I am still working my way through the details of the GSE takeover by Treasury, but here is my initial read of the details:

• FHFA will act as conservator of the two firms — meaning the US government has day-to-day control of Fannie and Freddie;

• The conservator’s goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company’s business and preserve and conserve the assets and property of the company.

• There is an immediate moratorium of the firms’ lobbying activities.

• New lending facility: "Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks;"

• Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS).

• Treasury purchases the mortgage-backed securities from the firms; no word about any derivatives or swaps owned by the two;

• Starting in 2010, the portfolios must be reduced at the rate of 10% per year.

• Both CEOs (Daniel Mudd and Richard Syron) dpart after a transition period. TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie; U.S. Bancorp Chief Executive David Moffett at Freddie.

• Senior preferred stock purchase agreement includes an upfront $2 billion issuance of senior preferred stock with a 10% coupon ($1B per GSE); Dividends are quarterly starting in 2010, and warrants represent an ownership stake of 79.9% in each firm. 

• 3 Goals of the takeover:  market stability, mortgage availability and taxpayer protection.

• The takeover is the result of a "detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve;"

This looks like a 80% haircut for the common holders, I am trying to figure out if this is a haircut for the preferred holders . . .

UPDATE: It seems the Preferred Shareholders take an even bigger haircut than the common, as they lose the present dividend payments.

Regarding common and preferred losses"With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."

On Moral Hazard: "Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."

>

Sources:

Treasury Department, September 7, 2008
http://treasury.gov/press/releases/hp1129.htm

Treasury Department Reports:

FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility

Category: Bailouts, Credit, Real Estate, Taxes and Policy

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.

92 Responses to “Treasury Takeover of GSEs: 10 Key Points”

  1. johnnyVee says:

    “Starting in 2010, the portfolios must be reduced at the rate of 10% per year.”

    WTF? How can I invest in a company that plans on reducing its business by 10% a year. BTW, this will cause the bottom of housing to be extended and, dare I say, over-shoot to the down side. Look for recovery in 2015.

  2. Doug Kass says:

    The treasury to get preferred senior to existing preferreds, a 10% coupon and 80% of the common. Exisitng preferred dividends are eliminated.

    Whether prefs get protected or not has been one of the detail uncertainties with this bailout. The banking industry’s lobbying to protect itself from losses on the preferred fell on deaf ears as well it should have. If taxpayers lose a penny, the common and preferred should and will get wiped out. Having to pay a 10% coupon on whatever the government gives them will assure there is nothing left over. Banks are going to have to take other than temporary impairment on their preferred holdings creating a new capital hole to fill in addition to that from credit losses. Banks will/may rally but this isn’t really good news. Not going to help credit or do anything to balance the negative effects of rising unemployment.

  3. BG says:

    johnnyVee,

    Maybe you don’t like the edict from an investor point of view; but as a taxpayer, I fucking love it.

    Get the US Government out of this business. We already know they can’t do anything efficiently; so turn it back over to private enterprise where it should have been all along.

    Hallelulah!!

  4. VennData says:

    They should extend the no-lobbying to all financial firms, heck, why not to all firms? That quid pro quo would go down quite well with the 95% of Americans who are paying for this.

  5. Interesting picks for the CEO positions.
    What about the common?

  6. alnval says:

    Barry:

    Good to see Allison from Tiaa-Cref being tapped to run Fannie-Mae instead of another Wall Street insider. Tiaa’s track record has always reflected a careful, conservative approach to managing other people’s money and with good results.

  7. devalera says:

    This looks like it is senior to the existing preferred with both dividend and liquidation preference and a dividend ratchet under covenant breach scenarios. They’ve cut the baby between the preferred and the sub-debt, leaving the latter alive, much to the chagrin of Ackman et al.

    I like this plan and disagree that it won’t help credit and liquidity markets. This ate least sets a floor on where the buck stops with more than half of the mortgage paper out there. That will bring some needed stability which will lead to increased confidence and activity. It won’t happen right away but the market’s discounting mechanism will impute it into equities fast. That means a solid rally this week that may self-perpetuate. But we’ll see more downdrafts and hiccups and perhaps an infarction between now and next fall.

  8. karen says:

    Another good site for discussion is nakedcapitalism.com

    I’m jumping between here and there right now as Yves and Barry keep updating.

  9. David Block says:

    Berry– Been a reader for years and just wanted to thank you for posting the information on a SUNDAY (God’s day of rest)! I truly appreciate you and admire your resolve for the facts. While a Harvard MBA, they sure didn’t teach us all this invaluable stuff. Thanks brother, you are in my prayers.

  10. MW says:

    Allison was a bagman for Enron while at Merrill. Come on guys read your history.

    One among many:

    http://articles.latimes.com/2002/jul/30/business/fi-merrill30xjul30

  11. Kid Dynamite says:

    the best part is the note in the “budget” section of the release where it says that since the Treasury can hold the GSE MBS till maturity, there is little risk of loss to the taxpayers…

    this is EXACTLY the beef Einhorn has with Allied Capital – their failure to mark losses to market.

    I guess the treasury can get away with it – they just print more moolah if they need to.

  12. mw says:

    This is “Mark to MARX”

  13. Bruce says:

    Little off topic, but I notice that Ike’s path on the FoxNews update this morning projects this hurricane to go through most of the gulf oil rigs around Friday. Unlike Gustav, which stayed to the east of the greatest density…also the hurricane should be about 115-120 mph when it reaches the west Louisiana east Texas area..for all you oil bugs….

    Now back to your regular program..

    Bruce in Tennessee

  14. Rich Shinnick says:

    Ok, I am calming down now. I guess that since this move was inevitable, the ONE saving grace would be if the taxpayer actually came first for a change…i.e. not one dime for any preferred or common equity holders (especially dividends) if the taxpayer loses….other than that we are still talking about a major American tragedy but at least we avoid the stick in the eye of having to bail out “investors”

  15. JustinTheSkeptic says:

    I don’t see spreads narrowing because of this fucadoo. Who in their right mind things that this really fixes anything except if inflation is a monetary event, boy are we ever going to have a big episode of hyper-inflation coming down the pike.

  16. Myr says:

    >>On Moral Hazard: “Market discipline is best served when shareholders bear both the risk and the reward of their investment.<<

    And what about creditors bearing both the “risk and reward” of their investment? Once again, this looks like a creditor bailout just like we saw with Bear. The politicians(which includes the Fed) will talk about the losses of the shareholders and conveniently avoid mentioning the FACT that they are bailing out the creditors. Simply absurd.

  17. JustinTheSkeptic says:

    KidDynomite, “inflation is the cruelist tax of all.”

  18. larster says:

    Agree with JohnnyVee- Seems to me that the “forced selling” of 10% a year, will insure lower prices. Anyone who has ever bopught a home knows that if the owner has to sell, you don’t pay retail.

  19. In cash says:

    with a 1 year time horizon, would you think is a good ideia, to invest in MBS mutual fund?
    How much of a % valuation is “expectable”? 10%?
    12%

  20. larster says:

    Forgot to include a question regarding Federal Home Loan Banks. Is their mention indicative of problems with the amount of money they have been throwing into the system?

  21. david says:

    I wonder where Freddie and Fannie stocks are headed?

    According to this article, Fannie and Freddie stock remains untouched by conservatorship, and will trade as they always. This comes directly from Treasury, so I’m quite confident the stocks will trade as normal:

    http://www.ehow.com/how_4503604_mac-fre-stock-during-conservatorship.html
    How to Trade Fannie Mae (FNM) and Freddie Mac (FRE) Stock During Conservatorship

    Whether they trade higher or lower remains to be seen!

  22. VennData says:

    VennData’s Law of Unintended Consequences:

    The unintended consequences of any government solution are proportional to the number of points on the cover page.

  23. alnval says:

    David Block: re Herb Allison Enron and Merrill

    Fair enough

    I had better luck finding the article at the following url:

    articles la times 2002 jul business merrill30xjul30

    It would also be fair to say that after Allison left Merrill in 1999, and joined Tiaa in 2002, that Tiaa managed to avoid the CDO problems that plagued the rest of the market place.

  24. D.L. says:

    The XLF rallied 3.6% on Friday. No doubt this was insider trading by those in on the bailout deal.

    I assume we get another rally in the XLF on Monday, and maybe Tuesday also. If the XLF can make it up to 23, it might be worth playing from the short side, at least for the next few weeks.

  25. John A says:

    If there was a God in heaven, would Franklin Raines et al. be in jail?

  26. VoiceFromTheWilderness says:

    Ya gotta love the beautiful spin that accompanies this announcement:

    “conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses”

    Wow, golly so the preferred guys come second, see they aren’t getting any help from the taxpayer, they’re coming in second…

    oh, wait you mean second to take a loss oh golly that would be like… better. Oh, wait, you mean, that’s what preferred means in the first place? so this is like… SOP. Well it sure is a good thing Paulson is on the lookout for my interests…

    And another one:
    “While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise”

    oh good we’re last, sounds like that means we don’t get hit, but wait… no what it actually says is ‘the only moral hazard we are worried about is for the little guys’ anybody with preferreds can have all the moral hazard they like.

    Order Up! 3 morals hazards to go with a side of taxpayer levies to boost ROI

    ‘That’ll be 3 board memberships please, payable in 6 months’.

    Funny how they didn’t even remotely address the issue of bond holder payouts. Bill Gross wins big.

    Hurry up and say thank you to your new owners PIMCO and China (better start learning chinese)

  27. Blissex says:

    «And what about creditors bearing both the “risk and reward” of their investment? Once again, this looks like a creditor bailout just like we saw with Bear.»

    This is a very wrong and very stupid and very damaging comparison.

    This is no bailout; the GSE debt have been in effect fully regulated, and their debt fully guaranteed and backed by Congress and the Treasury, so this is just the Treasury putting their wallet where their mouth was, as was/us their duty, especially after the Chinese issued dire threats of unrestricted financial warfare if Congress/Treasury walked away or even delayed to honour their debt. Repeat: the GSE debt is to all intent and purposes backed by the full faith and credit of the USA, and the GSEs have always been just off-balance sheet vehicles to avoid that debt being formally on the USA’s books.

    Bear Stearns was instead a full shameless bailout of a fully private random investment bank and its creditors, mostly JPMorgan, who were not GSEs, there was no Congress/Treasury guarantee, and who were not even insured deposit taking institutions.

  28. Captain America says:

    Bottom line for every one of us taxpayers-we are now the proud owners of the America’s mortgage mess.This is simply a tranfer of risk- with all the risk going to the taxpayer. One problem though-housing values will contnue to go down therefore our loss exposure goes up.

  29. Peter F says:

    There is only one term that comes to the forefront of my cerebral cortex when looking at this debacle-CLUSTERFUCK!!!!!

  30. Proton says:

    This is very CLEARLY A FULL BAILOUT OF CREDITORS of FNM and FRE.

    In particular, China, Japan, Russia along with PIMCO and others.

    FNM and FRE debt was not guaranteed by government before. The market assumed that they would be saved by government because they were too big to fail. The market was right.

    So, to repeat: The winners: Foreign central banks and Pimco. The losers: American taxpayer and US small banks with too much preferred exposure.

  31. franz says:

    Just a temporary patch to get this mess into next year. With the FED backstopping the GSEs and FHLB, I fully expect the printing presses to start wearing out due to the expanded printing rate. I also expect that the tax payer will suffer the loses next year from the FDIC bailout. So next week and until March of next year should be interesting as the debate between inflation and deflation should be settled. My guess is a bit of both as inflation in needs should be offset by deflation in wants. Cheers.

  32. Vermont Trader says:

    The common and preferred will continue to exist and trade.

    The dividends are eliminated but maybe they will be paid again someday or the preferred might be redeemed in the distant future.

    The market will impose its own haircut on the preferred on Monday. I would expect it to be pretty brutal.

    For the common..

    The share count will increase 5 times.

    The treasury can buy up to 100bilion of supper senior preferred but that doesn’t mean they will have to buy all of it.

    So one big question if you are trying to model earnings going forward is how much of this super senior preferred has to be sold to the government to plug all the holes

    And of course that goes back to your expectations for home prices and the economy going forward.

    It will be interesting to look over the sell side models next week…..

    So the common still has value and as always it depends on the earnings prospects going forward.

  33. lars says:

    This move, IMHO, will cause a “run” on GSE paper. It has given the FCB’s an escape route, which I believe they will take overtime.

    I say this because with the Treasury now buying (supporting/backstopping) MBS paper, FCB’s can runoff their investments without endangering their remaining holdings.

    This “plan” will cause the downsizing of the GSE’s overtime. Unless you believe Congress intends to get into the mortgage game permanently.

  34. Economics 101 says:

    Hello all,

    First, I would like to say thanks to all for some intelligent chat about this current financial crisis. Now let us get down to business.

    1. This is a the treasury backing its big mouth. However, they are backing it with our money not their money. (We the people are the financial provider).

    2. We just bowed down to China and PIMCO. Might as well slap a sticker on the side of the U.S. as “We got owned”. The “Elite” can apparently do whatever they want while the middle class and poor suffer.

    3. With all of the bail outs will more institutions or business ask for money?? Have you ever fed goats or birds???

    4. Moral Hazard?? How about us, our children and their childrens children??

    5. How much inflation will this cause with a drip, drip, drip effect?

    6. The alternative to the bailout was a deflationary spiral. (Oops!?) (So Sorry).

    7. Can I have some money?

    8. Party on! They just propped up a derailing train.

    9. Oh crap…, how long will it last?

    10. Will housing prices still continue downward???

    11. I could go on but I will save you all from reading the rest.

    Hope some of you who understand got a laugh.

    Thanks again,

    Economics 101

  35. DR says:

    Paradox:

    GSEs will now be viewed as safe as Treasuries but how safe will Treasuries be view?

  36. Kaos says:

    “Not going to help credit or do anything to balance the negative effects of rising unemployment.”

    Dougie! Wtf? Where do you think MBS spreads are going tomorrow morning? Even with a selloff in treasuries, this is going to *materially* lower mortgage rates. And it will flow over to jumbo loans which are spread off Agencies these days by most lenders.

    I admit to not knowing the impact of the preferred haircut on bank capital, but am assuming it is manageable. If so, relief to mortgage rates is the single best thing we could provide to the economy now.

    Sorry, but I strongly disagree this is not a “good thing” for the consumer.

  37. my favorite headline of the entire weekend, if only for its uniquely wonderful timeliness:

    S&P slashes Fannie, Freddie preferred stock to junk

    Sun Sep 7, 2008 1:35pm EDT
    NEW YORK, Sept 7 (Reuters) – Standard & Poor’s on Sunday cut the ratings on Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) preferred stock to junk status after dividends were eliminated in a takeover bu the U.S. government.

    S&P boosted its outlook on the housing finance companies’ “BBB-plus” subordinated debt ratings to positive from negative amid signs interest payments would not be affected.

    The Treasury is taking an equity stake in the government sponsored enterprises to shore up their financial stability, and placing them under conservatorship to manage their businesses of providing money to the U.S. housing market.

    The preferred stock ratings dropped to “C” from “BBB-minus,” according to the S&P statement. It was the second cut by S&P in less than two weeks.

    S&P also affirmed the “AAA” senior debt ratings of the GSEs, and cut their risk-to-the-government ratings to “R” from “A-minus,” before withdrawing that designation.

    (Reporting by Al Yoon)

  38. Chuck says:

    My wife inherited a modest portfolio from her late mother’s estate. I recall that there is a small portion in long-term FNMA bonds. As far as I know, my wife intends to hold these to maturity.

    Can it be assumed that these are senior to the Fed’s stake?

  39. DeDude says:

    So our foreign masters do not want to buy “maybe guaranteed” MBS from F&F they are however willing to buy treasuries. So the government sells them treasuries and purchase F&F MBS for the money. That is a good deal for the government and so are their senior preferred stocks. However, when government is taking/making money that is called a tax. Question in this case is who is being taxed and who in addition to government are winning – either directly or in the form of being bailed out from an otherwise sure loss.

    In the next few years there are nobody else but F&F that can securitize mortgages so they have a monopoly and can prize their products accordingly. Having been bailed out from the short-term crisis, I think they have a good chance of making it in the long term. Even if F&F charged 3% on every mortgage they securitized there will be no private entity that can compete with them. So the tax will definitely be on those who buy a home and, therefore, indirectly on all homeowners (who will see additional drops in home values). The winners are those who would have lost money if F&F had been allowed to fall and government had simply created a new agency (or government owned company) to securitize new mortgages via treasuries and without exorbitant fees.

    I agree with those who have noted that this is the ultimate kicking the can down the road. They get to look like they are punishing the investors (when they in reality are saving them) and the expense of this to taxpaying homeowners will be hidden and slow. It will probably look like it works and didn’t cost anything for the next 2-3 months so there will be no punishment at the election. The reality of what they did will only show up after the election and then they can blame it on the new president (if it is Obama) or on something that nowbody could have predicted (if it is McSame).

  40. my 1 cent says:

    lower mortgage rates are meaningless when consumers are over-leverageded, facing increased jobless, can’t sell their existing home to move into a new one and it’s already the end of the 2008 moving season.

    yet I expect a big gap up tomorrow morning.

    ymmv.

  41. KJ Foehr says:

    “S&P slashes Fannie, Freddie preferred stock to junk”

    So does this tilt things to the negative side for banks in tomorrow’s trading? Or are they still likely to soar?

  42. Blissex says:

    «GSEs will now be viewed as safe as Treasuries but how safe will Treasuries be view?»

    Especially as the public debt book expands from 10 trillion to 15 trillion of “assets”, as the off-balance-sheet money in the GSEs ends up back on the balance sheet.

    When regulators were threatening to clean house at Moody’s and S&P’s the rating agencies threatened to downgrade USA debt from AAA. Now that they have been whitewashed they will be grateful and the AAA rating will stay.

  43. VennData says:

    “…We do not support government bailouts of private institutions…”

    http://www.gop.com/pdf/PlatformFINAL_WithCover.pdf

  44. HH says:

    SKF is going to get hammered tomorrow.

  45. John(2) says:

    Where DO these posters get the idea that there was NOT a de facto guarantee of F/F’s paper. It’s always been there and Paulson made it absolutely explicit in July when he put in place the legislative framework for his rescue plan. Over the past couple of weeks they’ve obviously been working the phones to reassure foreign govt’s that they had nothing to worry about. Those who appear to think a default would have been a good idea although they never come right out and say it preferring to bloviate about being owned by China, and other profound thoughts, need to take a couple of minutes to think through what the consequences of a default would have been on the cost of govt borrowing and it’s impact on the federal budget. God knows what the impact on the stockholders will be but obviously they are trying to let the preferred down very lightly both because banks balance sheets are loaded with this stuff but also because they are a staple of pension and mutual funds and they presumably don’t want a lot of voters waking up with huge hole in their IRA’s/401k’s on the eve of an election. Finally, on the future of F/F where many think they are ultimately going to be privatized. They will not be because whatever may have happened they play a vital role in greasing the wheels of the US housing market. This action it seems to me kicks the can down the road to the next administration who will probably have to undertake a full nationalization and thus incur the odium of increasing the debt ceiling to cover the exposure. This would return them to the status FM enjoyed prior to around 1968 when Johnson tried to get the liability off the national books by turning it into a GSE.

  46. Kaos says:

    “lower mortgage rates are meaningless when consumers are over-leverageded, facing increased jobless, can’t sell their existing home to move into a new one and it’s already the end of the 2008 moving season.”

    You’d have to work hard to come up with a comment more in error. Not all consumers are described by even one of those conditions. At an inflection point in the macro cycle, it’s all about tackling the marginal unit, whether consumers or businesses.

    There have already been material price drops in most areas, but with tighter credit standards and flat to higher rates, many consumers have not been able to take advantage. Lower rates would allow more potential buyers to both qualify for current market credit standards and afford the payments. Also, if rates do drop as I expect, there will be a material refi boom which will boost bank mortgage activity and improve household cash flows for those who can lower their monthly payments.

    I am *not* suggesting this is a silver bullet and we’re back to a great economy, but to suggest that lower mortgage rates will not help is just way off the mark in my view.

  47. Red Fox says:

    From WSJ Online, note for Mudd it staes 14 Billion-hope thats a typo!!

    Mr. Syron may walk away with an exit package that could total as much as $15 million, says David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay, and a possible payment of $8.8 million to compensate for forfeiting certain equity grants.

    Mr. Mudd’s exit package, including stock he already owns, could total $14 billion, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday’s closing price. That value of that stock could fall sharply, however

  48. Paul Jones says:

    I appreciate your efforts, Sir.

    A question: how will the “no lobbying” thing be enforced? Is it a “Gentleman’s Agreement” or is it punishable in the courts?

    Do Bill Gross – style editorials and behind the scenes wrangling count as lobbying? Or are we talking only “official” lobbying?

    In the final analysis, whatever is done today is for the next 2 months only — the Weekend at Bernie’s strategy — No thought is given to the socio-economic cancer that is merely reflected in these numbers.

    America, once a nationalist and middle class nation is now just another third world plantation economy.

    Our people are ruled by superstition and an identity politics that renders democracy dangerous (Obama vs. Palin!?). Our elites are not doing what they must do to keep the system from cracking up, which is to govern AS IF they had the people’s best interest in mind, rather than wantonly pursuing their Master-status in the plantation society.

    Thus a crack-up is inevitable.

  49. John(2) says:

    Kaos | Sep 7, 2008 2:23:27 PM

    I’d say you are broadly correct as to the effect on spreads and mortgage rates. It’s good public policy even if Paulson was forced into it.

  50. Economics 101 says:

    Not everyone is versed in Political Economy and it shows.

  51. Marty V says:

    Let me get this straight now…I can fuck up a company,cost the taxpayers billions and walk away with millions-one question- where do I apply??

  52. Dude in Princeton says:

    Shorter BG:

    “Take it away from those who can’t do anything efficiently and give it to those who can’t do anything honestly.”

  53. Jim K says:

    Kudos to Barry-let us know when/where you will be asked to comment on this,for lack of a better term, development so we can tune in or TIVO.

  54. pmorrisonfl says:

    Kaos writes:
    > There have already been material price
    > drops in most areas, but with tighter
    > credit standards and flat to higher
    > rates, many consumers have not been able
    > to take advantage. Lower rates would
    > allow more potential buyers to both
    > qualify for current market credit
    > standards and afford the payments.

    I was talking with a friend this morning who has a 360K ARM on a house now worth 330K. He’s in the market for a house he can afford, or even a loan he can afford, two things he does not now have. Getting a 30-year fixed at a low rate on the house he’s in leaves him 30+K in the hole (an unlikely refinance). And buying a house he can afford (200K) leaves this one on the market at a 30+K loss to the bank.

    Multiply that by the thousands, and it is not clear to me that lower rates solve the problems in the markets. You seem to be hypothesizing a supply of buyers who are ready to jump in (with their saved downpayments) and buy houses at inflated prices with better monthly payments. Perhaps I am wrong about this, but that seems unlikely. I guess the proper measures of this will be foreclosure volumes and housing supply as time passes.

  55. HUH? says:

    “The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.”

    Isn’t this the underlying reason for all or this? Now they have a buyer and a price for all their level 3 crap.

  56. SBW says:

    “The stated intent of the Congress is to use the housing-related government-sponsored enterprises (GSEs) to provide a well-established channel between housing credit and the capital markets and, through this channel, to promote homeownership, particularly among lower-income families. Although prospectuses for GSE debt are required by law to stipulate that such instruments are not backed by the full faith and credit of the U.S. government, investors worldwide have concluded that our government will not allow GSEs to default. As a consequence, market participants offer to purchase GSE debt at interest rates substantially lower than those required of comparably situated financial institutions without direct ties to government.2 Given this advantage, which private competitors have been unable to fully overcome, the housing-related GSEs have grown rapidly in recent years. Fannie and Freddie essentially dominate the market for purchasing conforming home mortgage loans.” — guess who?

    So let me get this straight, John2. I can assume anything I want to — regardless of a quite explicit declaration of the opposite — and the government will have to yield to my views, well, just because that’s what I assumed.

    Brilliant.

    I can’t wait to put that into action for myself.

  57. pmorrisonfl says:

    > Where DO these posters get the idea that
    >there was NOT a de facto guarantee of
    > F/F’s paper.

    As Karl Denninger points out, The certificates read, in bold caps on their title page
    “THE CERTIFICATES AND PAYMENTS OF PRINCIPAL AND INTEREST ON THE CERTIFICATES ARE NOT GUARANTEED BY THE UNITED STATES, AND DO NOT CONSTITUTE A DEBT OR OBLIGATION OF THE UNITED STATES OR ANY OF ITS AGENCIES OR INSTRUMENTALITIES OTHER THAN FANNIE MAE.”

    Perhaps it is naive to take this at face value, but perhaps it is also not unreasonable.

  58. K Ackermann says:

    MBS’s will be issued until end of year, and Treasury will purchase them?

    Any word on how large the issues might be?

  59. Auberon says:

    “Unless you believe Congress intends to get into the mortgage game permanently.”

    Umm, Congress has been in the mortgage game since at least the New Deal. That seems pretty permanent to me.

  60. K Ackermann says:

    So is the new entity basically capitalized at $2 billion? Is that what the dividends are going to be based on?

    If they are based on the value of the MBS’s they issue, then that means the taxpayer is now in the business of paying dividends to investors.

    I guess that’s OK, because I will be in the business of burning down buildings and pitchforking fat bastards.

  61. Kaos says:

    pmorrisonfl -

    Lower mortgage rates does not solve for those severely underwater who wish to move. And definitely does not solve all market problems. I never suggested that!

    I agree there’s a large population that is underwater in their mortgage. We can see that in the hundreds of billions banks have set aside for losses that have not even taken place yet. But remember there are many more homeowners who are not underwater. And there are also many renters who want to buy. Heck, in So Cal here I know several people who sold high and moved their families into rentals expecting a housing correction to take place.

    Lower rates give banks more flexibility to workout customers who want to remain in their homes (whether they are underwater or not) but cannot continue with their payments either because they overextended, their ARM reset or one of their incomes was clipped or even went away.

    And there are many, many people with equity, savings and a secure job who are watching with interest in moving up, buying, etc. That group has two good reasons for waiting 1) we haven’t hit bottom in prices and 2) rates are at historic highs (on a spread basis). We tackle #2 with this move and while prices are still in decline in most areas, this probably helps facilitate more transactions overall which helps set price points and clips away at the psychological factor to housing prices.

    Again, no silver bullet this, but a solid move to provide real support to the epicenter of our financial problems – residential real estate.

  62. Youngtrader says:

    Vermont Trader, Karen, wise people,

    If you were sitting on SKF at 116, would you cut or hold out? Is this thing going back down into the 80s or will there be a bump to unload it… It’s in my modest Roth. Ouch.

  63. km4 says:

    > as the public debt book expands from 10 trillion to 15 trillion of “assets”

    Yes blissex let’s add this ‘housing mess’ sum to the $32 Trillion dollars in total liabilities and unfunded commitments for future payments and you get The cost of Bush to America since 2000 ( + plenty more over next 4 yrs if economically illiterate and tone deaf McSame wins ).

    former GAO Comptroller General David Walker said in a speech a few months ago at the National Press Club “The federal government’s total liabilities translates into a de facto mortgage of about $455,000 for every American household and there’s no house to back that mortgage.

    note: I’d now say it’s > $500,000

    In other words, our government has made a whole lot of promises that, in the long run, it cannot possibly keep without huge tax increases.”

    note: that’s what has to happen ( mostly by taxing the upper 1% and having corporations actually pay taxes by closing loopholes.

    This election is crucial and if America makes the wrong choice then America is for sure going down the tubes and if you’re an American under 40 yrs of age all I can say is BOL !

    “No generation has a right to contract debts greater than can be paid off during the course of its own existence.” ~ George Washington

  64. John(2) says:

    Posted by: SBW | Sep 7, 2008 4:14:08 PM

    If you want to believe that the US govt hasn’t de facto guaranteed the paper of F/F you are of course entitled to that view although it’s contradicted by popular consensus not to mention the widespread reporting of Treasury assurances given to overseas govt’s over the past couple of weeks. I think perhaps you see the world as you want to see it, not as it really is.

  65. pmorrisonfl says:

    Kaos: I’m one of the people you describe.

    We sold our house in South Florida in 2007 and have been renting here since, sitting on the equity we withdrew from the sale. I work at what I think to be a stable job, my wife works for the local school board… and I’m waiting at least a year, maybe longer, before we even think about buying a house. For us, and I think for many, your reason #1 will trump reason #2.

    What we’re in the market for sold for around 150K in 2000, around 400K in 2005, and is now back down to 250-325K these days. By rent or median income measures, our target house should sell for 175-225K. I would be happy to pay an extra point or two in interest rate on a house that was 50-100K cheaper than the same house at a ‘bargain’ rate but the higher price. I suspect I am not alone… as I view myself to be in a (less leaky) boat similar to my underwater friend(s).

    The F/F bailout works hard to preserve prices, with the possibility of lowered rates. For the average homebuyer, a better solution would have returned house prices to realistic figures (which I take to be in line with historical rental cap rates and price-to-income ratios).

    Here’s the rub: the 350K loans on 150K house have been made, and the money has been spent by the consumer. The entire financial system is trying to gloss over the gap between what the houses are worth and what is owed against them, and the various promises made based on the debt assets that the banks created to hold that fictional value.

    Improved interest rates are a pretty thin bone to throw to people who are looking at houses that are 30-150K more expensive than they should be.

  66. John(2) says:

    Posted by: Kaos | Sep 7, 2008 4:28:24 PM

    Pmorrison is mixing up issues here when he talks about the availability of competitive mortgages and people who are underwater and I think your take is exactly right although this action is really about preventing the domestic mortgage market rising dramatically or tightening. It will probably cause rates to fall slightly I’m not expecting dramatic drops are you?

  67. pmorrisonfl says:

    > Pmorrison is mixing up issues here when he talks about the availability of competitive mortgages and people who are underwater

    I used the underwater illustration as an example of a situation where a competitive mortage is not the solution to the person’s problem. I guess my main point is that most of the people who want a mortage have one, and so making mortages easier to get might not be the central problem to be solved.

  68. Vroom says:

    All we are looking at is the headlights rushing towards us when it’s the car that’s going to flatten us.

    John(2) has a great point about the efforts being directed toward propping up housing prices when the money has been spent. As the economy weakens and unemployment rises less consumer confidence will result. Who, unless it’s unavoidable, will buy a house right now?

    Increasing defaults will add more inventory and the REO’s will continue to place deflationary pressure on housing prices. I don’t see what will stabilize the housing market and reinflate the banks balance sheets.

    Add CRE starting to tank, auto loans and credit cards having remarkably increased default rates and you have even more pressure on the financial system. We are a long way from this bottoming. My doom and gloom perspective shows the only solution is destruction followed by rebuilding.

  69. Walt French says:

    “America, once a nationalist and middle class nation is now just another third world plantation economy.”

    Or, more precisely, we are now awakening to the fact that our trillions of borrowing during a time that we should have been storing acorns away for the winter, is having the most gentle possible impact on us.

    How many here can’t claim that they didn’t have an uneasy feeling that something like this was coming to happen, months or years ago?

    I like the Chinese quote: if the GSEs were to default, it would not be the end of the world. It would merely be the end of the current financial order where the US gets to have its currency as the reserve currency of choice and the preferred currency for most international trade.

    Paulson is making the choice, unpopular as it seems to be with some commenters here, that it is better to have some hope of retaining the existing, VERY FAVORABLE treatment of the dollar, continue as long as possible. Political ramifications for the GOP also aren’t a complete disaster either, now that you mention it.

    But the alternative would be a huge shock to American’s image.

  70. bold'un says:

    Remember the fable about two people being chased by a lion: one says “you’ll never outrun a lion”— answer: “I don’t have to outrun the lion, I only have to outrun you!”

    It seems very unfair to me is to treat Fannie and Freddie shareholders exactly the same when the former is the stronger. If Freddie folded first, that would leave Fannie shareholders in a position to make monopoly profits and so avoid the same fate.

    Allowing FNM shareholders to rebuild equity by slowing issuance and increasing credit insurance premiums may not suit the administration, but it seems a bit tough to expropriate them because they cannot increase lending capacity at the past, uneconomic rates.

  71. bold'un says:

    Remember the fable about two people being chased by a lion: one says “you’ll never outrun a lion”— answer: “I don’t have to outrun the lion, I only have to outrun you!”

    It seems very unfair to me is to treat Fannie and Freddie shareholders exactly the same when the former is the stronger. If Freddie folded first, that would leave Fannie shareholders in a position to make monopoly profits and so avoid the same fate.

    Allowing FNM shareholders to rebuild equity by slowing issuance and increasing credit insurance premiums may not suit the administration, but it seems a bit tough to expropriate them because they cannot increase lending capacity at the past, uneconomic rates.

  72. bold'un says:

    Remember the fable about two people being chased by a lion: one says “you’ll never outrun a lion”— answer: “I don’t have to outrun the lion, I only have to outrun you!”

    It seems very unfair to me is to treat Fannie and Freddie shareholders exactly the same when the former is the stronger. If Freddie folded first, that would leave Fannie shareholders in a position to make monopoly profits and so avoid the same fate.

    Allowing FNM shareholders to rebuild equity by slowing issuance and increasing credit insurance premiums may not suit the administration, but it seems a bit tough to expropriate them because they cannot increase lending capacity at the past, uneconomic rates.

  73. bold'un says:

    Remember the fable about two people being chased by a lion: one says “you’ll never outrun a lion”— answer: “I don’t have to outrun the lion, I only have to outrun you!”

    It seems very unfair to me is to treat Fannie and Freddie shareholders exactly the same when the former is the stronger. If Freddie folded first, that would leave Fannie shareholders in a position to make monopoly profits and so avoid the same fate.

    Allowing FNM shareholders to rebuild equity by slowing issuance and increasing credit insurance premiums may not suit the administration, but it seems a bit tough to expropriate them because they cannot increase lending capacity at the past, uneconomic rates.

  74. Kaos says:

    pmorrisonfl -

    I’m in So Cal and frequently visit So Fla. I understand very well what you are saying. However, the vast majority of the rest of the country is in a much different position with regard to prices. If you’re almost anywhere in TX you would hardly know there is a housing crisis from prices. It would be more the credit requirements, downpayment and the higher payment in rates.

    I don’t know when and where prices will settle in our geographies but I do expect lower rates to help us get there sooner.

  75. Fed Rescue of Lending Giants Imminent

    The historic takeover of Fannie Mae and Freddie Mac, which could come as soon as Sunday, moved to th

  76. johnnyvee says:

    So, Is the gov’t winding the GSE up? Reducing market exposure of 10% per year after 2010 is not a growth plan.

  77. pmorrisonfl says:

    Kaos – thanks for the reassurance… but personal specifics and examples aside, I am concerned that the real issue is not mortage rates, or even house prices… both are symptoms of the overextension of credit delivered by the financial system over the last decade. Lower rates for borrowing actually make that problem worse, not better, whatever effect they will have on the housing market. And backstopping bad bets with Gov’t money makes it every taxpayer’s problem, whether through higher prices, higher taxes, or currency debasement, especially if ‘too big to fail’ turns out to be ‘to big to bail’.

  78. Enslaved says:

    I’m no economist but Treasury buying over-valued mortgages and selling them off at a rate of 10% each year after 2010 doesn’t bode well for taxpayers.

    After assessing the values of mortgages they will see they’re over-valued and reduce the value to reflect fair market value then sell it to banks and investors. Taxpayers will eat the difference between value bought by Treasury and fair market value bought by banks and investors in 2010 and thereafter.

  79. Perhaps I am wrong about this, but that seems unlikely. I guess the proper measures of this will be foreclosure volumes and housing supply as time passes.

    Posted by: pmorrisonfl | Sep 7, 2008 4:09:33 PM

    pm,

    you’re not Wrong, you’re Sane.

  80. John(2) says:

    Posted by: Mark E Hoffer | Sep 7, 2008 7:43:13 PM

    Posted by: pmorrisonfl | Sep 7, 2008 4:09:33 PM

    Guys:
    Demand and pricing in the housing market are factors of inventory and available credit. Nationally we have about a years inventory of houses excluding phantoms from foreclosure but inventory varies substantially by region and even within regions (eg. there’s huge inventory in Bakersfield CA but not a very large one in West LA). Hence the disparity in the rate of price declines. Credit availability has tightened but it is still reasonably priced in historical terms. At all costs the govt has to ensure the continued availability of credit at affordable prices. If 30 year mortgages went to say 9% the housing market would shudder to a halt. They cannot allow that to happen although you seem to think this wouldn’t matter. If they can keep them in the low 6′s it will continue to function albeit on life support. That’s why housebuilding stocks have put on 6-10% over the past couple of day. Kaos’s assessment of the situation is completely accurate.

  81. Greg says:

    Bullet #9: The quarterly dividends on the senior preferred start right away. It’s the fee that does not get paid until starting in 2010.

  82. ken murray says:

    Two sides to every coin:

    And the other side of this coin was a “coup”!

    Read these through and in between the lines you’ll witness that our Government has unilateraly taken over the GSE’s without spending a dime! Or the Shareholder consent!

    Thats right! Without spending a dime, the GSE’s are giving the Treasury “$1 billion of senior prefered stock in each GSE” and “warrants for the purchase of common stock of each GSE representing 79.9% of the common stock of each GSE on a fully-diluted basis at a nominal price.”

    In “Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement: Terms of the Agreements:” first point line 3 & 4, “This number is unrelated to the Treasury’s analysis of their curent financal conditions of the GSE’s.”

    Now read Press Room paragraph 12: “..the GSE’s will modestly increase their MBS portifolios..”

    I might inquire, where might that MBS come from?.

    Walla! Why of course, it’s the MBS the banks can’t sell!

    And it’s after buying that MBS that the GSE’s couldn’t buy before, that, of course they’ll need injections after our GOV takes them under.

    As a shareholder in one of these insititutions I’m going to an attorney soon as I am “hurt”. I haven’t played rumers here, and I belive that our Gov has bent to rumers that have caused panic in foreign central banks.

    I believe that they think that they’re killing two birds with one stone. Stoping rumers about the GSE’s, and bailing out the banks with one hit!

    But. But that’s not Democratic! I suing the United Socialist State! I want a vote by the shareholders, and prefere Bankrupcy to this!

    Kenneth R. Murray

    P.S. I hope the IRS accepts FNM shares as payment on Federal Taxes, cause thats what they’er going to get!

  83. Cthulhu says:

    Mr. Murray:

    I’m an attorney and I’ve been wondering if anyone would bring a Takings lawsuit regarding this action.

    I mean…it seems odd to me that the federal government can take overa private corporation and dilute all of its stock with the stroke of a pen …essentially destroying an ownership interest.

    If you are serious about a suit, let me know.

    With regard to other matters, FWIW, I don’t quite see this as the boon which the futures market seemingly reflects.

    Around 18 billion (as IO understand it) of shareholder value has just vanished. People who invested in these companies might as well have invested in Enron or World Com.

    Those losses are real and they seemingly should hit home. And yet, the market rallies, or appears poised to rally.

    The losses in question will hit hardest on insurance companies and banks which bought this crap (at the insistence of the federal government). Banks will lose the ability to write about 180 billion in loans because they no longer have adequate capital — and yet, the market rallies.

    Insurance companies are staring down a gatling gun of hurricanes from the Cape Verde pipeline, and now they face a massive write down of their reserves. And yet, the market rallies.

    Can someone please explain to this Texas lawyer what the hell I’m missing?

  84. SteveInChicago says:

    Thanks again to Barry for taking a bunch of Treasury gibberish and translating it into English.

    Youngtrader-At some point, SKF will get back to where it is today. It all depends on your timeframe.

  85. pmorrisonfl says:

    John(2)…
    > If 30 year mortgages went to say 9% the
    > housing market would shudder to a halt.

    The housing market is already halted, as indicated by inventories and by it being cheaper to rent than to buy. And there have certainly been times in the past where the rates were that high and the world did not end. Why not now?

    > They cannot allow that to happen although > you seem to think this wouldn’t matter.

    Why is the goverment responsible for this, and for this above the concern of managing the currency? < sarcasm >Wouldn’t it be possible to run a commerical interest in making loans?< /sarcasm > And the housing market has essentially already stopped. It would restart if prices fell to where people could afford them, not only if they could borrow money more cheaply. Why so adamant about that particular solution?

    Here’s why I think you say it cannot be allowed to happen: If house prices returned to what people can afford, there would be a lot of ‘capital’ destruction (actually debts packaged as assets). This would hurt the owners of that debt, including banks, CB’s, SWF’s, mutual funds… and by extension, it would lower the value of all the 401(k)’s invested in these things. There would be a lot of deflation in paper wealth. That’s a problem for the owners of paper. But it would also raise the buying power of the dollars that the average joe on the street owns. They might be able to afford a house, a car, AND the gas to drive to work.

    > If they can keep them in the low 6′s it
    > will continue to function albeit on life
    > support.
    And if the Treasury spends hundreds of billions of dollars to buy Level 3 junk packages as MBS’s from the big players, supporting high house prices for the little guy, the currency and the country may need significantly more than life support.

    I am clearly no financial expert, but the way I read your arguments, I hear more ideology than I hear evidence. Would you care to elaborate further?

  86. JO says:

    Ken Murray:
    I see what you’re saying about tyring to understand markets. I have been following markets since 12 years old and love every minute and have come across countless times where I try to understand why markets react the way they do. My conclusion after looking at many different theories/models is that in the end, nobody can accurately “predict” market reactions on a regular basis indefinitely; however, there are a few things you may want to research that can help increase the probability of guessing the markets’ reaction to “news” and that may help you understand the nature of market movements. Most people are conditioned to think about markets in a cause/effect way, but when it comes to understanding markets, cause/effect does not work consistently. I suggest you investigate:
    1) Check out Socionomics / elliottwave.com (I focus on the theory of socionomics and basic principles of the Elliott Wave but I am not into labelling any charts or the like. Controversal theory but I recommend you look into it and derive your own opinion about how they look at markets.
    2) Psychology/sentiment is the most important factor in my opinion. Markets are moved for many reasons and a lot of research has been done by behavioural scientists which is showing most people overestimate their ability to “predict” markets and that so many factors influence markets that chaos often best describes how markets behave. I am talking about markets in general (indices, not individual company stocks)
    Hope you get a better understanding

  87. Kaos says:

    Cthulhu -

    On what would you base your Takings lawsuit?

    The shareholder approved boards of both companies approved the deal. They were in violation of their capital requirements.

    Sorry, I don’t see an option for parasitic lawyers to enrich themselves here.

  88. jc says:

    Is the failure of mid-size banks an unintended consequence of the F&F takeover?

    There’s a total of $45B of F&F stock, ($36B preferred) and they have supposedly budgeted $200B for the takeover so is there much likelihood that both common and preferred stocks will be wiped out.

    Much of the preferred is held by mid-size and regional banks as capital. These banks have more trouble raising capital than the big banks. How soon will these banks have to recognize their capital deficiencies?

  89. Is the failure of mid-size banks an unintended consequence of the F&F takeover?

    jc,

    it’s a “Feature”, not a “Bug”

  90. JC says:

    Desperate times require desperate measures. Remember all the happy talk from BB and Paulson about his being limited to some sub-prime mortgages. and King George referring to a “slowdown”, & some guys “got drunk’.
    He’s going to leave us all with a world-class hangover when he gets back to full time brush clearing in Crawford. He’s doing to the country what he did to his former company.

  91. Cthulhu says:

    KAOS:

    Please remember: parasites are the most succesful organism on the planet.

    As for “board approval” — that would be a breach of fiduciary duty, caused by the prior breach of misstated assets. Don’t think that’s a lawsuit? You might want to check out the Enron litigation — where the board “approved” all sorts of things.

    As for my takings lawsuit, I’d base my suit on the concept that the government cannot take property without just compensation. By watering the stock in this manner the government effected a taking which is prohibited by the Consitution. While the goivernment may act in the marketplace, when it does so it must follow a set of rules different than those followed by, say, a hedge fund.

    Essentially, the government by decree took control of a private enterprise, decided that it would issue a large amount of stock (the dilution) and announced that the value of the general and preferred will now decline to reflect the new reality it imposed. Someone who bought the stock a week ago for, say, five bucks now has lost 86% of their investment. And the person who bought the stock did so based on the representation from Paulson that these companies had sound financial footing.

    You don’t think that a parasitic lawyer couldn’t find a cause of action on those facts? If so, please explain.

  92. Mark Hill says:

    I have heard the record for these government bailouts is quite good. Menaing they usually have mad ethe tax payer a profit in the past. Any solid info I can reference on this?