Signs of the apocalypse

[Snipe]

U.S. Rescue Seen at Hand for 2 Mortgage Giants
By STEPHEN LABATON and ANDREW ROSS SORKIN

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

Read more at the link (http://www.nytimes.com/2008/09/06/business/06fannie.html?_r=1&oref=slogin&partner=rssnyt&emc=rss&pagewanted=print)

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Fannie May and Freddie Mac have each seen their stock lose over 90% of their value in the last year. It is an extraordinary amount of wealth that has been lost. Now the shareholders will lose the rest, being "virtually wiped out". While the government has let these shareholders fail, they have stepped in to stand behind and secure the interests of foreign investors who hold the debt.

These public-private companies backed by our government control 5 trillion dollars worth of mortgage backed securities. Many of which are held by foreign central banks. Our government is going to back them up. The article above states that the amount is difficult to ascertain but that the government could be on the hook for tens of billions of dollars. But think of it this way:

If the difference in what they are really worth and what we have them listed at is as high as 20%, the hit would be 1 trillion dollars. If it is 5%, the hit would be $250 billion dollars. Tens of billions of dollars sounds like a bargain.

My fellow Americans, someday everything we know is going to come crashing down upon us. I don't think most people have a clue how close we are to the edge. We may be able to dance on the edge a long while. I can't tell you how long it will take, but I can tell you with some certainty which direction we are going.

The collapse is going to be spectacular.

I am the Snipeman, and I approved this oriental massage.

[dc_x]

I think you are confusing the market value of the companies with the value of their portfolios. The current loss rate for Fannie's portfolio is 0.175%. Yes, the market value of the companies has dropped 90%, but that is a reflection of how woefully undercapitalized the 2 companies are.

[xubball93]

I don't know why McCain, Obama or anybody would want to inherit this mess!

[MHettel]

Snipe- do you actually DO anything about these problems you love to inform us all about?

[vee4xu]

dc x is on the right track. The debt side of both Fannie Mae and Freddie Mac are solid. The equity side is represented by investors who, like many other public companies, rode the stock side of the companies up with questionable loans. The sole reason for the existance of both Fannie and Freddie is to provide affortdable debt for single family and small multi family residential properties. The main stockholders were using the same tactics as Countrywide and in a hot real estate market the equity side of the house flourished. When it came crashing down Secretary Paulson said that the debt side of Fannie and Freddie are okay, but that they will not assist either until the stockholders who took advantage of lenders to their own profit were eliminated. So, the elimination of 90% of the equity means that once the profiteers are gone from the stock side, all that will be left is the debt side what Freddie and Fannie were created to provide. The government was unwilling to help prior to now so as not to allow those who profited from the stock to do so again. In this case, President Bush got it right because Fannie and Freddie will be once again healthly with the help of the feds and the profiteers get nada. So, the sky is really not falling. In fact, it is clearing.

[PM Thor]

Yeah vee, it's always a good sign to have the feds take over monstrous companies.

I kid. I kid.

They brought this on themselves, in my most basic explanation of this mess.

[Snipe]

I think you are confusing the market value of the companies with the value of their portfolios. The current loss rate for Fannie's portfolio is 0.175%. Yes, the market value of the companies has dropped 90%, but that is a reflection of how woefully undercapitalized the 2 companies are.

I realize that the two are seperate. I also freely admit that what I don't know about this is far greater than I know. I am in over my head in this conversation, and I am trying to figure out what it all means.

Take 5 trillion at your current loss rate (0.175%), that would lead to a loss of 9 billion dollars. Does that loss happen on a yearly basis? If so I guess that could be the tens of billions that NYTimes is talking about. That doesn't sound so bad in relation to my fear mongering.

I guess a question would be how stable is the current loss rate?


dc x is on the right track. The debt side of both Fannie Mae and Freddie Mac are solid. The equity side is represented by investors who, like many other public companies, rode the stock side of the companies up with questionable loans. The sole reason for the existance of both Fannie and Freddie is to provide affortdable debt for single family and small multi family residential properties. The main stockholders were using the same tactics as Countrywide and in a hot real estate market the equity side of the house flourished. When it came crashing down Secretary Paulson said that the debt side of Fannie and Freddie are okay, but that they will not assist either until the stockholders who took advantage of lenders to their own profit were eliminated. So, the elimination of 90% of the equity means that once the profiteers are gone from the stock side, all that will be left is the debt side what Freddie and Fannie were created to provide. The government was unwilling to help prior to now so as not to allow those who profited from the stock to do so again. In this case, President Bush got it right because Fannie and Freddie will be once again healthly with the help of the feds and the profiteers get nada. So, the sky is really not falling. In fact, it is clearing.

You guys may be entirely correct. One point: Doesn't the ("solid") debt side of Fannie and Freddie Mac consist of mortgage backed securities? If that is true, aren't those securities inherently unstable in this market?

Consider this (http://seattletimes.nwsource.com/html/businesstechnology/2008161920_foreclosures06.html):


WASHINGTON — A record 9 percent of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continues to mount, the Mortgage Bankers Association (MBA) said Friday.

That is one out of every ten homeowners and the number continues to rise. Are mortage backed securities as solid as people think? Is part of this a confidence game? And what happens if that 9% number doubles before it is over? If the sky is clearing, do you expect those numbers to start going down or to keep rising?


LONDON (AFP) (http://news.yahoo.com/story//afp/20080830/bs_afp/britaineconomypolitics_080830090401)– The British finance minister has warned the country is facing "arguably the worst" economic downturn in 60 years and says it will be "more profound and long-lasting" than people had expected.

Chancellor of the Exchequer Alistair Darling also admits in an interview with Saturday's Guardian newspaper that he had no idea how serious the credit crunch would become.

I admit that I am largely ignorant on these matters. So many opinions are out there and I don't seem to have a mastery of the true fundamental basics behind them. I also tend to read too much Ron Paul (which could explain a lot of things).

[Snipe]

I don't know why McCain, Obama or anybody would want to inherit this mess!

I would agree with that. Whoever wins is going to lose.


Snipe- do you actually DO anything about these problems you love to inform us all about?

How can I? I don't even know what I am talking about. And if I am right and we are headed towards a collapse, the only thing I will try to do is save my family.

[vee4xu]

Snipe, hope this helps.

http://hnn.us/articles/1849.html

http://www.mtgprofessor.com/A%20-%20Secondary%20Markets/what_do_fannie_and_freddie_do.htm

So, you can see that Fannie and Freddie are not public companies in the same sense as other stock companies because they are still funded my the Federal Gov't. In fact, as can be seen, it is Congress that actually created these two companies. The loans that they hold may in fact have some problems, but it is because those loans were purchased on the secondary market from those who made bad loans. So, Fannie and Freddie do not make loans, but buy them and create capacity for lenders to clear their ledgers and make new loans. So the reason that the gov't is trying to shake out the equity holders is to rid the companies of those who made the decision to buy these bad loans. That leaves the government with what it already is responsible for and that is the debt side. When the gov't infuses new money into Freddie and Fannie it will be to address any issues with the secondary debt holdings currently in Freddie and Fannies portfolios. However, they will not want to do so and simultaneously reward the stockholders who created the problem.

[ATL Muskie]

I would agree with that. Whoever wins is going to lose.
.


Which is why Hillary wants McCain to win, so he can have four years to inherit this mess and not get re-elected, then she can win in 2012. Now if that doesn't give you nightmares I don't know what will.

[xubball93]

Which is why Hillary wants McCain to win, so he can have four years to inherit this mess and not get re-elected, then she can win in 2012. Now if that doesn't give you nightmares I don't know what will.

I think Hillary might be done and we'd more likely see Obama again. Or, they learned from this campaign and will join forces. Now there's an apocalypse!

[XU 87]

In another example of government bailing out private industry, the government is guaranteeing loans to Chrysler and Ford up to $25 billion, and the number could go as high as $50 billion. McCain and Obama are reported to support these loan guarantees.

[dc_x]

Take 5 trillion at your current loss rate (0.175%), that would lead to a loss of 9 billion dollars. Does that loss happen on a yearly basis? If so I guess that could be the tens of billions that NYTimes is talking about. That doesn't sound so bad in relation to my fear mongering.

I guess a question would be how stable is the current loss rate?

You guys may be entirely correct. One point: Doesn't the ("solid") debt side of Fannie and Freddie Mac consist of mortgage backed securities? If that is true, aren't those securities inherently unstable in this market?



The 0.175% was Fannie's loss rate for the 12-month period from 7/1/07 - 6/30/08. Freddie reported 0.173% for the same period. Those losses have already occurred.

The future losses are likely to be greater. As of 6/30/08, the 2 companies combined estimate total future losses of about $110 billion.

$110 billion out of a $5 trillion book of business doesn't seem bad, until you realize that the 2 companies only have $84 billion of combined capital. Right now it looks like the 2 companies would need to raise at least $35 billion in additional capital to get through this.

The problem is that raising capital in this environment is next to impossible, which is why the Federal Government will have to step in and use tax payer money to finance the companies.

[vee4xu]

A couple of good articles.

http://hosted.ap.org/dynamic/stories/M/MORTGAGE_GIANTS_CRISIS?SITE=OHCOL&SECTION=HOME&TEMPLATE=DEFAULT

http://hosted.ap.org/dynamic/stories/B/BUSH_MORTGAGE_GIANTS?SITE=OHCOL&SECTION=HOME&TEMPLATE=DEFAULT

An economist from Goldman Sachs came into our office last month and pretty much outlined to us what was going on with Freddie and Fannie. It squares up with what has actually happened. He wasn't a fortune teller, rather it was a plan that was being floated around the investment world prior to implementing it.

[Snipe]

Paulson plan could cost $1 trillion (http://www.politico.com/news/stories/0908/13602.html)

Congressional leaders said after meeting Thursday evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that as much as $1 trillion could be needed to avoid an imminent meltdown of the U.S. financial system.

1,000,000,000,000.00

What is amazing is that all of this has been done without a single vote being cast in Congress. Who really controls the purse strings?

Some Democracy we have. I didn't vote to give away all this money. Oh yeah, we have a representative democracy. But wait, my representatives didn't vote to give away all this money either.

Bow down to your big government. Bow down to the Fed. I am confident that they have someone's best interests at heart. It is a fair question of who that would be.

Anyone think George Bush has a good handle on what is actually happening? Did anyone catch the Obama deer in the headlights reaction? (He didn't support it or oppose it, translation = doesn't really know what is going on) What about John McCain? The guy admited that he doesn't really know much about economics. The guy shouldn't even be a mayor of a small town much less a Senator. What a disgrace.

Does anyone have any confidence in those fools? It doesn't matter anyway. These decisions are not being made by Presidents or Congressmen, they are being made by the Federal Reserve.

It is nice that we just had two poltical conventions paid for by the taxpayer. I heard that the estimate of the cost was around $160 million dollars. I bet they covered a lot of these current topics there and I just missed it.

We elect politicians that don't know dick about Economics. We elect politicians that haven't been able to balance a check book since 1960. Ike was the last President to pay a penny off of the debt. That was 48 years ago. I guess we deserve those people because we elect them.

How are we paying for this? The Federal Reserve just created more money out of thin air. It's magic. Maybe the government can send us all another check again. That was laughable.

I think that the dollar is going to collapse. It is just a question of when it will happen. You can make a solid argument that the process has already started. When the walls come crumbling down not even the sacred Fed will be able to save you. When the dollar collapses the strategy of printing more dollars won't be seen as effective anymore.

[Emp]

The dollar "collapsed" because Bush et al made a decision not to support it 8 years ago. Theory: reduce imports, make exports more attractive. Of course we dont make much to export these days.

All of this payoff to de regulated insurance companies with coccamanie exotic insurance schemes (insuring subprime mortgages with totally inadequate reserves) and de regulated banks making the subprime loans in the first place.

Free markets my ass. Free markets when they are gaining on speculation and manipulation. Federally subsidized markets when every voter and special interest with retirement investments in those same markets is about to wring the nuts of the deregulation party.

Bush is bailing out his "base" and McCain...and any of us assuming we were going to retire on our 401ks invested in these markets. This is EXACTLY why privatizing Social Security was, is and will be a bad idea...the government will have to step in if it all goes south anyway.