being "middlemen," they were being the arbiters of the quality of the underlying loan pools and the market-recognized guarantor of the resulting securities.
Tanta | Homepage | 07.14.08 - 10:39 am | #

barely writes:
Waaaaayyyy too big to ever be private. I have no doubt they will get socialized. Just what will happen to the common with sleezeballs running the decision making for financial markets is a question.
barely | 07.14.08 - 10:40 am | #

Charles writes:
Great post, Tanta. I brought it to the attention of James Hamilton at Econbrowser, and will probably also link it at our blog.

I am still hoping you will generate an estimate of how many billions of dollars of doubtful loans were transferred onto the books of the agencies after everyone knew they were going to go sour. It is the intentionality of dumping that could shame Congress into making the shareholders suffer.
Charles | Homepage | 07.14.08 - 10:40 am | #

Fair Economist writes:
I think Krugman is, for the most part, thrashing a strawman with the claim that the F&F broohaha is overblown. You see some bloggers here claiming it's F&F's fault were in this mess but the MSM isn't saying that. Likewise very few think F&F are going to be bouncing checks in the next year or two.

The mainstream attitude to F&F is that they're undercapitalized and subject to massive potential losses over the next few years. This is what the uproar is about, and Krugman is actually arguing *for* that part. The effect is that F&F are going to be unable to raise capital except at high rates which make it unusable for their purposes. That's a very reasonable market response to solvency issues, and I don't see Krugman arguing against that either. He's certainly not saying you ought to run out and buy F&F preferred.
Fair Economist | 07.14.08 - 10:40 am | #

Average Joe writes:
Tanta,

You nailed it.

Thank you.
Average Joe | 07.14.08 - 10:40 am | #

mal writes:
It's a lovely morning for a dead cat bounce.
mal | 07.14.08 - 10:42 am | #

bacon dreamz writes:
One thing this decade has demonstrated is that we do not need GSEs to have a securitization market.

what do you want them to do, just buy and hold mortgages in their portfolios? the MBS market is where all the liquidity comes from.
bacon dreamz | 07.14.08 - 10:42 am | #

Alo writes:
Mac magical post, thanks very much Tanta!
Alo | 07.14.08 - 10:42 am | #

ac writes:

But since it’s already clear that that rescue will take place, their problems won’t take down the economy.

Couldn't that have been said about the LTCM rescue?

It seems to me like instead of taking down the economy in a minor way back in 1998, that "rescue" has come back to haunt us in a major way in 2008.

ac | 07.14.08 - 10:42 am | #

Average Joe writes:
So, if your bruhaha was about the worry that F&F wouldn't be around to lend....you worries were overblown.

But if your bruhaha was about the stock selloff, then your panic was a reasoned response.
Average Joe | 07.14.08 - 10:43 am | #

Shnaps writes:
The idea being that MBS are more liquid and rationally valued than a pool of whole loans.

Not to mention, your captial reserve requirements are way less on MBS versus whole loans. Quick - bacon dreamz - what are the percentages?
Shnaps | Homepage | 07.14.08 - 10:43 am | #

Anonymous writes:
GSE's old news WM on deck.
Anonymous | 07.14.08 - 10:45 am | #

Alec writes:
So how does one renationalize GSEs, and why would you need two unless you were putting management contracts out to tender?

Do you put them in runoff, splitting the proceeds evenly between the bondholders and the recapitalized firm, with shareholders getting a dividend(if any) after(if) the bondholders are paid off?

That's a lot of toothpaste to get back into the tube.
Alec | 07.14.08 - 10:47 am | #

energyecon writes:
Hmmm bucky (DX) seems to have sloughed off all of the Monday pop and about to work into the little boost from Sunday eve...
energyecon | 07.14.08 - 10:49 am | #

AllenM writes:
Well, I dumped my Freddie for a 66% profit and ran for the exits earlier.

COF is starting to roll over now.

A lot of banks are looking mighty sour.

The only mystery is how Ryland manages to levitate when even the GSE's look sour.


Tanta has the better part of the GSE argument, and puts a lot of the shrill posters back into tinfoil land.

Now, all we need is some lower oil prices before that makes life worse than houses.

Someday this war's gonna end...
AllenM | 07.14.08 - 10:50 am | #

Kp writes:
Well, they were high-risk mortgages and came back with a quasi-government guarantee, so it's not so ironic.

More like under-priced risk, in place of what could/should have been locally originated and appropriately priced familiar risk.

It is considered bad practice for a bank to take in deposits locally and make loans out of their footprint...what's so different about accepting MBS with foreign collateral?

An impossibly over-leveraged guarantee on loans which are viewed as risky?

Now they get to take the haircut on the MBS instead of the loans.

The risk never goes away!

Better to know it more intimately, then to place trust in bogus guarantees and create a cease pool so large as to bankrupt the treasury when it fails.
Kp | 07.14.08 - 10:51 am | #

Anonymous writes:
We gotta sink the Bismarck was the battle sound
But when the smoke had cleared away the mighty Hood went down
Anonymous | 07.14.08 - 10:51 am | #

Rob Dawg writes:
Tanta,
Fine post, you certainly know how to distill a subject. You write; "Any "rescue" that doesn't wipe out the shareholders is simply making a bad thing worse." Agreed but what about bond holders? If they don't suffer as well haven't you short circuited a market mechanism that helps correctly price risk?
Rob Dawg | Homepage | 07.14.08 - 10:52 am | #

ac writes:

So how does one renationalize GSEs, and why would you need two unless you were putting management contracts out to tender?

Do you put them in runoff, splitting the proceeds evenly between the bondholders and the recapitalized firm, with shareholders getting a dividend(if any) after(if) the bondholders are paid off?

That's a lot of toothpaste to get back into the tube.

See what makes me suspicious here is that having a government assisted mortgage market right now (which may be necessary to keep the US economy from totally collapsing) and bailing out Freddie and Fannie bondholders seem to be becoming synonymous.

I don't see why we need to bail out the bondholders (who have no explicit guarantee of a bailout) to move forward and say, OK we're going to provide more support for the mortgage market on a national basis going forward.

ac | 07.14.08 - 10:52 am | #

Bob_in_MA writes:
Tanta,

Thank you for the answer.

I guess what confuses me is that Krugman makes no mention of this portfolio, but it's my understanding that that's the real crux of the GSEs' problems.

I don't think anyone is arguing that they wouldn't be adequately capitalizted if they didn't have these portfolios.

He seems to be saying, everything is fine with their traditional business. But that's not what people have been warning about, apparently for the last 20 years. Even Greenspan warned about the potential for the portfolios to spell trouble, so it couldn't have been hard to miss.
Bob_in_MA | 07.14.08 - 10:53 am | #

Mary writes:
Excellent article, Tanta.

FYI: 13 July 2008
http://www.federalreserve.gov/ne...r/ 20080713a.htm
Mary | 07.14.08 - 10:53 am | #

JimPortlandOR writes:
Well, in the second round of the day's market, DJI, S&P500, QQQ are all red, FNM is up .50, FRE up .12 (both on 3-4 X normal volume). I'd guess that Mr. Market isn't impressed.

Yawn.
JimPortlandOR | 07.14.08 - 10:54 am | #

arroyogrande writes:
I still don't get the "need" for Fannie and Freddie, other than to keep mortgage interest rates artificially low...without the GSEs, wouldn't mortgage interest rates climb until the perceived risk to potential investors matched the increased return?

In other words, wouldn't the mortgage market work just fine using private capital if mortgage interest rates were allowed to rise to match the (perceived) risk?

There was a time when mortgage rates were in the low teens, and the housing market did not come to a standstill, even then.

Keeping mortgage interest rates historically and extraordinarily low, even beyond perceived risk, seems like a ruse to try to prop up housing prices…a ruse that makes about as much sense to me as propping up high energy prices, or propping up high food prices. Why would we want to do that?

- arroyogrande
arroyogrande | 07.14.08 - 10:56 am | #

mal writes:
"Our weapons are useless!"
mal | 07.14.08 - 10:56 am | #

Kp writes:
On the point of liquidity of MBS versus their component loans...

Haven't seen some pretty serious liquidity problems as of late?

Just as bad as it would be if the loans were still stand alone me thinks.
Kp | 07.14.08 - 10:57 am | #

Tanta writes:
I am still hoping you will generate an estimate of how many billions of dollars of doubtful loans were transferred onto the books of the agencies after everyone knew they were going to go sour.

Not very many billions, is my estimate.

The GSEs don't buy a whole lot of seasoned loans (although they do some). If by "transferring onto the books" you mean the GSEs outright buying junk loans out of private label securities, they cannot and do not do that. The private label securities can't sell loans (they cease to be REMICs if they do). So the GSEs may have bought some fairly iffy whole loans out of some bank portfolios, but not very much. Not a price that made it worth while for anyone to sell to them.

By "transfer" we really mean "refinance." And the reason we have "Hope Now" and the FHA bill and all the whining about how you just can't get a cheap jumbo loan is that the GSEs aren't taking tons of that stuff in refinance. They've focused most of their efforts lately, it seems to me, on refinancing their own loans to improve the credit profile. Not refinancing someone else's. FHA has done more of that. My view is that most of the stuff the GSEs have taken in the last year as refis would have been GSE-eligible in the first place. Those borrowers got steered into cruddy (but more profitable) loans.

People also forget that when the GSEs do take their "shareholder-owned" hat off and put on their "government agency" thinking cap, the first thing they do as the Only Game In Town is jack up the G-fees. Remember that?

They also have to live with whatever the MIs want to live with. That's a matter of charter, not whim. And the MIs are not busy enabling a large high-LTV refi transfer to the GSEs of toxic waste. Not hardly.
Tanta | Homepage | 07.14.08 - 10:57 am | #

Abe, NYC writes:
Thanks for a great post Tanta.

I've thought for the last couple of years that the GSEs so gladly cooperated with the Congress mostly to strengthen their ties to the government as well as to grab market share. So now they can say, "we're in trouble partly because of what the government asked us to do" and "without us the RE market is dead". Which, of course, strengthens their case for a bailout. That was shrewd planning on their part.
Abe, NYC | 07.14.08 - 10:59 am | #

Troy writes:
Tanta has the better part of the GSE argument, and puts a lot of the shrill posters back into tinfoil land.

that's cuz to get the right signal you need a GOLD foil hat.
Troy | 07.14.08 - 11:00 am | #

bacon dreamz writes:
One thing this decade has demonstrated is that we do not need GSEs to have a securitization market.

i guess your point was that securitization can exist without the GSEs. another frowny face for me. nonetheless, the thing about the agency MBS market is that most of the securities are considered fungible because of what the GSEs do (control loan quality and take the credit risk). i don't really see how you could do that without them.
bacon dreamz | 07.14.08 - 11:00 am | #

Interesting Times writes:
Freddie Mac Sells $3 Billion of Three-Month, Six-Month Bills

http://www.bloomberg.com/apps/ne...B_xw& refer=home
Interesting Times | 07.14.08 - 11:02 am | #

BB writes:
An organization or institution that is Not allowed to fail effectively means a carte blanche for the said organization to do as it pleases which gives it undue and unfair advantage over other institutions in its field.

So are any of these 'un-failable' organizations actually a public or private enterprise and are they subject to the rules of the markets which they operate in?

Clearly such organizations are a detriment to public trust, since they do not distribute the profits but surely socializes the losses.
BB | 07.14.08 - 11:02 am | #

2poor2care writes:
July 14 (Bloomberg) -- Freddie Mac sold $3 billion of short- term notes, finding higher-than-average demand after U.S. Treasury Secretary Henry Paulson said the government will shore up the mortgage-finance company.

Freddie Mac sold $2 billion of three-month bills at a yield of 2.309 percent and $1 billion of six-month reference bills at 2.496 percent, the McLean, Virginia-based company said today. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was more than 50 percent above the average of the past three months, according to Stone & McCarthy Research Associates.

Evidence of a pump.
When is the dump?
2poor2care | 07.14.08 - 11:02 am | #

Interesting Times writes:
From the link above:
"Paulson's statement yesterday effectively turned an implicit guarantee into explicit backing, said Christopher Whalen, co- founder of independent research firm Institutional Risk Analytics in Torrance, California. "
Interesting Times | 07.14.08 - 11:02 am | #

safe_as_apartments writes:
Well, in the second round of the day's market, DJI, S&P500, QQQ are all red, FNM is up .50, FRE up .12 (both on 3-4 X normal volume). I'd guess that Mr. Market isn't impressed.

Yawn.

The goggles--they do nothing!
safe_as_apartments | 07.14.08 - 11:04 am | #

ac writes:

If you haven't seen it already: Rogers Calls Fannie, Freddie Rescue Plan a `Disaster'

Rogers has been right about a whole lot of things so far...

ac | 07.14.08 - 11:04 am | #

Asphalt Mania & OIL!! writes:
Right on Tanta,

Re: Fannie and Freddie had about as much to with the "explosion of high-risk lending" as they could get away with...

That is the point, please, for God's sake, stay on topic with the years of illegal activity there and the on-going corruption which is 100% correlated with where we are today!

All my best! Cheers, rightthe fuc- on!
Asphalt Mania & OIL!! | 07.14.08 - 11:06 am | #

TradingStats writes:
Nibbling long, again...BAC
TradingStats | 07.14.08 - 11:06 am | #

BB writes:
...and as a result the dollar declines, as usual.

Maybe see 2 for the brit pound and 1.60 for the euro this week.
BB | 07.14.08 - 11:07 am | #

Broker writes:
GSEs and Kolkhozes were among the greatest achievements of the first half of the 20th century. I agree with Tanta. "We should have an honest socialism", like another genius on this blog said the other day.
Broker | 07.14.08 - 11:08 am | #

Anonymous writes:
"Our weapons are useless!"

A patriot must always be ready to defend his country against his government: Edward Abbey
Anonymous | 07.14.08 - 11:12 am | #

BB writes:
Poll: Who Should Bail Them Out?

http://www.cnbc.com/id/25638063
BB | 07.14.08 - 11:12 am | #

Asphalt Mania & OIL!! writes:
Taxpayers are bailing them out and any bond issue related to them devalues and dilutes the dollar, which is a tax and a pox upon every human in America! Taxpayers need to wake up!!

RE: Northern Rock will miss its target for repaying its £24bn emergency loan from the taxpayer if the housing market deteriorates further and the economy plunges into a 1992-style recession, it warned yesterday.

The new executive team of the nationalised Newcastle-based bank told the Treasury select committee of MPs it would review its business plan this autumn. The plan, which involves halving the bank's balance sheet to £50bn by 2011 and axing 2,000 jobs, is intended to repay the Bank of England by the end of 2010 and allow the government guarantee for depositors and creditors to be lifted by 2012.
Asphalt Mania & OIL!! | 07.14.08 - 11:15 am | #

barely writes:
Market is plainly saying, "Is this all you've got?"
barely | 07.14.08 - 11:15 am | #

Justin writes:
Are not "30 year fixed" mortgages fairly unique in the world? I think most countries only offer 3 or 5 year fixed. Perhaps offering 30 year fixed is a bridge too far.

Who provides most of the mortgage capacity in the UK, in Japan, in australia and NZ? (well, in the latter two, it is privately owned banks). Why is fannie necessary exactly? to give americans 30 year fixed rates or to subsidize market rates with public money (as if the tax deduction wasn't enough subsidy already)? perhaps either or both is a luxury that can/should be dispensed with.
Justin | 07.14.08 - 11:16 am | #

Alec writes:
And to think people last night/this morning were crowing about Bucky rallying.

To them I reply;

Talk to me when Bucky breaks EUR $1.50, JPY 110 or GBP $1.95.

Personally I'm looking to see if EUR can take and hold $1.60. If it happens it could be a quick slide to $1.65 on sentiment alone.

Still waiting to see Sterling implode against USD; is the city of London the only reason it hasn't shat the bed?
Alec | 07.14.08 - 11:20 am | #

donna writes:
The problem is we keep on privatizing profits and socializing losses. The citizen goes broke, the rich get richer.

Unsustainable, and it has begun to create real resentments. I'm in the top five percent of income in this country, and I'm pissed off about it.

Can't continue, and we need it to stop.
donna | Homepage | 07.14.08 - 11:20 am | #

Anonymous writes:
Sorry, but I find Krugman's article very troubling.

He admits they're in trouble and they cannot be allowed to fail.

What am I missing?
Anonymous | 07.14.08 - 11:21 am | #

Interesting Times writes:

Perhaps offering 30 year fixed is a bridge too far.
Justin | 07.14.08 - 11:16 am | #

It is clear to me and probably others here that the lengthening of mortgage amortizations over the years was to perpetuate the feeding of new dumb money into the RE ponzi-scheme.

When I began reading about multi-generational mortgages, I knew the bubble was near the top.
Interesting Times | 07.14.08 - 11:22 am | #

Anonymous writes:
the expected "relief rally" is kaput. They washed out the emotional sellers within the first hour (or so)but the buyers have not showed up at all.

Got a link to "taps"

Ciao
MS
Anonymous | 07.14.08 - 11:22 am | #

Asphalt Mania & OIL!! writes:
Ot, Kinda:

If we are to be bound by a new tax to bail out corrupt mortgage pirates, then it only seems fair that the IRS be allowed to raid these pirates businesses and homes and search for evidence of illegal activities -- and then take these guilty pirates to prison, where they will stay the night, then be executed:

Writ of Assistance

Re: The writs played an important role in the increasing difficulties that led to the American Revolution and the creation of the United States of America. In 1760, Great Britain began to enforce some of the provisions of the Navigation Acts by granting customs officers these writs. In the thirteen colonies these writs were only issued in the provinces of Massachusetts and New Hampshire.[1] In New England, smuggling had become common. However, officers could not search a person's property without giving a reason. Colonists protested that the writs violated their rights as British citizens
Asphalt Mania & OIL!! | 07.14.08 - 11:23 am | #

BSR writes:
Both Krugman's and Tanta's analysis assume Freddie & Fannie are vital to the survival of national economy. I am not so sure. These behemoths converted shelter for a family into "investments" thus encouraging the continuous growth of larger McMansions away from city centers in distant suburbs and exurbs. That wasted a tremendous amount of capital in unproductive assets. With the rising energy prices and bubble bursting, this wasted capital is going to stunt other areas of economy (e.g. alternate energy source).

(Mortgage interest deduction is another source of capital mis-allocation.)

It is time to question this mania that house ownership is the very purpose of life.
BSR | 07.14.08 - 11:23 am | #

Shnaps writes:
TradingStats, I suggest nibbling long...PZZA
Shnaps | Homepage | 07.14.08 - 11:25 am | #

Jus sayin writes:
but donna , the difference between you @ 5% and the 30000 people at the top 99.99 income bracket is like a gazillion dollars a year...
they'll do whatever it takes to keep you down.
Jus sayin | 07.14.08 - 11:26 am | #

Average Joe writes:
All the bulls are out of cash...those who believe this good news believed the last 10 times we hit bottom. The true believers are saying it's a buy...they just can't cause they are out of bullets.

Everyone who stepped aside and have cash know this is no where near the bottom.

The shorts are probably like Jim Rogers in that any rally is a reason to add to shorts.

If we avoid a short squeeze rally then even the bulls will sell to preserve capital and be able to buy when these "misguided bears" admit the error of their ways.
Average Joe | 07.14.08 - 11:26 am | #

Nemo writes:
barely --

Waaaaayyyy too big to ever be private.

Standard Oil was too big. That didn't mean we needed a national oil company.

So nationalize the GSEs, then slowly break them up: Re-privatize or just shut down. Very slowly...

See also ac's point above. What does guaranteeing existing (as opposed to future) bondholders have to do with saving the mortgage market?

Seems to me when you buy a bond you assume the risk of the issuer defaulting. Not what you "believe" that risk to be, but what the risk actually is...
Nemo | Homepage | 07.14.08 - 11:26 am | #

safe_as_apartments writes:
LOL @ MarketWatch headline:

"Monday's Bulls Need Bailout"
safe_as_apartments | 07.14.08 - 11:28 am | #

mp writes:
Anonymous | 07.14.08 - 11:21 am | was me.

One other thing. He also says that rescue eliminates a threat to the broader economy, and I certainly don't agree with that. It simply shifts it. Bernanke will end up drawing down *his* dry powder significantly.
mp | 07.14.08 - 11:28 am | #

Alec writes:
Asphalt Mania & OIL!

Looks like Doc Holiday has a new handle.

Is it a game of cat n mouse with Tanta/CR or just an odd duck with a handle changing fetish?

Either way, if I was writing a psych thesis I'd have a field day with that loon.
Alec | 07.14.08 - 11:30 am | #

jim writes:
More Jim Rogers on FNF:

The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies' shares may fall another 35 percent.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

'Course he might have irons in the fire and be short, so I can't say his view is completely impartial.
jim | 07.14.08 - 11:34 am | #

Douglas Hussein Watts writes:
As they say at Building #19:

Good stuff cheap.

Excellent analysis. Very helpful. Thanks.
Douglas Hussein Watts | Homepage | 07.14.08 - 11:34 am | #

blackhat writes:
Glad to get that rally out of the way before noon.

Government promises backstop. check.
Stocks tick higher. check.
Reality sets in. check.
Stocks bleed. check.
blackhat | 07.14.08 - 11:35 am | #

Tanta writes:
How does the weakness of the originators (may have problems buying back loans)and MI companies affect the GSE's need for liquidity?

That's the shoe I wouldn't want to be under when/if it really drops.

We saw what happened to the iBanks when their counterparties/warehouse borrowers couldn't buy back failures.

The GSEs are, as far as I can tell, trying pretty hard not to force so much stuff back that they break the backs of their seller/servicers.

I suppose you could say that in a way, it's not the GSEs who are being "rescued" right now, it's the GSEs' seller/servicers.

But then I firmly believe that if the GSEs had shoved everything back to, say, WaMu, just for example, that is legitimately shove-backable under current master commitments, WaMu would have beaten IndyMac to the FDIC party. Remember the Cuomo suit and the big review of WaMu appraisals? That fizzed out. The regulators are now making them back off their new appraisal rules, too.

So I think there are more than a few depositories with some nasty residual credit risk to the GSEs, but the regulators are bound and determined to keep it a GSE problem, not a bank problem.
Tanta | Homepage | 07.14.08 - 11:35 am | #

VoiceFromTheWilderness writes:
Agreed, Great Post, and thank you for helping to explain this mess.

On the other hand,I think the post misses the big picture. Here's the thing -- once the fed and Treasury get involved the issues ceases to be a purely fannie/freddie issue, it becomes a national issue. So explaining all the ins and outs of fannie/freddie business practices, or recounting the history of how we got here, misses the main issue.

The main issue now is what affect does this action have on the bottom line of the US Government, and what effect does it have on our international relationships. A second issue that matters to me, but is arguably less important, is who in the domestic economy benefits, and who loses. These are the only questions that really matter to a wide audience. Anybody who owns fannie/freddie stock or bonds had jolly well better not be getting their insights from blogs or they deserve what they get.

And, obviously, I don't see these questions being addressed. To me the answers to these questions determine whether the GSE bailout is a 'big deal' or not, not issues of whether they did or didn't participate in sub-prime lending or in what ways.

And... from everythign I've read, no one knows the answers. A week ago 'this accounting change doesn't make any difference', now we are bailing them out, sort of. Actually the public pronouncements are cryptic as yourself point out. They obviously are trying to create the impression it's not a big deal -- the scope, terms, and methods all indicate a desire to minimize either actual federal involvement, or the appearance of federal involvement. Unfortunately the very cryptic implies to this observer that in fact the planned actions are significant. Given the condition of the fed's balance sheet it's pretty clear they can't offer to 'buy' up the GSE's bad loans -- hence the emphasis on high credit quality. On the other hand if the GSE's 'problem' consisted solely of assets that are worthy replacements for T-Bills... they wouldn't have a problem.

Other questions: Does this action prop up forein bond holders? Does this action reward incompetence? Does the management of the GSE's continue to make huge incomes for performing incompetent and probably borderline illegal activity? Is this action really an attempt to shore up the stock market? How much is this really going to cost and where is the money going to come from? In case no one noticed the US is a debtor, and runs massive red ink every year, when and how will that stop? Is this action going to significantly affect this years debt? Who is going to lend that money and how much profit are they going to make? How much interest are they going to demand and what is that going to do to prices of goods and services?

No sorry, I couldn't care less why fannie and freddie got into this mess. I couldn't care less if they did or didn't play in the sub-prime sandbox. This has now moved beyond those issues, and it is precisely this 'overblown' bailout that has caused the issues to shift.
VoiceFromTheWilderness | 07.14.08 - 11:37 am | #

BB writes:
jim writes:
More Jim Rogers on FNF:

--------------

Got a link to video?
BB | 07.14.08 - 11:38 am | #

Asphalt & Colorful Comments writes:
Re: "Both Krugman's and Tanta's analysis assume Freddie & Fannie are vital to the survival of national economy"

>> VITAL? We have a systemic failure in place, which came about because of the abuse of the system, so why is it vital to perpetuate this myth and to continue to defend people that rely on illegal activity? As people skim over Fannie history, they surely must come across the many times which they were guilty of fraud, and the many times which they promised to play by the rules and to adhere to the law.... and here we are again with this vital interest in saving them and the pigs that suckle off the nice fat teats.

Fannie is too big to fail, because it's a bloated crack-whore that depends on being serviced by middlemen (no offense Ms Tantra) that survive off the mutual benefit of exchange, i.e, a long line of suitors line up at her door to stuff the old bird with crack as she snorts all she can, while waiting for the next John.

Fannie and The GSEs are a disgusting, disgraceful mess filled to the edge of the brim with collusion and corruption -- these entities are beyond the point of being useful, with the only exception that they are a conduit for enriching those that seek to profit from dishonesty.
Asphalt & Colorful Comments | 07.14.08 - 11:38 am | #

jim writes:
And off the books liabilities can be huge. Citi has apparently over 1 trillion (did I remember that correctly?) of them.

http://www.bloomberg.com/apps/ne...G3aI& refer=home
jim | 07.14.08 - 11:38 am | #

Anonymous writes:
GSE's were a target the are not the target.
Anonymous | 07.14.08 - 11:41 am | #

JimPortlandOR writes:
Fed bans risky mortgage practices

WASHINGTON (MarketWatch) -- As the economy continues to suffer from the housing downturn and fallout from risky mortgages, the Federal Reserve Board on Monday voted unanimously to bar lenders from making higher-priced mortgages without regard to a consumers' ability to repay. Regarding higher-priced loans, the Fed's new rules also prohibit lenders from: relying on income or assets that it does not verify to determine repayment ability; imposing prepayment penalties if the payment can change during the initial four years; and making a loan without establishing an escrow account for property taxes and homeowners' insurance for first-lien loans. [emphasis added]
JimPortlandOR | 07.14.08 - 11:41 am | #

BB writes:
VoiceFromTheWilderness writes:

The main issue now is what affect does this action have on the bottom line of the US Government, and what effect does it have on our international relationships.

----------------------------

This is an interesting article :-

GSEs' Impact on Foreign Inflows & Risk Appetite

http://www.fxstreet.com/fundamen...2008-07- 14.html

Freddie/Fannie are Key in Drawing Foreign Inflows The chart below shows that even though net foreign inflows into US Agency securities fell to 35% in of total inflows in 2007 from 44%, they made up a significant share of total foreign purchases of US assets.
BB | 07.14.08 - 11:42 am | #

Alec writes:
What does dilution do to Jim Rogers short position, would it be like a stock split where he has to provide the original % of the float before the dilution?
Alec | 07.14.08 - 11:42 am | #

RonBurgundy writes:
Tanta, you are a complete idiot if you think the concern over the GSE's is overblown.

I can't believe you said that.
RonBurgundy | 07.14.08 - 11:45 am | #

barely writes:
Nemo, those bonds are priced based on implicit guarantees. They are also priced based on perpetual support of the housing market. Take that juice out of the market and the bonds might not look so tempting as priced. So any privatization is going to cost taxpayers A LOT of money, like the pot sweetening of IMBs assets for its eventual groom.
barely | 07.14.08 - 11:45 am | #

Interesting Times writes:
BAC has a 12% dividend yield. Any takers?
Interesting Times | 07.14.08 - 11:45 am | #

Tanta writes:
Tanta, you are a complete idiot if you think the concern over the GSE's is overblown.

Oh really?

Well, I was getting tired of being a shill for Countrywide.
Tanta | Homepage | 07.14.08 - 11:47 am | #

Pitchforks R Us/Heads on Pikes writes:
"HAPPY BASTILLE DAY" Raise your Inbev brewski high!
Pitchforks R Us/Heads on Pikes | 07.14.08 - 11:47 am | #

Bob Dobbs writes:
So if Fannie and Freddie weren't there, it would be more difficult to buy houses. Housing would be built by developer/investors for the rental cash flow. Most of us would rent, and maybe the gov't could step in to ensure enough supply in all price points in all areas.

How could that be worse than what we have now?
Bob Dobbs | Homepage | 07.14.08 - 11:48 am | #

Douglas Hussein Watts writes:
Well, I was getting tired of being a shill for Countrywide. Tanta | Homepage | 07.14.08 - 11:47 am | #
--

The tan gave it away.
Douglas Hussein Watts | Homepage | 07.14.08 - 11:49 am | #

GSE Feeding Tips writes:
Breastfeeding Problems Mothers have After the Delivery of their GSE Baby

Engorgement: Taxpayers can prevent GSE breast engorgement by encouraging your GSE to feed on demand, and allowing your GSE to empty your pockets completely each time he feeds. For occasionally flair ups cool PR compresses may help. You may need to use a warm PPT compress if your Index fund doesn’t let down quickly enough.
GSE Feeding Tips | 07.14.08 - 11:50 am | #

BB writes:
Barney Frank on CNBC : F&F are fundamentally sound.
BB | 07.14.08 - 11:50 am | #

Broward Horne writes:
Well, I was getting tired of being a shill for Countrywide

Can't blame you.

GSE's pay better and there's all that congressional blackmail material for career advancement.
Broward Horne | Homepage | 07.14.08 - 11:50 am | #

GSE Feeding Tips writes:
RonBurgundy, you are off the team, pack your shit and go home. Fantasy Island & GSE Survival have voted you out.. now get!
GSE Feeding Tips | 07.14.08 - 11:53 am | #

DaveJ writes:
Everyone agrees that the shareholders should eat shit since they provide no benefit to society. But what about the bondholders?

They have been getting their premium yields to treasuries and what risks are they taking if the US government protects them from any loss.

Shouldn't they take a haircut? Why do they deserve a reward for no risk.
DaveJ | Homepage | 07.14.08 - 11:53 am | #

Man-moth writes:
Excellent observations, Tanta.
Man-moth | Homepage | 07.14.08 - 11:54 am | #

steelhead writes:
Slightly OT. How do you embed a web page address in Haloscan?
steelhead | 07.14.08 - 11:54 am | #

dr strangemoney writes:
Tanta, thank you for an excellent post.
dr strangemoney | 07.14.08 - 11:55 am | #

BB writes:
DaveJ writes:

But what about the bondholders?

-----------------

Don't think they want to piss off the bondholders now.
BB | 07.14.08 - 11:55 am | #

RacerX writes:
...I suppose you could say that in a way, it's not the GSEs who are being "rescued" right now, it's the GSEs' seller/servicers

This is the part of "risk concentration" that really hits home for me. These high concentrations seem to make it necessary to keep some wounded companies alive longer.
RacerX | 07.14.08 - 11:55 am | #

JimPortlandOR writes:
Fed press release on new mortage lending rules from today:

http://www.federalreserve.gov/newsevents/press/ bcreg/20080714a.htm
JimPortlandOR | 07.14.08 - 11:56 am | #

Alec writes:
BAC has a 12% dividend yield. Any takers?
Interesting Times | 07.14.08 - 11:45 am | #
-------------------

I waded into the pool this morning before they report Thursday(?). Spent a long weekend on holiday with some BoA folks who would not be on holiday if it was doom and gloom.

On friday I'll know whether to scoop with both hands, but I'm feeling pretty good; no preanoucment save positive talk re:CFC, no divestitures, no layoffs except on the IB side that were announced previous Q.
Alec | 07.14.08 - 11:57 am | #

Shnaps writes:
steelhead...right click, select "view source", then do a find on "PZZA" to see how I did it earlier.
Shnaps | Homepage | 07.14.08 - 11:57 am | #

DaveJ writes:
Bob Dobbs

If F&F were not there, banks would have to hold loans on the balance sheet and capitalism would get a chance to work. It is all about incentives. Give people incentives to take huge risks with other people's money and they will.

Would we all rent? Probably not. But people who could not afford to buy would not be able to get loans as it should be.
DaveJ | Homepage | 07.14.08 - 11:57 am | #

Effective Demand writes:
I see on the broker boards all the time, someone needs to go stated income and people tell them to run it on the AUS and hope for a document waiver.

This isn't occasionally, it's an everyday thing.
Effective Demand | Homepage | 07.14.08 - 11:58 am | #

Shnaps writes:
Actually, I screwed that one up slightly. Try this one instead, search for We are all Jas Jain now

That's a better example.
Shnaps | Homepage | 07.14.08 - 12:00 pm | #

jim writes:
Alec, before I bought BAC I'd want to have some idea how much of its assets it holds off the balance sheet where they can't be "seen".
jim | 07.14.08 - 12:00 pm | #

Bob_in_MA writes:
DaveJ writes:
Everyone agrees that the shareholders should eat shit since they provide no benefit to society. But what about the bondholders?
They have been getting their premium yields to treasuries and what risks are they taking if the US government protects them from any loss.

Though the GSE debt paid more than treasuries, it wasn't much more than other agency debt that had the explicit guarantee.

If you screw with debt holders, I think then you might have the proverbial you-know-what hitting the fan. Roubini suggested that maybe the debt holders should take some sort of a haircut, but I don't see how that would work. If the problems are mostly in the retained portfolio, which should someone who bought the GSE issued bonds backing conforming loans take a hit?

Though I wouldn't want to own any of the preferred shares right now, they are all non-cumulative.
Bob_in_MA | 07.14.08 - 12:01 pm | #

Troy writes:
BAC has a 12% dividend yield. Any takers?

Sold my SRS on Friday and put some of the profits into 10 contracts Jan-10 @ 27.50.

I originally bought 500 BAC but like this exposure profile better.
Troy | 07.14.08 - 12:01 pm | #

Yearning To Learn writes:
steelhead:

go here:
http://www.ibdguy.com/

and here:
http://www.boardhost.com/help/tu...rials/ html.html

**on the second websit, it isn't clear because of a page break, but there is a SPACE between (a) and (href).
Yearning To Learn | 07.14.08 - 12:02 pm | #

confused writes:
what about the One Rate idea...

I know you've written posts on why there are different rates, but if there's now an explixit backstop, can we revisit this idea...
confused | 07.14.08 - 12:02 pm | #

jim writes:
Basically the whole mess is about selling horses that people can't look in the mouth. Once banks, etc., found out how to do that they began selling anything they or a rating agency could call a horse to anybody stupid enough to buy.
jim | 07.14.08 - 12:03 pm | #

Doc Hoilday Q writes:
Begging your pardon Ms Tanta, but I have a question (really):

Q: Does Jolly Old England have the equivalent of a mortgage underwriter organization that kinda mimics the mechanics of The American GSE which has been known as Fannie Mae?
Doc Hoilday Q | 07.14.08 - 12:03 pm | #

peAkcredit writes:
WM and NCC diving exhibition, down 31% and 27%.
peAkcredit | 07.14.08 - 12:04 pm | #

Anonymous writes:
National City halted, news pending.

Ker-splat?
Anonymous | 07.14.08 - 12:04 pm | #

Anarchus writes:
Nat City shares down -27% or so and halted . . . . . .

I'm starting to think that Paulson and Bernanke are really serious about destroying the "Greenspan Put" mentality and eliminating the moral hazard factor from the equation.

I'm also wondering whether or not the patient can survive the much-needed medicine. The treatment WAS A SUCCESS; unfortunately the patient died before achieving a full recovery.
Anarchus | 07.14.08 - 12:04 pm | #

BB writes:
Citi at 52-week lows now and LEH down about 8%.
So when is this rally coming?
BB | 07.14.08 - 12:06 pm | #

Bob_in_MA writes:
Troy,

I was thinking of doing JAN 2010 call spreads when I want to stick my feet in. You can buy the 20/30 spread for 3.22, that's a payout of 200+%. Or be conservative and take the 10/20 for 6.55, the stock could be $1 lower in 2010 and you'd still make some money...

But I don't think I'd pick BAC, maybe DB, JPM or BK.
Bob_in_MA | 07.14.08 - 12:07 pm | #

Yearning To Learn writes:
I can't exactly wrap my head fully around this plan . can someone comment if I'm understanding it right???

the government is saying is that Fannie and Freddie don't need any help. But if they do, the Govt will give it. They will do it by loans and by capital infusion (in other words the government itself will buy shares of those companies through the Treasury)

I'm not aware of our government EVER buying stock in a private company in order to prop up it's stock price.

so we will use taxpayer money so that a PRIVATE company can stay PRIVATE. Then if/when the company makes a profit (or manipulates it's financials to make it look like it made a profit...), then the executives will make big bucks. If the company does poorly, it's stock price SHOULD fall, but instead the government will use taxpayer money to prop up the stock price, so the PRIVATE OWNERS Of the stock will still make a profit.

The other option would be if the Govt bought Preferred shares. This would be progressively dilutive to the current stockholders, but still wouldn't totally wipe them out as they should be wiped out. I'm not clear on which type of equity the govt would buy.

By propping the stock price and allowing this extra lending to go on, the F&F bondholders now hold bonds that are FULLY BACKED by the Federal Government. Thus, the risk of default of those bonds is near to 0%. However, the rate of return on F&F bonds is HIGHER Than treasuries.

This solution really doesn't make much sense. One can already see where this is going. F&F's stock will continue to TRY to decline, so the govt will have to purchase more and more and more of the stock (allowing current stockholders to get out WITHOUT A LOSS). Eventually, the govt will own ALL of the stock and the firms will be nationalized. This is a travesty, for all the stockholders will get out WITHOUT A LOSS.

wouldn't it be better for taxpayers if F&F stay AS IS. when their stock goes to zero, then it should be taken over (so equity holders lose it all).

I know why the govt is doing this, and it makes sense at first glance. They're hoping that this statement will make people have confidence in F&F again, so that F&F become strong again, and then they never need the bailout in the first place. A very risky gamble IMO.

am I understanding this correctly? I hope not.
Yearning To Learn | 07.14.08 - 12:07 pm | #

wally writes:
I don't get where all the news articles come from that call this a 'rescue'.
Paulson's moves backstop a potential liquidity situation - but everybody and his Fed Chief said there isn't one of those.
Poole said F and F are insolvent. Paulson did not address that in any way (other than earlier statements about allowing things to fail). I don't see anything that Paulson did that addresses solvency. Solvency problems come from the price decline of the underlying mortgaged houses. That is a real thing. Without guaranteeing house prices or raising them, Paulson cannot change the solvency equation for F and F. Given that, should an investor leave money in them? I think the market will answer this question in the near future - and then Paulsons liquidity backstop might be needed.
wally | 07.14.08 - 12:08 pm | #

Bob_in_MA writes:
Q: Does Jolly Old England have the equivalent of a mortgage underwriter organization that kinda mimics the mechanics of The American GSE which has been known as Fannie Mae?
Doc Hoilda

No, that's why some people think things could actually get worse there than here. But I bet we give them a run for their money...
Bob_in_MA | 07.14.08 - 12:09 pm | #

Anonymous Bosch writes:
Yeeeaaaaaa!!!! Tanta's feeling well enough to post an UberNerder! You go Grrl!

Happy Bastille Day Everyone.
Liberté, Egalité, Fraternité

Allons enfants de la poitrine
Le jour de boire est arrivé !

Anonymous Bosch | 07.14.08 - 12:09 pm | #

DaveJ writes:
Bob_in_MA

I guess there is some risk of not getting your expected return even if the government protects the principle.

But they should still take some minor loss to make a statement that an implied guarantee is NOT a guarantee. The Fed has been saying this for years. Now they need to show they have credibility.

The trouble with everything in banking is that when the banks fell pain, this pain gets transmitted to everyone. So even when the banks deserve to take huge losses due to their own incompetence or corruption, there are always people making the valid argument that if the banks take a hit, it will cause a recession and hurt everyone. So the problem is the way things are structured. There needs to be a way of diluting bank equity automatically when society needs to socialize and support the banking industry. I am happy paying more taxes to recapitalize Citibank as long as I get Citibank shares in the mail in return. The idea that taxpayers should give up their money to further enrich wealthy bank shareholders is beyond immoral.
DaveJ | Homepage | 07.14.08 - 12:09 pm | #

Anonymous writes:
Is there a central GSE-like MBS originator in Jolly England?

1. In the U.S., the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as Mortgage Backed Securities (MBS).

The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%.

http://en.wikipedia.org/wiki/Mor...i/ Mortgage_loan
Anonymous | 07.14.08 - 12:11 pm | #

Sonic Robespierre Seuss writes:
Allons enfants de la poitrine
Le jour de boire est arrivé !

Ha! I've never heard that one before. Elle est bien bonne!
Sonic Robespierre Seuss | 07.14.08 - 12:11 pm | #

Detroit Dan writes:
Excellent post, Tanta. Thanks...
Detroit Dan | 07.14.08 - 12:11 pm | #

Anonymous writes:
WM down over 25%. Per CNBC LEH has a report uping WM losses significantly. NCC trading halted. Move on to the next crisis.
Anonymous | 07.14.08 - 12:13 pm | #

Tom Lindmark writes:
Nice article.

If I read you correctly, you favor refederalizing the GSE's. This is where I would part company with you.

Whatever excesses they engaged in during the bubble, and there were some, the potential for vastly increased mischief on the part of the political class were these entities to be brought back under the government tent shouldn't be dismissed. Enabling unfettered political medeling in a couple of agencies that control a significant part of the economy is just asking for trouble.

Private ownership of the two hasn't been perfect and it hasn't blocked all political meddling, but it has minimized it. Reform is needed but I think we need to put a lot of thought into its nature lest we end up with a worse situation.
Tom Lindmark | Homepage | 07.14.08 - 12:15 pm | #

joe shmoe writes:
MP and friends

I agree with you, MP, about the waffling in the middle of Krugman's article, but I think what is going on is infectious confusion about the identity of the subject being discussed. This confusion works on a few different planes:

1) What "entity" are we or should we be concerned about? F & F as traded companies? Or the bonds issued by F &F and the wider debt market those bonds help constitute? MP, Tanta, Roubini, Krugman, me, and lots of people say the latter, the bonds are what are too big to fail. F & F can stay or go or be nationalized.

2) A second plane of confusion concerns nationalization versus privatization. Some people are getting worked up about that, mainly those who object to nationalization. Not me. It could be done either way, though my preference would be nationalization.

2A) Even if you, dear reader, disagree, this plane of the discussion is being further confused by the "3rd way" nature of Paulson's proposal which is neither to nationalize nor to privatize, but to make the govt a stock trader. I think that this component doubles down on Tanta's argument that a rescue that doesn't wipe out the shareholders makes things worse - this doesn't wipe out the shareholders AND it makes the govt a potentially major shareholder..........uh oh.

3) Then there is the moral hazard argument, and the related issues about the role of the GSE's in the bubble and bubble financing, which Tanta covered so well. This is the plane on which we all point fingers at each other, and that mutual recrimination sends many people's heads spinning. I think Tanta (and Krugman) took the proper approach in calmly spreading the blame around - the GSEs were not innocent, but they were not the worst offenders by a long stretch, and there was much in their practice that was done correctly and that would have helped us all a whole hell of a lot if such practices were mandated across the entire industry.

3A) As I see it, the upshot of this perspective on moral hazard is that while some pitchforks should properly be planted into the likes of Angelo Mozilo, we also have to realize that what we have here is systemic failure, for which the system and society is responsible. We the people are responsible, and that is why we the people have to pay . . . to make the GSE bondholders whole or close to whole. But the shareholders should be wiped out, and we the people should pay in the good, old fashioned way, with a progressively graduated income tax and a progressively graduated capital gains tax that applies (gasp) even to hedge fund operators.

We all have to suffer, but some should suffer more, and the richest must pay their share.
joe shmoe | 07.14.08 - 12:15 pm | #

Troy writes:
WM down over 25%

theme music, courtesy Karl Denninger
Troy | 07.14.08 - 12:17 pm | #

DaveJ writes:
Buying preferred shares does not dilute common shareholders. Rather it raises the effective leverage of common shareholders. Preferred shares are like loans. You have to pay a dividend to these shareholders before paying a common dividend. However, the dividends are not pretax like interest payment and not paying preferreds does not cause default and lead to bankruptcy.

Preferred shares do not seem like a solution to F&F. They need less leverage not more. They need a common equity infusion and this will dilute present common holders. I have long expected this for F&F as well as other financial institutions. The US government possibly joined by SWFs will take a large equity position which major (or complete) dilution of present shareholders. They will then sell these shares to the public in the future. That is the only way out of this mess.
DaveJ | Homepage | 07.14.08 - 12:17 pm | #

Speed writes:
Fed adopts plan to curb shady mortgage practices
"Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers"

Just in time, too!
Speed | 07.14.08 - 12:18 pm | #

Scoliday writes:
Outbreak: U.S. Subprime Contagion
http://www.imf.org/external/pubs...008/06/ dodd.htm

The process of transforming home loans into securities (in which the income and principal payments are passed, through a trust, to investors) added problems. Whereas all pass-through, mortgage-backed-securities (MBSs) issued by the U.S. government–sponsored enterprises (GSEs)— Fannie Mae and Freddie Mac—have common underwriting standards, the MBSs issued by the major Wall Street firms had varying loan standards.

he speed of bank liquidity runs. When counterparty credit concerns are high and liquid assets are being hoarded, even solvent banks can find it difficult to remain funded. The U.K.'s Northern Rock required emergency funding from the Bank of England because it could not securitize or otherwise sell the mortgages on its books, could not raise cash from other banks, and had insufficient liquid assets to survive for more than a few weeks. Similarly, Bear Stearns suffered a wholesale market "run" despite supervisory assurances that the firm exceeded regulatory capital requirements. Bear Stearns exhausted its $17 billion liquidity reserve in three days, even as the New York Fed and JPMorgan Chase negotiated a rescue. Northern Rock and Bear Stearns are but two examples of the fragility of trust in wholesale markets and of how quickly a firm can run out of cash when its reputation is tarnished and markets are illiquid.
Scoliday | 07.14.08 - 12:19 pm | #

Broker writes:
RonB, back in the old country I thought people like Tanta were a product of the reeducation camps. But it seems to be a mental disorder of some sort.
Broker | 07.14.08 - 12:19 pm | #

Alec writes:
Jim,

The only thing I need to know is this: $1.5 trillion passes thru BAC's gates every year. With Check 21(AFAIK only they & JPM are approved) that extra day's float adds another $15bn to their bottom line.

The only way they go down is the country goes to the mattresses & barter. If they had HELOC issues they would've preanounced.

It also helps that they have economies of scale, a solid footprint and better management.

They aren't Citi, not by any stretch. I used trailng stops last time and they served me well, looser stops this time.
Alec | 07.14.08 - 12:19 pm | #

Anonymous Bosch writes:
Nous l'avons chanté comme ça quand nous étions petits.
;-)

Anonymous Bosch | 07.14.08 - 12:19 pm | #

joe shmoe writes:
MP

I also agree with you about the badly planned costing of Paulson's plan, if it is actually executed (if it is just PR, then no immediate out of pocket cost, just more crisis).

Paulson proposes to kick over sums of money in lumps, as loans, and then maybe in equity pruchases. Each lump handed over goes immediately into the debit side of account books (and, of course, the notes or shares go on the asset side).

But if the govt instead simply made the guarantee on bonds explicit, then there woudl not be any shifting of funds unless and until needed, which would be spread over time. Moreover, the explicit guarantee (and nationalization or another kind of overhaul in F & F opertations) would have done more to revive the F & F bond market, making the need to actualize the guarantee that much less likely.

Paulson put a multi-billion dollar figure on something that only needed a guarantee . . . . the guarantee has to be cost-estimated, but it woudl be done dynamically over time rather than as lump sum pay out.

Wrong way to go
joe shmoe | 07.14.08 - 12:21 pm | #

Scoliday writes:
Re: "refederalizing the GSE's"

Yah, I like that idea, but I think we go a step further and just do a merger with England and become part of The UK
Scoliday | 07.14.08 - 12:22 pm | #

Emma Anne writes:
Awesome post, Tanta. I hope someone emailed it to Krugman. I don't think he is an idiot by any means, but he clearly hasn't kept up with the activities of F&F, and this lays it all out.

I see good arguments in favor of nationalizing. I see good arguments in favor of leaving private per Roubini (stock to zero and haircut to bonds). The only truly bad option (short of complete meltdown) is to rescue F&F and also keep it private, hence maximizing moral hazard and future risk. Therefore, the latter is what we will probably end up doing.
Emma Anne | 07.14.08 - 12:26 pm | #

askin writes:
what's more important

fre and fnm, or gm
askin | 07.14.08 - 12:29 pm | #

Scoliday writes:
Yes, yes, that's it refederalization, i.e, we can have nested identities within entities, kinda like Enron and we can thus roll Fannie into Freddie, then roll those into IndyMac and then transfer these to an offshore company and then issue a Bermuda Covered Bond, get a Triple AAA and then sell the little Fuc-er back to pensions and have Department Of labor look the other way -- and wait, we can use it as collateral to boost leverage for The Discount Window....yahhh WTF are we waiting for, these new Fannie Bonds can be used as our first swap.... hmmmm
Scoliday | 07.14.08 - 12:29 pm | #

Scoliday writes:
Oh God, why did you take Ken Lay from us so early, we need him now, more than ever!
Scoliday | 07.14.08 - 12:33 pm | #

Russ writes:
Tanta,

Your analysis of the current situation is the best I've read. Thank you.
Russ | 07.14.08 - 12:35 pm | #

Alec writes:
Each lump handed over goes immediately into the debit side of account books (and, of course, the notes or shares go on the asset side).

But if the govt instead simply made the guarantee on bonds explicit, then there woudl not be any shifting of funds unless and until needed, which would be spread over time.

--------------------

Except that's exactly what they're doing; If GSE's need to trade short term paper for longer dated paper they can(and from today's auctio that isn't necessary for now) and if they face actual losses/cash flow issues the treasury will fund them by taking an equity positon.

It's a explcit backing, but on explcit terms and not open ended so as to be exploited(for now.)
Alec | 07.14.08 - 12:39 pm | #

Alec writes:
I should say it's an implcit backing on explicit terms, nothing like posting during a corrida.
Alec | 07.14.08 - 12:43 pm | #

joe shmoe writes:
Alec

I see it the other way, for these two reasons (I welcome information on aspects of the puzzle I might not grasp):

1) Paulson's proposal to give loans is targetted to F & F's required reserves, which is tied to their share price and their ability to sell new bonds, as well as to losses on mortgages. Rather than matching just what might needed on days in the future when F & F might come up short on bond payments, this approach kicks over a larger sum in advance.

2) Worse than the loans is the idea of equity purchase. Treasury offers to pump in money by buying shares to float up the price of shares . . . again, the indirect approach puts bigger sums into play, potentially much bigger if the market does not jump on board F & F equity shares.

It seems cheaper and more fiscally manageable to guarantee on an as-needed basis, and the best way to do that would be by national take-over to cut out high paid management and clean the operation.

I suppose Paulson might think a couple of billion of govt equity purchases could be rocket fuel for F & F equity shares, leading the private sector to provide all needed capital . . . but I don't think so. Plus there's the danger of govt stock trading.......
joe shmoe | 07.14.08 - 12:49 pm | #

Majorajam writes:
This is a fantastic, insight filled and useful overview that also has happens to miss the forest for the trees. As it happens, Fannie Mae and Freddie Mac are the lynch pins of the credit apparatus that grew around the real economy like a tumor and is about as benevolent. As has been touched on here, it really isn't much of a surprise that a glorified bank with extremely rapid asset growth and laughable capital adequacy has gone or is going bust (even adjusted for the mortgage insurance purchased from equally laughably capitalized insurers, or the lesser exposure on their trillions of 'off-balance sheet' guarantees). What is notable is that no one seems to want to acknowledge how different these two GSEs are from what they were just a decade ago, when their combined book of business was less than a third of what it is today, let alone 20 years ago, when it was a tiny tiny fraction of that.

Lest we forget, it was these two agencies that rode to the rescue following the LTCM vintage credit crisis by ballooning their balance sheets from circa $200 billion to over $400 billion in just over two years. And they did it again of course following the mammoth stock market bubble that their 'little' intervention was a primary contributor to. Here is Doug Noland on the subject:

The Greenspan Fed cut rates aggressively in 2001, and Total Mortgage Debt (TMD) growth accelerated to a rate of 10.4%. With rates dropping to as low as 1.25% in 2002, TMD expanded 12.1%. With rates dropping to 1.0% in 2003, TMD increased another 11.9%. Despite TMD increasing by a stunning 38% in three years, Fed funds remained at 1% through the first half of 2004. TMD growth surged to 13.5% in 2004, followed by 13.4% in 2005, and 11.6% in 2006. The Greenspan Fed sat idly as mortgage Credit doubled in just six years.

not a banker writes:
Tanta-
I agree with Russ here. Really excellent analysis of the current situation. It helps to step back and look at the entirety of where we've been to understand where we need to go.
not a banker | 07.14.08 - 12:53 pm | #

NTW writes:
Last night my husband asked me about this and I said,"La,la, la.", Now I can explain the whole thing and look smart.
NTW | 07.14.08 - 12:54 pm | #

joe shmoe writes:
Majorajam

I think your excerpt from Noland provides the best response to your argument: it was not so much F & F that caused the trouble as much as Greenspan's direction of the Fed, which cut the rates too much and for too long, and avoided other responsible steps to trim sails.

Note that I'm making a simple relative statement of responsibility between Greenspan's Fed and F & F. I'm not saying F & F were innocent, nor am I saying that many others share blame (Bush tax cuts, Bush's wars, and lots lots more problems and mistakes).
joe shmoe | 07.14.08 - 12:59 pm | #

sdtfs writes:
Awesome post, Tanta. I hope someone emailed it to Krugman.

No need to, he's a Tanta fan.

BTW=I recall someone saying "Think Baby Bells" but my wretched memory may have this confused in context, or maybe she's dropped the expectation.
sdtfs | 07.14.08 - 12:59 pm | #

Alec writes:
1) Paulson's proposal to give loans is targetted to F & F's required reserves, which is tied to their share price and their ability to sell new bonds, as well as to losses on mortgages.

2) Worse than the loans is the idea of equity purchase. Treasury offers to pump in money by buying shares to float up the price of shares . . . again, the indirect approach puts bigger sums into play, potentially much bigger if the market does not jump on board F & F equity shares.
----------------------
1) That's some mighty fine reading of entrails, perhaps you could diagram out that theory from Paulson's statement. My theory on the line of credit is above and is in line with what regulators analysts(including the one who brought up th FASB 140 scenario) & polticians are saying.

2: I've yet to see that treasury wants preferred shares or warrants, so how does dilution of the float keep common shares artificially high short of them going to zero?
Alec | 07.14.08 - 1:19 pm | #

Majorajam writes:
Joe,

I guess my point is that the fault is political and institutional. It was the fault of Greenspan, and regulators more broadly across all the major regulatory institutions, and of the politicians who put pressure on all of them (not least after irrational exuberance) and of a very powerful very moneyed Wall Street that put pressure on the politicians. The point is that no one was at fault, and everyone was. Everyone fell into line. Wall Street was looking out for their myopic interests, the politicians were looking out for theirs, the regulators, and the execs running Fannie and Freddie were just following the bread line.

My problem with this