Feds to take over Fannie Mae, Freddie Mac

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/05/BUKS12OVO1.DTL

by furiouslol • 18 years ago

42 46 18 years ago

mick_m• 18 years ago

A wholesale indictment of American capitalism, if I've ever seen one.

epi0Bauqu• 18 years ago

Not really. Both were chartered by Congress, and at best are considered quasi-private. This position (being quasi-private) may actually be worse than either totally private or totally public, but in any case isn't anything close to unfettered capitalism.

stcredzero2• 18 years ago

Yes, but he said "American capitalism" not "unfettered capitalism."

ivankirigin2• 18 years ago

You have no idea what you're talking about. Both groups had board appointees from the government. The market basically assumed they were "too big to fail", meaning if trouble happened, the government would take over.

When a company isn't run by it's shareholders and beholden to the market, bad things happen. Many of the choices made by both groups wouldn't have made it had there been better oversight.

Government involvement was the problem here, not capitalism.

gills3• 18 years ago

Not an indictment of capitalism, but an indictment of the fraud that has been overlooked for too long.

JeffJenkins• 18 years ago

I've been following this for weeks in The Economist. They recommended that the Fed do this, but I honestly didn't think it would happen. Here are a couple recent articles if ou haven't been following:

Recent background article:

http://www.economist.com/finance/displaystory.cfm?story_id=1...

about nationalisation:

http://www.economist.com/opinion/displaystory.cfm?story_id=1....

Alex3917• 18 years ago

This got deleted when I submitted it, but I think it's a good read anyway:

http://www.dailykos.com/story/2008/7/31/64417/6293/543/55984...

byrneseyeview• 18 years ago

In other words, unscrupulous investment bankers might see an opportunity in helping weaker banks launching covered bonds; given their circumstances, these banks will have to provide top notch collateral, ie their best remaining assets, and will probably not get a great price for them (ie the bonds will be both overcollateralised and expensive).

Either the offered price is less than what these assets could otherwise be sold for (i.e. the transaction won't happen) or it's more (in which case the price criticism doesn't make sense).

Other than that, decent but fear-mongering article. Pretty much any scheme by which you exchange cash for a set of promised future cash payments is bound to be abused at some point. There is very little new here, except that this is another quasi-guaranteed asset.

ctkrohn2• 18 years ago

A bailout has been rumored for quite some time. There have been a couple instances in the past few months where news outlets have reported that a weekend deal is imminent, but nothing ever came. The mortgage basis (i.e. the difference in yield between mortgage-backed bonds guaranteed by Fannie/Freddie and Treasury notes) has compressed quite a bit in recent weeks, indicating a lower expectation of risk because market participants have been expecting a deal. But yesterday when the news hit, mortgages didn't really do much... we sold off a couple ticks and the basis tightened by 2 basis points or so, but that was it.

In short, the bond market won't treat this as news until some concrete announcement comes out -- it's already been priced in. It's only the common equity holders who are reacting, since any deal will likely wipe them out.

ojbyrne• 18 years ago

Since Jim Collins (Built to Last, Good to Great) has come up a few times here, just thought I'd mention that Fannie Mae is one of his "Good to Great" companies.

esja• 18 years ago

In Search of Excellence (the classic of this genre) had the same problem. Being profiled in a pop-business book should be considered a huge red flag.

jlhamilton• 18 years ago

The Halo Effect, by Phil Rosenzweig, does a good job describing many of the problems with popular business books like Good to Great and In Search of Excellence. It's worth reading.

http://www.amazon.com/Halo-Effect-Business-Delusions-Manager...

steveplace• 18 years ago

Freakonomics author Steve Levitt noted this:

http://freakonomics.blogs.nytimes.com/2008/07/28/from-good-t...

gruseom• 18 years ago

Has the leadership of Fannie Mae changed since Collins did his analysis? If it has, then this might not be a counterexample. I don't think he said that companies can't go from good to great to suckage.

If the people leading the company are the same, though, then it would seem to contradict his theory, which (as I recall) places the greatest emphasis on that factor.

patrickg-zill• 18 years ago

I have come to have a term for these announcements of action to take over banks, restructure credit, etc. which always seem to happen on Friday afternoons, timed perfectly to have minimal impact on the news cycle and get the least amount of attention.

"FDIC Fridays" or in this case "Fed Fridays"

notauser• 18 years ago

They are done on Fridays so that stockholders have time to calm down and get some perspective before trading restarts on a Monday morning.

mseebach• 18 years ago

> "FDIC Fridays" or in this case "Fed Fridays"

http://en.wikipedia.org/wiki/Take_Out_The_Trash_Day

Protophore• 18 years ago

It's about time they work out a plan to move forward and add some stability to these two companies and the market. I don't like the idea of having the taxpayers foot the bill for all of this mess, but the alternative is even worse (doing nothing and letting the market continue to its downward trend). I would imagine that in this day and age the majority of people have some, if not all, of their retirement money in the stock market either through 401ks or through private brokerage firms. Either way the the common American gets to pay for this mess - through depressed stock prices or through taxes used to bail out Freddy, Fannie, and others like them.

It's got to suck for anyone how owned shares of either of these two firms. Down something like 80% this year. Ouch!

Xichekolas• 18 years ago

> Down something like 80% this year.

Well, now that they have been nationalized, it's more like 100%. From my understanding (as gleaned from the Economist), this will wipe out shareholders, both common and preferred.

But either way, I think the Feds are doing a good thing, as these guys were pulling Enron-style shenanigans, (guaranteeing their own mortgages, etc) and dominating the conforming mortgage market due to their access to cheap debt. Let regular banks step in and serve that market, instead of being confined to riskier mortgages that the two giants weren't allowed to buy.

mtw• 18 years ago

can somebody say why this is necessary? what would happen if the gov. wouldn't have taken over?

would the fed. gov bail out general motors, boeing or google if those are in the verge of bankrupting?

wheels2• 18 years ago

http://www.economist.com/opinion/displaystory.cfm?story_id=1...

http://www.economist.com/finance/displaystory.cfm?story_id=1...

An extremely oversimplified answer is that it would hurt confidence in the dollar, which would further damage its status as the foreign federal reserve currency, which would cause further inflation in the US.

richcollins• 18 years ago

It seems to me that allowing them to fail would help the dollar by tightening credit.

ctkrohn2• 18 years ago

Actually, the government agreed to guarantee some of Chrysler's debt in 1979, and to buy large quantities of Chrysler vehicles:

http://en.wikipedia.org/wiki/Chrysler#Government_loan_guaran...

felipe• 18 years ago

Right! If our economy relies so much on housing to the point that it is a threat to the entire economy, then it shows that we didn't have a solid economy in the first place.

We are seriously compromising the well-being of future generations of this country in order to bail-out over-consuming house-owners and fat-cats in Wall Street. Absolutely outrageous.

etal2• 18 years ago

The U.S. mortgage system works like this: Freddie Mac and Fannie Mae make the housing market more liquid by buying up mortgage loans satisfying reasonable criteria. Other banks can issue mortgages and then immediately resell the loans back to Fannie and Freddie. This makes it easy to get a mortgage through any bank if you have a reasonable financial history, because the other banks don't have to serve out the loans they issue.

Since Fannie and Freddie were implicitly backed by the Fed, they were able to leverage their capital much more than a normal bank in taking on loans -- only a few percent of their issued loans were backed up by real money. These beasts were designed to be too big to fail, and in the unlikely event that they did fail, the companies' histories indicated that the Fed would step in. This is a huge advantage for the two companies, and over the years they essentially squeezed other banks out of the prime mortgage market.

The entire housing market therefore depends on the ability of Fannie and Freddie to buy up the mortgage loans that other banks issue. Without them, the pool of available capital to support those loans would suddenly shrink dramatically, meaning much fewer loans can be issued. Meaning none of us could buy a house for the next few years.

The Fed is stepping in because (1) they created both companies originally, though they cut the umbilical cord at some point; (2) they're still tied into the companies' finances in various ways; and (3) crippling the housing market and setting off a chain reaction of more bank collapses is not something this economy needs, particularly in an election year. There are a few other government-sponsored enterprises that would also get this sort of rescue if needed. Boeing isn't one of them, but as a matter of national security, I doubt the government would allow them to fail. (I still can't quite explain why Bear Stearns got bailed out, but they did.)

gills3• 18 years ago

The prospectus for every bond issued by these agencies explicitly states that it is not guaranteed by the United States.

The housing market does not need Fannie and Freddie. What it needs is a stable provider of liquidity (a broker for the secondary mortgage market). Let Fannie and Freddie fail, and simultaneously introduce an explicitly-backstopped liquidity mechanism/agency.

gills3• 18 years ago

No, I can't say, because it wasn't necessary. We're all looking at Paulson's right hand waving about conservatorship, but missing his left hand; his left hand is bailing out the foreign central banks who bought agency paper and later threatened to dump treasury paper if their agency paper was not backstopped. So now the shareholders get hosed but the foreign central banks get their bonds paid for by the American taxpayers.

MaysonL• 18 years ago

the foreign central banks get their bonds paid for by the American taxpayers.

Given that the bonds are backed by mortgages taken out by those very same American taxpayers, it doesn't seem all that unfair. (And all those T-bills, as well as the mortgage bonds, were bought by dollars paid to overseas businesses to buy lots of cheap goods for American consumers).

zandorg• 18 years ago

Maybe they should get married...

fugue88• 18 years ago

There goes the neighborhood!

mleonhard• 18 years ago

> After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

It looks like a good time to buy Fannie & Freddie stock!

Feds to take over Fannie Mae, Freddie Mac

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