Posts filed under “Bailouts”
So much for a relaxing weekend! We spilled plenty of pixels on Fannie (FNM) & Freddie (FRE)this weekend, as did lots of other folks. What follows is all of the relevant commentary I could scratch together:
Here’s TBP recap:
• Fannie & Freddie Bailout: In terms of Conservatorship, Management, Shareholders, Mortgages, Legislation, Foreign Holders, Financial sector, Politics, Timing, & GSE Insolvency
All of the Treasury, Federal Reserve and FDIC news releases:
Treasury Department Reports (PDFs):
- 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
- Freddie Mac Warrant to Purchase Common Stock
- Freddie Mac Certificate
- Freddie Mac Senior Preferred Stock Purchase Agreement
- Fannie Mae Warrant to Purchase Common Stock
- Fannie Mae Certificate
- Fannie Mae Senior Preferred Stock Purchase Agreement
FDIC React to Takeover
Fannie Mae & Freddie Mac Shareholder Ownership, via MSN:
Treasury News Conference:
GSE Bazooka Fired Ticker Forum, Karl Denninger (Video)
Wall Street Research
First thoughts on the market impact of the Treasury’s GSE plan, Goldman Sachs (PDF)
Paulson Begins Gradual Wind-Down of GSEs within Conservatorship, Institutional Risk Analyst
What the Mainstream Media had to say:
Monday, September 8, 2008
Mounting Woes Left Officials With Little Room to Maneuver WSJ
U.S. To Take Over Mortgage Giants Fannie, Freddie NPR Audio
The Dilemma of Fannie and Freddie NYT
In Crisis, Paulson’s Stunning Use of Federal Power Washington Post
The How, Why and What Of Fannie-Freddie Plan MORNING BRIEF
Here are the official statements on the Fannie & Freddie bailouts:
Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal
Housing Finance Agency Action to Protect Financial Markets and Taxpayers:
Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.
In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action. (continued after jump)
-Treasury Department, September 7, 2008
Treasury Department Reports:
Jim McTague, a dyed in the wool Republican, is surprisingly negative on the McCain/Palin team. Recall that McTague forecast the GOP would retain both houses in 2006, based on a calculation relying on campaign fund raising. McTague sounds more like a Democrat than a Republican.
Note the discussion on bailouts at the end:
THE 2008 REPUBLICAN PLATFORM RELEASED at the party convention in St. Paul last week is a grandiloquent document, replete with Reaganesque calls for lower taxes, smaller government, and greater self-reliance. An honest librarian would file it in the fiction section.
I’m not a naïf. I appreciate that searching for candor among politicians is about as productive as shopping for a Rolex at the corner drugstore. All politicians make promises that they never intend to keep. You generally can wrest a straighter answer from 16-year-old teenager intent on deceiving you than you can from a campaigning politician.
Even so, this GOP document is so divorced from reality that it approaches parody. The authors should have penned the document in cuneiform, because it describes an ancient GOP, not the party of today.
One of the platform’s most monumental political principles is daily being trampled upon by the Bush administration, with the acquiescence of most GOP members of Congress. This is contained in a section devoted to the housing crisis that declares, "We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all…"
Democrats are depicted as the party of big, intrusive government, willing to "ignore fiscal problems while squandering billions on ineffective programs." The GOP, however, has no moral legs to stand on when it hurls such insults.
The Bush administration has bailed out Wall Street, and stands ready to bail out mortgage giants Fannie Mae and Freddie Mac — in the process abetting a slide into more intrusive government. If we are headed down the road to socialism, then the GOP can be credited with setting the pavers. (Emphasis added)
The GOP has lost its way.
Spinning a Grand Old Fantasy
MONDAY, SEPTEMBER 8, 2008 D.C. CURRENT
Last evening, we asked what are the costs and consequences, as well as the market reaction to, the imminent bailout of Fannie Mae (FNM) and Freddie Mac (FRE). Your responses were inspired and informative. (For a brief history of the GSEs, see this earlier commentary).
This morning, its page one news. Here’s what the major papers are suggesting is the likely outcome:
• Conservatorship: Fannie Mae and Freddie Mac will be brought under government control; The assumption is this is a temporary measure (12-24 months);
• Management: will be kicked out, starting with Fannie Mae CEO Daniel Mudd as well as Freddie Mac CEO Richard Syron. (No word if Charlie Gasparino is defending the two on CNBC). The current Board of Directors would also be fired;no word on other senior management;
• Shareholders: Speculation is that most (but not all) of the common stock would be diluted but not wiped
out; Company debt and
preferred shares are likely to be protected according to the Washington Post. A variation comes The New York Times, which stated that both the common and the $36 billion of outstanding preferreds "would be reduced to little or nothing."
In a typical recapitalization, preferreds, which are equity, receive little if anything.
• Mortgages: held by FNM/FRE would be guaranteed by taxpayers. This is approximately $5+ trillion dollars, the vast majority of which are sound. (Remember, Fannie was not allowed to buy subn-prime). If 3% of these go bad — a historically high estimate — that would amount to ~$150 billion dollars;
• Legislation: President Bush signed the law that gave the government the authority to inject billions of dollars into the companies through investments or loans. At the time, Treasury Secretary Hank Paulson said there were no plans to actually use the money, it was to help the firms raise capital.
• Foreign Holders: NYT: "With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital" forced the government’s hand;
Foreign central banks are key investors in Fannie and Freddie paper, and they have been losing confidence in the GSEs. Barron’s reports that "Fed data offer circumstantial evidence of, if not of a run, then of a steady walking away from Fannie and Freddie securities."
• Financial sector: With losses of about $500 Billion, and quite a few billion more to go, the hope is that the relief to FNM/FRE eventually finds its way to the entire sector.
Note that the Preferreds of both companies are primarily banks, many of which already are already suffering from the
effects of the credit crunch and mortgage debacle. A bailout of the Preferreds would amount to a $36 billion bailout of the entire financial
• Politics: With both conventions now over (were the GSEs even mentioned?) the Presidential election starts to heat up. The closer we came to November 4th, the greater the risk of political complications. Hence, the bailout sooner rather than later;
• Timing: Any Decision is likely to be announced Sunday, before Asian markets open. Some are speculating that this is an attempt to get out in front, rather than waiting for a "financial tipping point, as happened with Bear Stearns;" Delaying a rescue might also increase the "risks and costs."
• Insolvency: Armando Falcon Jr., who from 1999 to 2005 headed
the agency that oversaw the companies’ financial stability, believes the GSEs are already insolvent. "I would force the more accurate accounting of
their assets and liabilities, and that would show them to be
insolvent," Falcon said in an interview. He added that additional delay to receivership "only digs taxpayers into a deeper hole."
One more note: Anytime the government obtains authority to do
something — go to war, spend money on bailouts — it is identical to
actually authorizing the act. Meaning that yes, it will eventually occur. Claiming you are merely granting authority only serves to make the act more politically palatable, but don’t ever kid yourself — it is no different than the actual act.
In practice, the act of authorizing a fill in the blank (war, bailout, whatever) is the same as declaring (war, bailout). The two are identical.
More on the bailout to come . . .
As you add sources and links in comments, I will cull key data points and add above.
Full source list after the jump . . .