Feds Takeover Fannie Mae and Freddie Mac

[Rex Kickass]

http://news.yahoo.com/s/ap/20080907/ap_on_...e_giants_crisis

 

WASHINGTON - The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.

 

Officials announced that the executives of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

[NorthSideSox72]

Needless to say, this is causing quite the chatter among the traders this morning. They're talking extended ramifications in various markets outside the core debt instruments that are directly effected. Lots of weird downstream stuff is possible.

 

Should be an interesting trading day.

 

Cknolls, where art thou?

 

[Texsox]

We saw this coming.We like to think of our systems as perfect and import them around the world, but situations like this show us otherwise.

[Balta1701]

I'd just like to add...sometimes, we ought to be thankful that we have a massive, unwieldy, multi-trillion dollar government and occasionally regulatory apparatus available in this country.

 

Because, although the lack of government regulation was a key part in helping us get in to this mess, if we didn't have the thing that so many people want to drown in New Orleans...the financial system of this country would probably have been destroyed over the last 12 months.

[Cknolls]

-It will be impossible for impaired banks to raise common/preferred debt.

-Treasury supply will increase.

-Our deficit will increase.

-U.S. debt/GDP will not fall and may in fact increase.

-Earnings will remain unchanged, at best.

-Liquidity is still abysmal.

-Hedgies still face liquidation.

-Credit spreads more than likely will not tighten significantly.

 

 

And 1200.75 will not hold on futes. 1170 may, short-term, but I think we see a 10 handle on futes before a 14 handle.

 

Once the Fed starts the printing press, I fear the deflation that will follow the inflation balloon.

 

Cut your debt and preserve your capital.

[Rex Kickass]

Dumb question:

 

Fannie Mae and Freddie Mac are/were quasi private companies sort of along the lines of Amtrak and the Postal Service, correct? They enjoy a special relationship with the Federal Government but are entities that are supposed to operate independent of the government.

 

If that's the case, why were they allowed to float stock out on the open market?

[Balta1701]

If that's the case, why were they allowed to float stock out on the open market?

Because it made a lot of money for some very wealthy people who have good lobbyists.

 

That was the real fun of those "companies", there was always this implicit guarantee that they'd never be allowed to fail. Thus, their management could afford to do just about anything, take much bigger risks with their investments than a company normally would, and they'd still not lose everything on the deal if it went belly up. So they were able to rake in the dough as the mortgage market went up, and now they can still walk away without drowning in debt.

[Texsox]

The payoff for the people and by extension, the government, is private home ownership, aka "The American Dream™".

[Balta1701]

The payoff for the people and by extension, the government, is private home ownership, aka "The American Dream™".

In other words...because of the fact that these were GSE's and there was always an implicit guarantee by the government, it really has been another large taxpayer provided advantage to homeowners, as it's knocked down mortgage rates by a non-trivial amount since they were set up.

[southsider2k5]

Its no big surprise really. These companies should have never been backed by the government in the first place. This should all be independant of the taxpayers, so that a bailout isn't really even an option. This kind of crap is exactly why places like automotive industry are lining up to be next in line for the next bailout.

[Balta1701]

Its no big surprise really. These companies should have never been backed by the government in the first place. This should all be independant of the taxpayers, so that a bailout isn't really even an option. This kind of crap is exactly why places like automotive industry are lining up to be next in line for the next bailout.

So...where exactly would the world's financial systems be if these companies owning 1/2 of the mortgages in the US were actually allowed to go belly up?

[southsider2k5]

So...where exactly would the world's financial systems be if these companies owning 1/2 of the mortgages in the US were actually allowed to go belly up?

 

Fannie and Freddie should have never existed in the first place.

[kapkomet]

So...where exactly would the world's financial systems be if these companies owning 1/2 of the mortgages in the US were actually allowed to go belly up?

We get it. Governments should control everything.

 

[Texsox]

We get it. Governments should control everything.

Why do we establish governments? Protecting us seems like one of the first roles or government.

[NorthSideSox72]

We get it. Governments should control everything.

And he gets it too. Governments should control nothing.

 

[kapkomet]

And he gets it too. Governments should control nothing.

 

When it comes to market control, there needs to be enough regulation to control the funny business, and then stay out. But they couldn't even do that right in this case.

 

[southsider2k5]

Why do we establish governments? Protecting us seems like one of the first roles or government.

 

The purpose of the US government wasn't to protect us from ourselves, it was to protect us from invaders. Its funny to me to hear the outrage over issues that impinge freedom of speech, or religion, or guns, but no one really complains too much as their freedom of commerce, which is just as protected in the constitution, gets given away.

[southsider2k5]

And he gets it too. Governments should control nothing.

 

I wouldn't go that far, but there is a definate set of ideals that were set forth by our founding fathers, and they did recognize that economic freedom was just as important as many other freedoms.

[Texsox]

The purpose of the US government wasn't to protect us from ourselves, it was to protect us from invaders. Its funny to me to hear the outrage over issues that impinge freedom of speech, or religion, or guns, but no one really complains too much as their freedom of commerce, which is just as protected in the constitution, gets given away.

 

The purpose of the government is to do what the citizens demand. As soon as they created currency, they went past simply protecting everyone in its borders and went away from a totally free commerce. A totally free and unregulated system would not include a government backed currency. We accept the FDIC, fraud laws, etc.

 

If the citizens want to add this protection, that should be a purpose of government.

[NorthSideSox72]

I wouldn't go that far, but there is a definate set of ideals that were set forth by our founding fathers, and they did recognize that economic freedom was just as important as many other freedoms.

I wouldn't go that far either - I was just giving Kap an elbow to the ribs on his over the top response. Not intended to be serious.

 

[southsider2k5]

Plus it is worth mentioning that Freddie and Fannie have spent something like $200 million in lobby money over the years, including people working on both campaigns and people who were on both candidates VP vetting groups.

[mr_genius]

Why do we establish governments? Protecting us seems like one of the first roles or government.

 

I don't think we established a government to bailout corporations that make bad business decisions

 

Oh, by the way, the auto industry is now asking for a bailout.

[kapkomet]

I don't think we established a government to bailout corporations that make bad business decisions

 

Oh, by the way, the auto industry is now asking for a bailout.

Yep. And they'll probably get it, on the benefits side.

 

[Balta1701]

Posting some commentary to either rile up the other side or to at least solicit some responses:

Over the past several days, before the U.S. Treasury Department acted to seize Fannie Mae and Freddie Mac, several people asked me if I thought it was a good idea for the government to “nationalize” the two mortgage giants. In virtually none of the coverage of the Bush administration's latest emergency action did anyone bother to tell the back story. Fannie Mae, nee the Federal National Mortgage Association, began life as a government invention. It was born “nationalized” -- and it worked beautifully until it was privatized.

 

FNMA was part of the New Deal’s trinity of housing agencies -- the other two being the Home Owners Loan Corporation and the FHA -- agencies that Roosevelt created in order to literally create the modern mortgage system. Before the New Deal, there were no long term, self-amortizing mortgages. The loan was due and payable at the end of the term -- usually five years -- and if you couldn’t persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA’s job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.

 

The system worked like a fine watch. Homeownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filthy rich. And mortgage lenders hardly ever went broke. The government’s bank insurance funds regularly turned a profit. And here’s a quaint, archaic concept: it operated in the public interest.

 

Then in 1968, as part of a general budget reform, government technocrats decided to get FNMA off the government’s books. This was intended as a purely technical revision. It was tacitly understood that Fannie was to keep doing the same thing it always did -- buy mortgages from banks, turn them into securities, keeps some, sell others, but maintain its standards and service to the public good.

 

It took about two decades for the wise guys to realize that there was big money to be made. And I am sorry to report that this was a bipartisan trough. In the Clinton era, many of the wiseguys at FNMA were Democrats.

 

Criticism was limited to the right and left. The Wall Street Journal and libertarian think- tanks regularly warned that Fannie was getting too big and too speculative with an implicit government guarantee. A few progressives like your faithful writer objected that FNMA’s true purposes were being perverted and the system being put at risk so that insiders could get very rich.

 

After 2000, Fannie also served to abet the sub-prime mess. For the most part, Fannie refused to buy the very worst sub-prime loans, but it was happy to buy so called “Alt-A” loans, which were a slightly milder version of the same abuse -- very risky loans with exorbitant interest costs (and profits) and almost non-existent standards, that are now going into default at almost the same rate as sub-prime.

 

Under private management, Fannie did a 180. It was perverted from a government-sponsored and well managed agency that served the public interest -- into a privatized casino whose big bets enriched a few insiders and then helped crash the entire system.

 

So now, the Bush administration is playing half-of-FDR. It is saving capitalism from itself as Roosevelt did -- but without getting serious about regulatory standards going forward. The taxpayers will bail out Fannie, but the rules for regulation of the mortgage system have yet to be written. That will await the next administration. And if the next administration is led by John McCain, the top financial guy is likely to be former Senator Phil Gramm, the senate’s biggest cheerleader for reckless deregulation.

 

Here is the cycle: government invents something virtuous. The private market takes it over, loses hundreds of billions. Government then bails it out. This is best understood as socialized risk, privatized gain. Yes, the shareholders of Fannie Mae will deservedly lose a bundle -- it’s always the shareholders who take a hit -- but the insiders who thought up subprime and the executives of Fannie Mae during the roaring ‘90s already made their pile.

[southsider2k5]

This power should have never been held by one or two large groups. Banks should own their own loans, which would make them responsible for their legitimacy. By having a governmental agency to dump the bad loans on, we the people, have to pay for the people who have lived outside of their means.

 

This is truely a bipartisian clusterf***, and all you have to do is look at all of the key people in both campaigns who have involvement in these two companies. I will definatey agree with that much.