Go figure: In the midst of a deep selloff, a bullish rumor seems to have been planted that would allow for the rescue of Fannie Mae (FNM) and Freddie Mac FRE).

It turns out to have been shite:

"Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

"Federal Reserve officials are following the situation closely,” Smith said in a telephone interview today. "However, there have been no discussions” with the companies “about access to the discount window,” she said.

Shares of the two largest U.S. mortgage-finance companies plummeted this week on concern they don’t have enough capital to offset losses from the mortgage meltdown. The discount window offers direct loans to commercial banks at an interest rate that’s now 2.25 percent, a quarter point above the Fed’s benchmark rate.

Chairman Ben S. Bernanke and his colleagues opened the discount window to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis."

These bullish bull$%*# rumors end up costing investors real money. Remember the story about Buffett buying Bear Stearns? That made the rounds, including all of the financial television channels, Forbes, etc., sending the stock to $126.

I am waiting for Jamie Dimon to call for an investigation over who started that enormously expensive, money-losing false rumor.

>

Previously:
About Those Companies Brought Down by Rumors . . .  (July 11, 2008)
http://bigpicture.typepad.com/comments/2008/07/about-those-com.html

Buffett to Buy Bear? Bull$%*# !  (September 27, 2007) 
http://bigpicture.typepad.com/comments/2007/09/buffett-to-buy-.html

>

Sources:
Fed’s Bernanke tells GSEs discount window open
Patrick Rucker
Reuters, Fri Jul 11, 2008
http://www.reuters.com/article/topNews/idUSWBT00938820080711

‘Fed Says No Talks With Fannie, Freddie About Loans 
Scott Lanman
Bloomberg, July 11 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=a79GKfbIbW10&

Bernanke told GSEs they can use discount window: report
Wallace Witkowski
Reuters/Marketwatch, 3:10 p.m. EDT July 11, 2008
http://tinyurl.com/5gqf5f

~~~

Category: Federal Reserve, Legal, Psychology, Short Selling, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Fed: No Discount Window for FNM, FRE”

  1. In case this disappears from the Reuters site:

    Fed’s Bernanke tells GSEs discount window open: source
    Fri Jul 11, 2008 4:18pm EDT
    By Patrick Rucker

    WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

    The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

    The Fed declined to comment on whether it was considering opening its discount window to the government-sponsored enterprises (GSEs). A senior senator said at a press conference on Thursday afternoon that such action was among a range of possibilities under discussion to help the struggling mortgage lenders weather a crisis of confidence.

    “I know that both the Fed and the Treasury are looking at various options … including things like the discount window,” Senate Banking Committee Chairman Chris Dodd told a news conference on Capitol Hill on Friday.

    “I don’t want to draw any conclusions about it yet, but they are certainly examining what other means might be necessary in order to shore up the situation,” the Connecticut Democrat said.

    Freddie Mac spokesman Douglas Duvall declined comment when asked about a phone call between Bernanke and Syron. A Fannie Mae spokesman was not immediately available for comment.

    Fannie and Freddie shares have been pummeled in recent days amid reports that the Bush administration was considering contingency plans for taking over one or both of the companies and place them in a conservatorship if their problems deepened.

    Fannie Mae shares slid 22.4 percent to end at $10.25, off a session low at $6.87, while Freddie Mac ended down 3.1 percent at $7.75, off a session low at $3.89. The listings topped the list of the New York Stock Exchange’s biggest percentage losers.

    But Treasury Secretary Henry Paulson effectively rejected any plan to nationalize the companies, saying the administration’s focus was on supporting the GSEs “in their current form.”

    William Poole, the former president of the St. Louis Federal Reserve Bank, said the Fed likely could open its emergency lending facility to the mortgage lenders under the same circumstances that were in play when it gave investment banks access in March.

    Poole, a 10-year veteran at the Fed, said the U.S. central bank would probably have the authority to open the discount window to Fannie and Freddie under the “unusual and exigent” circumstances it cited in March.

    But also said he did not think such a drastic step would be necessary, noting that the Fed could simply purchase the GSEs’ debt directly and hold it on the Federal Reserve system’s open market portfolio.

    (Reporting by Patrick Rucker; Writing by Glenn Somerville; editing by Gary Crosse)

  2. leftback says:

    More Fannying Around:

    I think they must have had second thoughts when they saw the 10-year go through the roof yesterday.

    A truly brilliant Roubini post on Fannie and Freddie is on nakedcapitalism. He is really on target in this one.

  3. Paul Jones says:

    Laws are not being enforced anymore: Sarb-Ox? We know that the plaints of Wall Street have already neutered that law, even while it’s still on the books! Mortgage and contract fraud? Fugheddaboutit! Lying and rumormongering in positions of public trust? We know where the politicians stand on that one!

    If one brought suit, would the courts respond in a timely manner? No. Thus there is no legal remedy. The only remedy is to start protecting yourself with tax shelters and getting your money out of America into more stable economies.

    Join the predator class or be eaten.

  4. If you follow Dimon-think, you’ll also come to the conclusion that the failure of IndyMac is entirely due to Chuck Schumer…

  5. blin says:

    Hmmm…

    After reading the Reuters article, I noticed that it was posted at 4:18pm EST.

    The Marketwatch article that references Reuters was posted at 3:10pm EST.

    The rally in FRE & FNM occurred all day.

    Was the rumor/article possible posted earlier in the day? Did someone then change the time?

    It appears rumors are a major weapon for Wall Street to manipulate markets for the short term.

  6. D. says:

    And even if FNM and FRE were rescued, do people actually think there would be any value left for shareholders? Supported or not, these firms won’t be producing earnings for a while.

  7. BobC says:

    Yeah. Where’s Eliot Spitzer when you need him? He nailed Martha Steward (not THAT kind of “nailed” – he pays for that service). Surely he would have “defended the little guy”.

    Not.

  8. Steve Barry says:

    Great post Barry.

    Another big story is IndyMac…just the first of the bank failures…that one alone will cost FDIC Between 4 and 8 Billion

  9. Steve Barry says:

    They say IndyMac will be the costliest bank failure ever…don’t forget to adjust for inflation!

  10. Winston Munn says:

    I thought it was well known that all disinformation had to be first cleared by the office of the Vice-President.

  11. Name says:

    There seems to be confusion/obfuscation on the matter.

    “Fannie Mae and Freddie Mac may have several options for capital and liquidity, including gaining access to the Federal Reserve’s discount window, Senate Banking Committee Chairman Christopher Dodd said. ”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=ae9uchhwIkfg&refer=home

  12. VennData says:

    This rumor business needs its own NAIC (North American Industrial Classification) as it appears to be a leading US profit-producing sector. I am, however, against these recent government moves to nationalize the industry.

  13. Greg0658 says:

    CNBC reports Fan & Fred have 1/2 the US mortgages with a total of $5Tril

    even if our deadbeats and bloat in light of China capitalism halved that $5T worth

    who would have the money to buy them out anywhere near the real asset worth?

    or is this to be the next game that will present wall street with salaries?

    I think each of the $5T properties should go out for bid one at a time on devestiture. Then maybe each property owner can end up owning their property at dimes on a dollar.

  14. cinefoz says:

    I haven’t posted much here recently because I realized I really don’t give a shit about a lot of this anymore. I buy low and sell high. And I’m pretty good at it. Lieberman’s introduction of the Commodity Speculation Reform Act of 2008 yesterday, along with the absolutely Beautiful campaign by the airlines regarding criminal commodity speculation, tell me we are at a bottom. I’ll go into the market a little more real soon.

    Lieberman is shooting for a bill passage before the August recess. Combined with the pounding the oil thieves are going to take from the Airlines letter writing campaign this month and passage is a done deal.

    Once oil is fixed, the other problems will evaporate at varying speeds. I prefer to look forward and not repetitively over analyze the same things. Especially when so many pundits ignore the controlling effects that oil has on everything else. Ostrich Economics is alive and well all over.

    Thank you all for being so panicky. I have a good use for the money I plan to make from this bottom.

  15. N! says:

    …Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

    The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies…

    I wonder what kind of window is that? Drive thru’ a Ben’Mansion? Crystal Clear? Opaque?

  16. Marcus Aurelius says:

    After a while, they’ll have to open the “discount window” to everyone for any and every thing. It won’t be a “bail out” as in bailing out a boat. It will be a “bail out” as in grab a parachute and jump.

    We.

    Are.

    Bankrupt.

    Using the discount window (and other forms of bail outs) is only possible because we have fiat currency. We talk about the declining value of the fiat dollar as if that dollar held value in the first place.

    Now we get to watch our Federal government pull itself up by its non-existent boot straps.

  17. century says:

    Are you sure your title “Fed: No Discount Window for FNM, FRE” is correct???

    Please don’t spread incorrect rumors!!!

  18. ddt says:

    I went short at the worst possible time yesterday (possibly my worst timed trade of all time) and got blown out in the afternoon by the fed window rumor.

    thank god I didn’t cover. here’s to a nasty monday :)

  19. VoiceFromTheWilderness says:

    Barry, I’m surprised…

    You know that all bullish rumors are blessed by god, no amount of praise is too great. Only the rumors of the evil shorts belong to the bag of trickery of the evil one and must be prosecuted will the full strength of the right arm of God — the federal government.

  20. zackattack says:

    I’m don’t think there’s a non-foolish thing to do here.

    The late news that caught my eye was Freddie’s confusing statement:

    http://www.freddiemac.com/news/archives/corporate/2008/20080711_statement.html

    The main points seem to be:

    - We are well-capitalized.

    - But if we aren’t, there’s always the nuclear option of refusing to lend by going into runoff mode.

    - We’re liquid, but if we’re not, we can return endlessly to the debt markets.

    - The media is a bunch of lying scumbags. We don’t need to raise capital because, like we said, we’re well-capitalized.

    - But if we do need to raise capital, we can. Congress says so.

    WTF? Is this just confusing or do I need some kind of special GSE decoder ring?

  21. Winston Munn says:

    From an AP article:

    “President Bush met with senior economic advisers and said Paulson had assured him that Paulson and Federal Reserve Chairman Ben Bernanke ‘will be working this issue very hard.’ Wall Street sent the companies’ stocks lower nonetheless.”

    Nonetheless???

  22. bumble says:

    http://www.haloscan.com/comments/calculatedrisk/7962646707430122689/#515675

    Sanity is prevailing.
    Stop whacking the fantasy that fannie and freddie are busted.

    Look at it this way- they get to borrow at 2-3% and lend at 6-7%.
    No run on assets is possible, ’cause they sold bonds. Geez, so what if a bunch of losses are caused by mark to market. The real question is what are the *realized* losses.

    That cash burn is the only question of solvency. The assets are huge, but most of them are sound. I don’t see much of the pre 2004 stuff to do more than continue to be paid. There will be very little default on the tranches from 2005-2007, because, ironically due to their requirements, most of the really toxic trash was not eligible to be sold through GSEs without fraud being involved.

    Now, what Indymac has on the books is probably the most toxic remnants of the boom excesses.

    Ugh. What else is buried on the balance sheets from that era on all of the gogo lenders? who knows, but most of it didn’t go GSE.

    Remember, they were complaining about a lower percentage of loans and not making their fees during the boom.

    Now they have the market nearly to themselves, so time to raise *fees* and push income.

    Geez, they sound like buys to me, especially with explicit government backstops.

    Crisis over, for them. Now, those banks with toxic portfolios, well, they are a different matter.

    Someday this war’s gonna end…

  23. rational says:

    I’m waiting for Jamie Dimon to call for an investigation over who started that enormously expensive, money-losing false rumor.

    Barry, when you are done waiting on this please be sure to come pay for the 3 beautiful bridges in Baghdad I am about to sell you

  24. Andy Tabbo says:

    I’m surprised this blog hasn’t put anything up on the FDIC/OTS takeover of IndyMac, yet. I guess it was so well known that it was coming, that the actual takeover is old news. However, I think it’s interesting that this IndyMac company went bust lending to Alt-A.

    Is Alt-A subprime, or not subprime? Remember when this crises first started and we were told that subprime was “contained”? And that Alt-A mortgages were somehow better quality than subprime mortgages?

    And now, the FDIC is going to blow 10% of its budget, $5-8 bn, on a company that had $29bn of mortgages on its books? These are just some of the numbers I’ve been reading in the last few hours, and they may be wrong. But that sounds like a loss ratio on mortgage assets between 15-30%??

    WTF?!?

    We are going to continue to see a flight out of equities into hard commodities until we stabilize this situation. There are no free lunches. Bailouts are not the solution. Bailouts will only lead to runs on the dollar.

    At some point, we are just going to be left with the realization that we are facing a deep, economic depression. Let’s just get it over with quickly.

    Remember, almost every single economic Depression in modern times, began with a real estate bust.

    - AT

  25. donna says:

    FDIC is hiring like crazy. Don’t think Indymac will be the only one.

  26. DL says:

    I don’t see why the government can’t just insure a portion of the face value of the Fannie/Freddie bonds (perhaps 80% or so); if this were then coupled with a three-year moratorium on the issuance of new debt, very few people would lose much money, and the taxpayers wouldn’t be left holding the bag. (I would assume, however, that this would mean somewhat higher mortgage rates going forward).

  27. michael schumacher says:

    Is it a coincidence that the rumor was floated
    exactly 15 minutes after the close of the oil market??

    Not a chance..

    I await with much giddiness what “happy news” is in store for us at about 4pm PST before the japanese continue it’s race to the bottom.

    Ciao
    MS

  28. Sidney says:

    Maybe it wasn’t a rumor (It would be a pretty detailed rumor, and Reuters would be making this up?)maybe the TRUTH was spiked for other reasons. See this analysis:

    http://www.economicpolicyjournal.com/2008/07/is-treasury-secretary-paulson-trying-to.html

  29. 220 says:

    Take a look at the loan performance of the IndyMac portfolio – you know those allegedly “toxic” ALT-A loans …

    From their Q1 2008 (3/31/08) reports – they show a little over 6% 30+ day default rate and a 2.24% foreclosure rate – almost exactly what the Mtg Bankers Assoc numbers show as industry averages

    They show losses of 12 basis points on the portfolio (0.12%) but note they projected (built in) 150 basis points in losses (1.5% of the portfolio … they go on however to note they have credit enhancements (essentially insurance) in place for up to 750 basis points loss (7.5%)

    IndyMac notes they have appx $6 billion in loans (with 90% rated AAA) – a 7.5% loss rate would mean they can lose $450 million and be within their loss coverage – their actual losses were 0.12% or appx $7.2 million

    And their loans in this protfolio were typically seasoned appx 28 months – so statistically the majority of defaults should have already occured – which is shown by the declining default rates

    Their default rate increased 82% from Q3 to Q4 2007, and increased 39% from Q4 2007 to Q1 2008 – they project default growth rate to continue to decline to 21% in the second quarter to 6% in the third and basically be flat in the fourth

    The reality sure seems to be as with most of the industry – that the underlying loan portfolio was performing – with almost 98% NOT in foreclosure and 94% fully performing and paying as agreed

    Yet because of primarily accounting rules – causing paper lossess – they are now out of business – non-FDIC insured depositors will lose appx $1 billion, shareholders will lose everything, thoudands will lose their jobs and the taxpayers will lose an estimated $4+ billion ….

    http://seekingalpha.com/article/76942-indymac-bancorp-inc-q1-2008-earnings-call-transcript

  30. brion says:

    put me down in the “trial balloon” camp…
    Treasuries/dollar **** themselves and so right now the Boyz are going: “****, back to the drawing board..”

    Over at Minyanville, they’re speculating that Freddie and Fannie will be placed into conservatorship and wound down , expecting that the US mortgage market will move quickly to the covered bond format that is common to the Europe mortgage market.

  31. VJ says:

    Doncha just love all these “get the government off my back”, “pull yourself up by your own bootstraps”, “free enterprise”, “pro-deregulation”, types lining up at the Fed Discount Window with their hands out ?

    That “Welfare State” they repeatedly complain about is for the Rich & Corporate.
    .

  32. Nihilism says:

    Breaking News!

    Henry Paulson, the U.S. Treasury secretary, is planning a $15 billion capital injection into U.S. mortgage companies Fannie Mae and Freddie Mac, the Times of London reported, without citing anyone.

    The plan is “high” on the list of solutions to the nation’s mortgage crisis, the newspaper said. In exchange for the capital, the U.S. government would get a new class of shares, the newspaper reported, citing no one.

    Paulson’s plan also would allow the two mortgage companies to use the Federal Reserve’s discount window so they can borrow from the central bank, the Times reported.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=adGvdKB7NpAg&refer=home

  33. ter says:

    original Reuters post of rumor re GSEs access to Fed lending was well before the close and before Marketwatch reported it. Look aT the charts: it turned market up from nearly 250 points down, under 11,000, preventing further decline.

  34. ter says:

    original Reuters post of rumor re GSEs access to Fed lending was well before the close and before Marketwatch reported it. Look aT the charts: it turned market up from nearly 250 points down, under 11,000, preventing further decline.

  35. Japanese Monetary Policy: A Case of Self-Induced Paralysis?
    December 1999
    http://www.princeton.edu/svensson/und/522/Readings/Bernanke.pdf

    How to Get Out of a Liquidity Trap
    - Commitment to zero rates—-with an inflation target
    - Depreciation of the yen
    - Money-financed transfers
    - Nonstandard open-market operations