Posts filed under “Taxes and Policy”
"As with any contract, the parties to the agreement may modify the covenants by mutual agreement only.”
Hank Paulson’s God Complex just got bigger. The Director of Government Bailouts, and head of the Socialism Departmant at Treasury has informed Congress to back off his turf.
"All your legislation belongs to us!"
Now, last I checked, it was Congress that had the power of authorization disbursements, and that Treasury does not have the authority to spend 5.3 trillion dollars. Comrade Paulson does not seem to understand the way the different branches of government work in the United states, and is apparently unfamiliar with a little parchment called the Constitution. Perhaps we can get Ron Paul to explain how these things work to our friend from the People’s Republic of Goldman.
Bill King: "Hank is trying to euchre the market into believing that if Congress tries to change the law, the executive branch would then sue Congress for breach of contract. Good luck with that at the Supreme Court." Nice try, comrade, but no such luck.
The issue here is authorization. I cannot write a contract to sell you home, car, etc to a third party, without your authorization. Otherwise, its fraud. The party with the legal title and ability to convey those goods or services on the one side, or indebtedness or money on the other side of the transaction requires authorization.
The original Bazooka legislation did not give Treasury a blank check to do whatever they want. A decision, for example, to add Fannie and Freddie to the budget "wouldn’t
automatically translate into explicit government backing for the
companies’ combined $1.7 trillion in unsecured debt and $3.5 trillion
of mortgage guarantees." To do so requires Congressional legislation to change the companies’ legal status. That’s where any of the changes — like reducing the absurd pay packages for the current idiots running Fannie/Freddie — would come in.
Here’s Bloomberg’s excerpt:
"The U.S. Treasury said Fannie Mae and Freddie Mac’s debt and mortgage-backed securities are "protected” by the government’s stock purchase agreement that put the mortgage finance companies under federal control.
"The holders of senior debt, subordinated debt, and mortgage-backed securities issued or guaranteed by these GSEs are protected by the agreement without regard to when those securities were issued or guaranteed,” the Treasury said today, referring to the so-called government-sponsored enterprises.
The federal government took over the two largest sources of money for U.S. home loans on Sept. 7, placing them under conservatorship and establishing procedures for buying their senior preferred stock if liabilities exceed assets.
The federal takeover didn’t address whether the companies’ $5.2 trillion in debt should be included in the budget, or whether it carries an explicit government guarantee. In an interview this week with Bloomberg Television, Treasury Secretary Henry Paulson cited "incongruities” in the law, saying "we should be clear, is there a government guarantee or isn’t there?”
I do not believe Treasury has purchased any stock yet, but that can change in an instant. Long live Bailout Nation!
FACT SHEET: TREASURY SENIOR PREFERRED STOCK PURCHASE AGREEMENT
U.S. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
Treasury Says Fannie, Freddie Accord Protects Debt
Bloomberg, Sept. 11 2008
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:
September 5, 2008
The Honorable Henry M. Paulson, Jr.
Secretary United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Fannie Mae/Freddie Mac Restructuring
Dear Secretary Paulson:
We understand that a Treasury plan for Fannie/Freddie ("the GSEs") may be announced this weekend. We thought you might find useful some further thoughts on potential GSE solutions.
As you are likely aware, we had previously distributed a proposed restructuring plan for the GSEs. In that plan, under a prepackaged conservatorship, equity interests would be extinguished, subordinated debt would be exchanged for warrants, and senior debt would be exchanged for new senior debt and common equity in the newly recapitalized entities. The government would write a put to the new common equity holders which would expire in three years.
It appears, however, that the GSEs may need help more quickly, and conservatorship may not be triggered until the GSEs are formally determined to be undercapitalized. As such, in the event the government needs to inject capital immediately, we suggest you consider the following transaction ("the Transaction").
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 . . .