Posts filed under “Bailouts”

Poole: Save Fannie/Freddie, Then Dismantle Them

Its actually kind of ironic: Two Fed Governors warn Federal Reserve Chief Alan Greenspan about major problems — and are promptly ignored by the maestro. Ed Gramlich on subprime and predatory lending, and Bill Poole on Fannie and Freddie.

In the Sunday NYT, Poole argues that now Fannie and Freddie must be saved for systemic reasons — but then taken apart:

CRITICS of the Congressional housing package complain that we are now committing taxpayers to huge new outlays to rescue Fannie Mae and Freddie Mac. That view is wrong: Congressional inaction over the past 15 years had already committed taxpayers to the bailout.

Congress could and should have required Fannie and Freddie — which enjoy a peculiar and highly advantageous status as quasi-public agencies and quasi-private companies — to maintain more capital, but didn’t. Now the costs from Congressional inaction are becoming painfully apparent, and they cannot be avoided. To permit the two mortgage giants to default would set off a worldwide crisis. But we can decide what should become of Freddie and Fannie after this crisis. The best option is one getting little mention in Washington: get rid of them.

Because the government cannot permit Fannie and Freddie to default, their obligations are part and parcel of the full-faith-and-credit obligations of the United States. Thus, the national debt, usually viewed as the $5 trillion held by the public, is really $10 trillion once we add the Fannie and Freddie obligations and the mortgage-backed securities they guarantee.

For now, the Congressional Budget Office has entered a “place holder” of $25 billion to cover the bailout costs over the next two years but recognizes that this is a guess. The important issue is not the 2009 outlay, but the total that will be required eventually. Even if the two firms are technically insolvent, the market will continue to buy their obligations readily, for it understands that they are fully backed by the government.

Given this faith on the part of the marketplace, there will be no immediate catastrophe that would force the federal government to provide additional capital to Fannie and Freddie. The situation is similar to the one in the 1980s, when many savings and loans were technically insolvent yet had no difficulty attracting deposits, as they were covered by federal deposit insurance. So the federal government has the option of delaying any ultimate resolution of the Fannie-Freddie mess, as it did with the savings and loans 20 years ago, in hopes that the two giants can dig themselves out of the hole. Still, it seems more likely that — again, just as in the 1980s — the longer we delay, the higher the eventual taxpayer cost will be.  (emphasis added)

Well stated . . .


Blaming Greenspan (June 2007)

Subprime Mortgages: America’s Latest Boom and Bust (May 2008)

Too Big to Fail, or to Survive 
NYT: July 27, 2008

Category: Bailouts, Credit, Derivatives, Federal Reserve

Quote of the Day: Rampant Capitalism ?

Category: Bailouts, Credit, Financial Press

Moral Hazard ?

Category: Bailouts

Pimco’s Gross: Fannie, Freddie Mortgages ‘Excellent’

Let’s call this a bit of counter programming to all of our negative coverage of Fannie Mae (FNM) and Freddie Mac (FRE):

Bill Gross, who manages the world’s biggest bond fund, said it’s not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department’s support.

"Let’s be blunt: to the extent the Treasury suggests they’ll never have to use their authority, that’s a sham,” said Gross of Pacific Investment Management Co. "It’s fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don’t think that’s possible.”

Freddie Mac said on July 18 that it intends to proceed with a $5.5 billion capital-raising plan it announced in May that will include both common and preferred securities. Pimco wouldn’t buy the companies’ stock without the Treasury’s involvement, Gross said, in a Bloomberg Television interview from the firm’s headquarters in Newport Beach, California.

Treasury Secretary Henry Paulson is pushing Congress to authorize the Treasury to purchase equity stakes in Fannie Mae and Freddie Mac and expand government-backed credit lines to them amid concern that they don’t have enough capital to weather the worst housing slump since the Great Depression. Freddie Mac shares have tumbled 74 percent this year and Fannie Mae has dropped 65 percent. The companies make money by guaranteeing mortgage-backed securities they create out of loans bought from lenders and sell to investors worldwide.

Mortgage-backed bonds issued by Fannie Mae and Freddie Mac are “an excellent buy” compared with debt of the agencies, Gross said.

Bill Gross, who manages the world’s biggest bond fund at Pacific
Investment Management Co., talks about Treasury Secretary Henry
Paulson’s plan to rescue Fannie Mae and Freddie Mac, the outlook for
U.S. home prices, Federal Reserve monetary policy and the bond market.

click for video

00:00 Passage of GSE rescue plan is "critical."
01:03 Recapitalization of Fannie and Freddie
01:49 Fannie and Freddie mortgages are "excellent."
02:55 Government’s GSE model "has to be amended."
03:54 Outlook for the U.S. housing market, prices
04:58 Capital-raising efforts by Fannie and Freddie
06:00 Rate hikes by Fed would be "wrong approach."
07:17 Treasuries and TIPS; measures of inflation
09:23 Relationship of credit turmoil, home prices
10:36 Investment in bank debt; U.S. dollar value
12:53 "Inappropriately" valued U.S. Treasuries

Pimco’s Gross Says Fannie, Freddie Need Treasury
Kathleen Hays and Sandra Hernandez
Bloomberg, July 21 2008

Category: Bailouts, Credit, Video

How Much of Fannie/Freddie Paper is Held Overseas?

Category: Bailouts, Credit

End of Illusions for GSEs

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

Category: Bailouts, Credit, Federal Reserve, Psychology

Rescue Plan!

Category: Bailouts

Moral Hazard & Risky Precedents

Excellent discussion from PBS News Hour, on Moral Hazard:
click for video


Bailout of Mortgage Firms Could Set Risky Precedent  (Transcript)
July 18, 2008

Audio Recording


Category: Bailouts, Credit, Video

A Nation of Whiners? No, Just Wall Street Beggars

Category: Bailouts, Credit, Derivatives, Markets, Taxes and Policy