Fannie Mae and Freddie Mac Bailout

[Sunny]

I was thinking that after this bailout, is America now the biggest council estate in the world? The Government now owns over half the houses in the US!

 

[z109]

ANd what is more, they own 90% of new mortgages issued. With the sickness in securitisation, the GSEs have been guaranteeing almost the whole mortgage market over the past year - is this likely to change in the near future?

 

[Sunny]

ANd what is more, they own 90% of new mortgages issued. With the sickness in securitisation, the GSEs have been guaranteeing almost the whole mortgage market over the past year - is this likely to change in the near future?

I wouldn't have thought so. I wonder do American taxpayers know exactly or understand what they have taken on. This bailout is just staggering in size. I don't think people have fully grasped the full meaning of it. Be interesting to see how the markets react over the next couple of days as they look more closely at the deal. I know Asia suffered heavy losses overnight.

 

[z109]

Yeah, Asia's back down to where they were before the bailout.

To my eyes, it looks as though it is pressure from foreign central banks, notably China, that has triggered the bailout. They have been big purchasers of GSE debt and the Reserve Bank of China have been getting it in the neck from the Finance Ministry over the paper losses they have been making with the decline of the value of the debt.

As to the cost to the US taxpayer? Who knows! Something like 20% of the debt issued or held by the GSEs is Subprime or Alt-A. They used some tricksy accounting methods (not illegal, just unspirited) to stop recognising losses on mortgages in default by extending the default terms from 90 days to 2 years. With 9% of US mortgages in default, that's a fair whack. Recoveries from foreclosures are running very low in some places at less than 50%. So all in all there is still a big mess of money that is going to be missing!

The whole thing has been kicked into the lap of the next administration. I think Mr. Paulson was hoping that his "can bailout if I want to" bill (the bazooka in his pocket) would have that effect, but he has been forced to pull the trigger earlier and impose conservatorship. Whether he has to reload and fire some more shots before he can escape is another question.

Will it end or ameliorate the credit crunch? I doubt it. Vast as the sums are and although the debt is now government guaranteed, it is not going to shore up balance sheets that much. At best it will reduce the amount that US banks have to raise to offset losses on the mortgages they currently hold. This might make a difference to the amount of investment capital that is left for the rest of the world when banks elsewhere seek to raise money. As I understand it, 93% of GSE paper is sold in the US with only 6% in Europe (excluding central bank purchases), so it won't have a material effect on European bank's balance sheets.

But, as I say, who knows!

edit: It does show one scary thing - there's no-one too big for the US government to take over.

 

[Sunny]

Good post. Fully agree with you. I am one of the people who think this is a sign of how bad things are and are going to get rather than a bottom of the credit crisis.

Talking about funny but legal accounting, I loved reading how roughly 50% of their declared regulatory capital was based on tax credits which of course are only useful when your company is profitable. Another example of failed regulation.

 

[z109]

Good post. Fully agree with you. I am one of the people who think this is a sign of how bad things are and are going to get rather than a bottom of the credit crisis.

Talking about funny but legal accounting, I loved reading how roughly 50% of their declared regulatory capital was based on tax credits which of course are only useful when your company is profitable. Another example of failed regulation.

It's a great story isn't it? Right up there with Enron and Worldcom.

Jonathon Weil at Bloomberg has done a piece on it:
http://www.bloomberg.com/apps/news?pid=20601039&sid=aB5s3oci5VH8&refer=home

 

[room305]

Talking about funny but legal accounting, I loved reading how roughly 50% of their declared regulatory capital was based on tax credits which of course are only useful when your company is profitable. Another example of failed regulation.

Indeed. In most cases of fraudulent corporate accounting (e.g. Enron) it is the shareholders and bondholders who notice that there is something remiss not the regulators.

 

[Elphaba]

Thank God, Fed drew the line at Lehman Brothers. They have paid their staff colossal bonus over the years, a few days ago, before share price collapsed, LB bonuses was estimated to be at 3 billion, while the bank was valued at less than 2.7 billion! Who valued it? Interesting to note Pricewaterhouse are/were their auditors. Wonder will Goldman Sachs be next? I think bailing out FM & FMc by the Fed admits their culpability.
Trust has been shattered in the financial system and it will take a lot for it to be restored.

 

[gally74]

hello,

im no ecomist or anything, have learnt a bit by watching cnbc and bllomberg over the past 9 years,

im convinced this is all going to end in tears, espically for the americans, it will hurt the globe aswell and end up in new trends, politics etc.

America has over spent for 10 years and now its coming home, the idea that interest rate drops etc. can bring an economy back etc, is nuts, all these bailouts now to help the market, the tax payers are going to get loaded next year.

 

[room305]

hello,

im no ecomist or anything, have learnt a bit by watching cnbc and bllomberg over the past 9 years,

im convinced this is all going to end in tears, espically for the americans, it will hurt the globe aswell and end up in new trends, politics etc.

America has over spent for 10 years and now its coming home, the idea that interest rate drops etc. can bring an economy back etc, is nuts, all these bailouts now to help the market, the tax payers are going to get loaded next year.

Economist or not, this is a far more accurate representation of what is happening than you'll hear from many a so-called "economist".