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-- Fed Seizing Fannie-Mae and Freddie-Mack?
Fed Seizing Fannie-Mae and Freddie-Mack?
Umm, hello?
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| September 6, 2008 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. |
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| 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. |
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| 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. |
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| The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount. Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year. |
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| A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans. The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said. For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems. Even after the companies are put under government control, debates will continue over whether they should be independent and how they should operate over the long term. The declines in the housing and financial markets apparently forced the administration�s hand. 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, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months. |
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| Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared. |
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| As their problems have deepened � and the marketplace has come to expect some sort of government rescue � both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies. |
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| In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected. The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies. Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell, who was representing Fannie. Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies. Spokesmen at the two companies did not return telephone calls seeking comment. The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital. Instead, Mr. Paulson has struggled to navigate through potentially conflicting goals � stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses. Publicly, administration officials have tried to bolster the companies because the nation�s mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump. But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr. Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003. Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has failed to make good on that promise � even as Fannie Mae raised more than $7 billion. Mr. Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company. With the possible removal of the top management and the board, it is no longer clear who would appoint new management. Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive. The stock prices of the companies have also plunged. 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. With Fannie and Freddie guaranteeing $5 trillion in mortgage-backed securities, and a big share of those held by central banks and investors around the world, Mr. Paulson appears to have decided that the stakes are too high to take chances. The Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie for a capital infusion. The exception is if the companies� regulator, Mr. Lockhart, determines that the companies are insolvent or deeply undercapitalized it could take the companies over anyway. Charles Calomiris, a professor of economics at Columbia Business School, said delaying a rescue would only increase the risks and costs. �The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,� he said. �You don�t want zombie institutions floating around with time on their hands.� Stephen Labaton reported from Washington and Andrew Ross Sorkin from New York. Edmund L. Andrews contributed reporting from Washington, and Eric Dash and Charles Duhigg from New York. http://www.nytimes.com/2008/09/06/b...MQbWd1l8quER+ow |
Re: Fed Seizing Fannie-Mae and Freddie-Mack?
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| Originally posted by MisterOpus1 But the business philosophy is just fucking pathetic to me - privatize the profits, socialize the debt. |
Marxists!
seriously...hypocrites...If the Dems did this, the Repubs would be screaming "SOCIALISTS!!"
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| Originally posted by Krypton Marxists! seriously...hypocrites...If the Dems did this, the Repubs would be screaming "SOCIALISTS!!" |
Your government had to do something since the economy is going to hell in a hand basket and as a result, created a huge sucking black hole dragging just about every aspect of the economy with it.
I (normally) don't agree with government interference in business either however with something that catastrophic, they really had no choice.
I just hope the reigns aren't too tight...
Re: Re: Fed Seizing Fannie-Mae and Freddie-Mack?
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| Originally posted by Shakka Yup. It's wrong, it's a flawed business model, and it's been forecasted by some for decades. This is how bad things have gotten, and this is what we've been forced to resort to in order to avoid all sorts of financial Armageddon. Thank you FDR for creating these quasi-government backed institutions. Thank you regulators for setting up such a poorly regulated, highly-leverageable business model with zero room for error. I'm not sure your Hugo comment is appropriate though. |
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| and told them that the government was preparing to place the two companies under federal control |
Re: Re: Re: Fed Seizing Fannie-Mae and Freddie-Mack?
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| Originally posted by MisterOpus1 Maybe not, but I threw that in there because of this statement: Sounded a little nationalistic, didn't it? |
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| Fannie, Freddie Capital Concerns Prompt Paulson Plan (Update1) By Dawn Kopecki and Alison Vekshin Sept. 7 (Bloomberg) -- Treasury Secretary Henry Paulson decided to take control of Fannie Mae and Freddie Mac after a review found the beleaguered mortgage-finance companies used accounting methods that inflated their capital, according to people with knowledge of the decision. Paulson will hold a press conference at 11 a.m. today in Washington, according to a statement. Morgan Stanley, hired by the Treasury to probe the companies' finances, concluded the accounting, while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves, according to the people who declined to be identified because the findings are confidential. The Treasury plans to put Fannie and Freddie into a so- called conservatorship and pump capital into the companies, House Financial Services Committee Chairman Barney Frank said in an interview yesterday. The government would make periodic capital injections by buying convertible preferred shares or warrants, according to a person briefed on the plan. Paulson is seeking to end a crisis of confidence in the companies sparked by concern the companies didn't have enough capital to weather the biggest housing slump since the Great Depression. The Treasury was ``convinced that the markets simply wouldn't respond until after something like this,'' said Frank, who was brief by Paulson. ``I think it's an important combination.'' Debt Holders Protected Paulson gathered Federal Reserve Chairman Ben S. Bernanke, Federal Housing Finance Agency Director James Lockhart, Fannie Chief Executive Officer Daniel Mudd and Freddie CEO Richard Syron to discuss the plan to take control of the government- sponsored enterprises, which have operated as private shareholder-owned corporations for almost 40 years. Lockhart will also speak at today's press conference, the statement said. Holders of the companies' common and preferred stock are ``very unlikely to come out of this at all happy,'' and the chief executive officers will be forced out, Frank said. Senior and subordinated debt holders will likely be protected, said other people who were briefed on the plan. Fannie and Freddie own or guarantee almost half of the $12 trillion in U.S. home loans and the government had been leaning on the companies to help pull the economy out of the housing crisis. Instead, they got caught in the same slump that left the world's banks with more than $500 billion of losses since the collapse of the subprime-mortgage market last year. Rising Costs Concern over the companies' capital pushed their borrowing costs to record levels over U.S. Treasuries, sent their common and preferred stocks tumbling and boosted mortgage rates. Washington-based Fannie is down about 66 percent in New York Stock Exchange trading since the end of June. McLean, Virginia- based Freddie has fallen about 69 percent. Paulson met with Mudd, 50, and Syron, 64, Sept. 5 to tell them of the decision to remove the executives from their jobs, according to two people briefed on the discussions. Mudd, who replaced three top executives almost two weeks ago, is negotiating with regulators to stay on in a consultative role for several months, according to people with knowledge of the talks. A government takeover would be the latest attempt to blunt the impact of the yearlong credit crisis, after the Fed provided financing for Bear Stearns Cos.'s takeover by JPMorgan Chase & Co. ``They have to open their wallet,'' Bill Gross, manager of the world's biggest bond fund at Newport Beach, California-based Pacific Investment Management Co. About 61 percent of Gross's holdings were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or government agency Ginnie Mae, according to data on Pimco's Web site. Obama, McCain Briefed Pimco and other large investors may put in their own money once the Treasury decides to inject government funds, Gross said Sept. 5 in a Bloomberg Television interview. Paulson hired Morgan Stanley a month ago to advise on Fannie and Freddie. Mark Lake, a spokesman for Morgan Stanley, declined to comment. Paulson also consulted with Bank of America Corp. Chief Executive Officer Kenneth Lewis on his plan, according to people with knowledge of the talks. Bank of America spokesman Scott Silvestri declined to comment. The Treasury briefed Democratic presidential candidate Barack Obama yesterday and has contacted Republican contender John McCain's staff. Officials also discussed the plans with House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Banking Committee Chairman Christopher Dodd. ``We are making progress on our work with Morgan Stanley, FHFA and the Fed,'' Treasury spokeswoman Brookly Mclaughlin said Sept. 5 in Washington, declining to comment on any specific plans. FHFA spokeswoman Stefanie Mullin declined to comment. Losses Grow Fannie was created by the government in 1938 as part of President Franklin D. Roosevelt's New Deal. Freddie was chartered in 1970 to compete with Fannie. As losses on the mortgages grew late last year, the companies recorded $14.9 billion in combined net losses, eating into their capital. Fannie raised $14.4 billion since November and Freddie sold $6 billion of preferred securities. Plans for a $5.5 billion sale were delayed as the company's fortunes sank. Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show. Critics including former Federal Reserve Chairman Alan Greenspan and Richmond Federal Reserve Bank President Jeffrey Lacker have called for the companies to be nationalized. William Poole, the former head of the St. Louis Fed said in July that Freddie Mac is technically insolvent and Fannie Mae's fair value may be negative next quarter. Fed Involvement Fannie and Freddie dropped in after-hours trading on Sept. 5. Fannie fell $2.25, or 32 percent, to $4.79 at 5:50 p.m. in New York Stock Exchange trading and Freddie slumped $1.40, or 27 percent, to $3.70. The market value of Fannie's $21.7 billion in preferreds had dropped 64 percent to $7.87 billion late last month, according to Friedman Billings & Ramsey & Co. The market value of Freddie's $14.1 billion in preferreds has fallen 61 percent to $5.44 billion. Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period. Bernanke participated in the meetings because the central bank was given a consultative role in overseeing Fannie's and Freddie's capital under legislation approved in July. Paulson's decision won the approval of Bernanke and Lockhart, the person briefed on the discussions said. Conservatorship The FHFA has the authority to place Fannie or Freddie into conservatorships or receiverships under the law. The legislation that President George W. Bush signed July 30 also gave the Treasury the power through the end of next year to extend unlimited credit to or make equity purchases in the firms. Under a conservatorship, the authorities would aim to preserve Fannie and Freddie assets, rather than dispose of them, the law says. The FHFA was scheduled to release its assessment of the companies' capital levels as early as last week as part of a quarterly appraisal of their finances. Analysts have speculated that the Treasury would wipe out common shareholders, while seeking to shield preferred stockowners from total loss. Fannie and Freddie preferred shares are typically owned by banks and insurance companies. Their $5.2 trillion of debt outstanding is held by investors including Asian central banks, and would probably be guaranteed, analysts said. Senior Position Frank said the federal government will take a senior repayment position to ``all shareholders, preferred and common.'' The Treasury is ``going beyond no dividends, I believe, in terms of what's going to happen to the shareholders,'' Frank said. ``I think shareholders are going to find themselves in a very subordinate position.'' ``Treasury's main concern is the debt markets, and if it was to say that it will do whatever is necessary to keep Fannie and Freddie running, the better it is for their funding,'' said Alex Pollock, fellow at the American Enterprise Institute in Washington and former president of the Chicago Federal Home Loan Bank. Fannie and Freddie sell billions of dollars of bonds each month to pay maturing debt. As of mid-August the companies had $223 billion of debt to refinance by the end of the quarter. While they have continued to issue securities, Fannie and Freddie have paid record yields over U.S. Treasuries to attract investors reluctant to take on the debt even with its implicit backing from the government. Freddie sold $3 billion of two-year reference notes this week at 3.229 percent, or 97.5 basis points more than Treasuries of similar maturity, the highest since at least 1998, based on company and market data compiled by Bloomberg. >LINK< |
*whistles quietly in the corner*
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| Originally posted by occrider *whistles quietly in the corner* |
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| Wall Street hails government takeover of troubled mortgage giants. Dow rises more than 200 points, but Fannie and Freddie shares plummet. Wall Street hails government takeover of troubled mortgage giants. Dow rises more than 200 points, but Fannie and Freddie shares plummet. By Alexandra Twin, CNNMoney.com senior writer September 8, 2008: 10:09 AM EDT NEW YORK (CNNMoney.com) -- Stocks surged Monday morning, with the Dow up more than 200 points, as investors cheered the government's announced takeover of troubled mortgage firms Fannie Mae and Freddie Mac. The Dow Jones industrial average (INDU) jumped 225 points, or 2% in the early going, after having surged more than 300 points at the open. The broader Standard & Poor's 500 (SPX) index and the Nasdaq composite (COMP) also rallied. Stocks ended mixed Friday after a tough session and week, as rallying financial shares vied with a weak labor market report that amplified recession fears. But the tone was ebullient Monday morning, as investors breathed a sigh of relief about the government rescue plan of Fannie Mae and Freddie Mac. Fannie and Freddie. The Bush administration said Sunday that it was taking control of the mortgage backers in an attempt to help stabilize the battered housing market and bring down mortgage rates. Treasury Secretary Henry Paulson said the companies were being put under a government conservatorship. He also said their CEOs were being replaced and that the Treasury Department would put up to $100 billion in each company over time so as to keep them afloat, in exchange for senior preferred stock. The two government-sponsored firms own or back about half the mortgage debt in the country and have lost billions in the housing market collapse. The plan should lower mortgage rates by lowering Fannie and Freddie's borrowing costs. But analysts are split as to how much the plan will be able to help the battered housing market and sluggish economy. (Full story) Freddie Mac shares plunged 73%, while Fannie Mae lost 81%. But most financial stocks rallied, including Dow components AIG (AIG, Fortune 500), American Express (AXP, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500). Merrill Lynch and Morgan Stanley both jumped more than 5%. Washington Mutual (WM, Fortune 500) surged 9% after announcing that its CEO has been ousted. Fuel prices: Oil prices rallied as Hurricane Ike headed toward the Gulf of Mexico and other tropical storms continued to pose threats. Additionally, investors were keeping an eye on the OPEC meeting in Vienna this week, amid bets that the cartel could cut production levels due to the recent slide in prices. Prices have fallen about $40 a barrel from a record high of $147.20 in July on bets that a sluggish global economy is cutting into demand. U.S. light crude oil for October delivery gained 87 cents to $107.10 a barrel on the New York Mercantile Exchange, after ending the previous session at a five-month low. Gas prices declined for an eighth straight day, according to a national survey of credit-card activity. Company news. Altria Group (MO, Fortune 500) said it would buy UST (UST), the maker of dip products such as Copenhagen and Skoal, for about $10 billion, confirming rumors. Other markets: In global trade, European markets rallied at midday on the Fannie and Freddie news, while Asian markets ended higher. In the bond market, Treasury prices slipped, boosting the yield on the benchmark 10-year note to 3.75% from 3.70% late Friday. Prices and yields move in opposite directions. The dollar gained versus the euro and fell versus the yen. COMEX gold for December delivery rallied $15.90 to $818.70 an ounce. http://money.cnn.com/2008/09/08/mar...sion=2008090810 |
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| Originally posted by Fir3start3r Your government had to do something since the economy is going to hell in a hand basket and as a result, created a huge sucking black hole dragging just about every aspect of the economy with it. I (normally) don't agree with government interference in business either however with something that catastrophic, they really had no choice. I just hope the reigns aren't too tight... |
The issue that is being skirted is that effect that this will have on the long term. The fact that the Treasury has offered unlimited liquidity to both organizations for a year means they will print money until the debts are paid.
Exactly how long can inflation be held in check with intrest rates low and money getting printing faster then baseball cards?
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| Originally posted by atbell The issue that is being skirted is that effect that this will have on the long term. The fact that the Treasury has offered unlimited liquidity to both organizations for a year means they will print money until the debts are paid. Exactly how long can inflation be held in check with intrest rates low and money getting printing faster then baseball cards? |
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Cost of US loans bail-out emerging By Krishna Guha in Washington and Michael Mackenzie and Nicole Bullock in New York Published: September 9 2008 15:57 | Last updated: September 10 2008 00:34 The US on Tuesday began to face the financial consequences of the bail-out of Fannie Mae and Freddie Mac after Congress�s budget watchdog said the housing giants� operations should sit on the government�s books and the cost of insuring against a US default crept higher. With the stock market tumbling, the non-partisan Congressional Budget Office said the government takeover of Fannie and Freddie meant the companies should no longer be regarded as outside the public sector. Peter Orszag, CBO director, said: �It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.� The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: �We are working through this issue with Treasury and other stakeholders.� The White House could take a different view on Fannie and Freddie and exclude them from its budgets. But this would be difficult because the CBO is regarded as the leading independent authority on US finances and its assessments guide spending decisions by Congress. The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn. The CBO bombshell came as it raised its baseline estimate for the US budget deficit to $407bn this year and a record $438bn next year owing to falling revenues and higher spending, some of it related to the fiscal stimulus. The price of credit default swaps on five-year US government debt hit a record 18 basis points in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt. Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries. Traders said the CDS market for US debt was illiquid and it was hard to see evidence of increased concern over US creditworthiness in broader market prices. The price of US government bonds rose and yields fell across the board, as concern over the economic outlook overwhelmed any rise in perceived credit risk. Jay Mueller, senior portfolio manager at Wells Capital Management, said: �We are seeing flight-to-quality buying of Treasuries.� Both Standard & Poor�s and Moody�s Investors Service said the government takeover of Fannie Mae and Freddie Mac did not affect the US�s triple-A sovereign credit ratings. �It does represent some deterioration in the US balance sheet, but it�s well within what we would call the triple-A space,� said Steven Hess, senior credit officer at Moody�s. |
I am at least pleased that Obama is demanding that the departing executives not be given the bullshit golden parachute packages that the Treasury has said they would grant them. Absolute bullshit to believe they are completely innocent and should be rewarded. I would hope that others would take the same stance.
I have a friend who works at Freddie and apparently the first thing his co-worker said after the takeover was "wait, we're still going to have free snacks and drinks on every floor, right?"
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| Originally posted by Shakka I am at least pleased that Obama is demanding that the departing executives not be given the bullshit golden parachute packages that the Treasury has said they would grant them. Absolute bullshit to believe they are completely innocent and should be rewarded. I would hope that others would take the same stance. |
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| Originally posted by atbell I'm no fan of golden anythings, parachutes, hand shakes or anything else. I do think the theory makes sense though. When someone that high up is let go you can't just escort them out, you need some amount of cooperation so they help with the incomming rescue workers and, more importantly, so they don't break "things" on the way out. |
One of the biggest casualties of the housing meltdown of the past few years has been Fannie Mae and Freddie Mac, the two independent government agencies that act as holding companies and insurers to the bulk of mortgage loans in the whole nation. As it stands today, according to Businessweek, roughly 60 percent of all residential homes are guaranteed or the mortgages held by the two agencies.
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