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Fannie, Freddie Capital Concerns Prompt Paulson Plan (Part1)
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
http://www.bloomberg.com/apps/news?pid=20601068&sid=at2rZoL11_sw&refer=home
Comments
This wasn't about bailing out the guys who made the loans, but rather the guys who bought the debt. This is little more than a way to transfer wealth: tax payers to various funds and stockholders.
But this might work big picture-wise, because now these institutions are being directly backed by the US tax-payers... er, by the US Government. Of course, that'll only remain true until the government itself starts to look financially unstable.
Unfortunately the government was put into a position that they had to do this. It is a little scary, and it involves a lot of tax dollars for something that could have been prevented for a lot less of our tax dollars, but hopefully we will learn from this failure. As long as what Obama said in his press conference about the Congress having major and strict over-sight of who benefits and who doesn't, I feel less worried about the matter. My only real concern is the involvement of the Chinese stock holders and their involvement in our decision to go ahead with the buy-out. Americans are scared to death of the spread of religion or government, but apparently could care less about how much money China has tied up in our Economy and how much of our land they currently own the rights to.
Absolutely wrong.
The government HAS NO PLACE WHATSOEVER to do this. It isn't constitutional, these were private/for profit businesses. They went down because they participated in what was basically a mortgage-ponzi scheme/FRAUD.
A little scary? It is compromising THE NATION for NO GOOD REASON. Not only that, but there is now no real ceiling as to how much money we have to put into these two entities ALONE. Don't forget that the FDIC is also alluding to requiring more money to cover guarantees for the failed banks, and other large private entities coming to the trough that is the tax-payers money.
These lenders knew what they were doing. These CEOs knew it. The CEOs should be ARRESTED instead of being replaced.
TOO LATE!
The perps have ALREADY gotten away with all their money. And Congress? You realize that there is more than just speculation that a lot of them are involved and stand to benefit from all of this?
You should feel all the worse, because now the tax-payers are on the hook for at least several hundred billion dollars that it should not have. It could rise to over 1.2 Trillion with just F@F. Just those two, alone.
___________________
Sadly, I see storm clouds on the horizon. A faint stench of Vanguard is in the air.-Kien
http://www.penny-arcade.com/comic/2006/12/13/
Holy crap, Government gains +3000 bonus experience!!!
I bought my condo about 2 months before all that boom stuff started happening. I couldn't believe the old houses in my area were going for 700k+!!!!! These people are nuts. If you wanted a house all you had to do was show up at the settlement and prove you are alive and can sign documents!! Instant house!!!
Don't be terrorized! You're more likely to die of a car accident, drowning, fire, or murder! More people die every year from prescription drugs than terrorism LOL!
The problem with Fannie Mae and Freddie Mac is the (nonbinding) agreement with the Fed. I haven't read up on it for several years, but iirc the Fed, while not financially responsible, does have some sort of implied agreement to back them should they fail. I remember thinking it was a strange relationship many years ago, are they Fed guaranteed or not? They aren't supposed to be, but apparently the Fed appears abliged to help them.
Honestly, I don't think it will actually help in the long run. I think the government has become too short sighted on the economy lately and unwilling to make unpopular decisions in an election year to "do the right thing."
Implied is not the same thing as explicit. Oh and, no, I do not think this is even going to help us at all regarding the prevention of something like another Great Depression. People have already gone so far out as to refer to this as a "controlled crash", meaning that involved parties all around are thinking of ways to delay serious but imminent problems. Almost everything that I have read, and seen, indicates that time will not solve problems.
I personally suspect that they might be helping to delay certain bad events so that they happen after the election so that it won't affect Bushs legacy.
___________________
Sadly, I see storm clouds on the horizon. A faint stench of Vanguard is in the air.-Kien
http://www.penny-arcade.com/comic/2006/12/13/
Yes, lovely isn't it? Our tax dollars essentially hedged their risk. It's a great scam that was perpetrated by the government and the institutions, since they ran EXTREMELY HIGH RISK positions WITHOUT REDUCING THEIR RISK THROUGH T-BILLS.
It's finance 101 to hedge (reduce overall risk by making investments that are negatively correlated) and these companies had analysts that were math/finance PhD's working for them, so they were well aware of the situation and had knowledge that the government would bail them out of anything had gone wrong.
I'm really curious why there is no serious investigation into the issue, since this is really an obvious scam.
This is a sequence of characters intended to produce some profound mental effect, but it has failed.
So what does all this mean? DId the government just print more money to offset FANNIE and FREDDIE's loses?
I found that an interesting statement. I agree it has to do with the election year, but don't think there is much thought in Bush's legacy. More like our elected officials don't want an upopular vote during an election year.
From MSN newstory:
Twisting the Treasury's arm
Major foreign investors, including more than 60 countries' central banks, hold more than $1.4 trillion in securities of U.S. agencies such as Fannie and Freddie, and they were getting extremely nervous as the two companies teetered on the edge of insolvency this summer. So were major U.S. financial institutions such as JPMorgan Chase (JPM, news, msgs) and Pimco, prompting the chief investment officer of the latter, Bill Gross, to pen a scathing article last week that warned of a financial "tsunami" if the U.S. Treasury failed to act quickly to guarantee their investments.
In late July, the Financial Times reported that the U.S. Embassy in Kuwait called that country's sovereign wealth fund managers to assure them of the soundness of U.S. agencies' bonds after the Kuwaitis announced they were not planning to buy the bonds in the future.
Around the same time, Yu Yongding, a Chinese economist and former adviser to China's central bank, warned that if the U.S. government allowed Fannie and Freddie to fail and international investors were not compensated adequately, the consequences would be “catastrophic."
He added: "If it's not the end of the world, it is the end of the current financial system."
Over the top? Not really, for U.S. mortgage loans had become the foundation of what Pimco co-CEO Mohammed El-Erian called the "global liquidity factory." If payments were scuttled, trillions of dollars that were borrowed against them in debt derivatives would become worthless, an event that had the potential to bring down countries, not just companies.
Now that Paulson has made his play, Americans are exposed to incredible danger. If that sounds like hyperbole, do the math:
Of the $4.7 trillion in U.S. debt already in private hands through last week, $2.4 trillion, more than half, was held by foreign investors. The Paulson plan to take over Fannie and Freddie adds an additional $5.4 trillion to U.S. debt, of which $1.4 trillion is owned by foreigners. Thus Paulson has committed to doubling U.S. debt and increased foreign exposure by around 50%.
This is plainly a troublesome matter on its face and may affect the country's overall sovereign credit rating. Now add to this exposure the likelihood of a sharp rise in demand for funds from the Federal Deposit Insurance Corp. and increased demands from the Federal Home Loan Bank system -- and consider that the U.S. faces slowing tax revenues from falling incomes amid swelling joblessness and recession -- and you begin to understand the size of the risk Paulson is taking in our behalf.
Yeah we are in serious trouble. Just today WaMu experienced a 29.70% drop down to 2.32 a share. Many speculated that it wouldn't make it past the afternoon. This is Wednesday, not Friday. I think that a failure of WaMus magnitide, alone, would put a serious hurting on the FDIC. They would have to ask for money from the government. I heard that WaMu, like Indymac, is/was not on the troubled banks list?
Unlike F@F there is no concievable way to avoid paying the FDIC because people would never trust the banking system or government ever again if they failed to retrieve their guaranteed deposits. You see we already have enough obligations on our plate without doubling or quadrupling it just to appease the masses and foriegn investors.
People have been claiming that the deflation part of this mess is here and will grow, but I just don't see it right now. I think we will have it in spades, but that it is still truly a long way off because the only way out of the situation appears to be printing more and more money.
___________________
Sadly, I see storm clouds on the horizon. A faint stench of Vanguard is in the air.-Kien
http://www.penny-arcade.com/comic/2006/12/13/
Yeah we are in serious trouble. Just today WaMu experienced a 29.70% drop down to 2.32 a share. Many speculated that it wouldn't make it past the afternoon. This is Wednesday, not Friday. I think that a failure of WaMus magnitide, alone, would put a serious hurting on the FDIC. They would have to ask for money from the government. I heard that WaMu, like Indymac, is/was not on the troubled banks list?
Unlike F@F there is no concievable way to avoid paying the FDIC because people would never trust the banking system or government ever again if they failed to retrieve their guaranteed deposits. You see we already have enough obligations on our plate without doubling or quadrupling it just to appease the masses and foriegn investors.
People have been claiming that the deflation part of this mess is here and will grow, but I just don't see it right now. I think we will have it in spades, but that it is still truly a long way off because the only way out of the situation appears to be printing more and more money.
Well, you heard wrong. Most people have this weird idea that these things come completely out of left field. In reality, they are understood in the financial sector for quite a while before people read about it in the general news. Washington Mutual has been looking very shaky for quite a while now. I'd say it has been in mild trouble since the end of '07 and has been near fucked since April of this year. It has way too much of its holdings tied up in mortgages, and people know it. Businesses have already mostly pulled out of WaMu. Once the full extent of how bad it is becomes revealed to individual consumers, the stock price will completely crash, triggering a run, and the government will step in. It won't actually be a big loss for most depositors, though, and it won't be a big charge to the government. This is honestly not that big of a news item as you think.
Anyway, you partially misunderstand what Fannie Mae is. Private, huh? It's a phoneticized acronym. The F in FNMA is for Federal. It's kind of a weird hybrid between a public and private institution. The body was created during the Great Depression, and ironically, the purpose it is serving at this very moment is the closest it has come to doing its intended job since the Great Depression. If you want to complain about Fannie, complain about the fact that its profits were privatized, and its failures were socialized. The past twenty years have seen a culture of irrational risk-taking among financial institutions, and most of them are learning now that the government will bail them out if things get too risky. What's the message? Keep on taking the risks. Your investors will get the massive profits when things are good, but John Q. Public will gladly eat the trillions in losses.
There is no choice, though. Fannie Mae really is too big to fail. Most people have no comprehension of just how much money flows through FNMA's veins. The amount of debt that Fannie controls is more than the amount of debt that any _country_ controls short of the US itself. Yeah, that includes China and Japan. Oh yeah, another thing. In terms of how much money it controls, Fannie Mae is the largest company ever to have existed. Yep, ever existed, including all nations and all time periods. Maybe the British East India company is an exception. _Maybe_. If FM were to collapse, which really isn't even possible, as it can't collapse in the traditional sense of the word, the results would be beyond catastrophic. You can't really describe that contingency in anything but apocalyptic financial terms.
Let me give you a rough idea. We'd first see an outright collapse of all financial markets in the US, followed almost immediately by those in UK, Japan, and China. Within weeks, Australia and most of Western Europe will follow. Within a year, all American foreign aid will have ceased, and combining that with the economic losses that will ripple throughout the Americas, we'll have mass poverty and starvation in many of the weaker Latin American countries that are tied more heavily to us than other trade partners. The only countries that will have any kind of economic insulation will be those controlling vast amounts of resources through nationalized or semi-nationalized companies. Russia, Mexico, Venezuela, and a few others jump to mind. The Middle East would not be sheltered for monetary reasons, though the impact there would mostly be felt by the lower classes. At minimum, we will start to see some kind of recovery within five years. This is an extremely optimistic number. Within ten years, a new term will be coined by economists to describe something worse than a global depression by a factor of ten or twenty. High-level financial institutions as we know them will have ceased to exist by then, replaced by something either almost completely nationalized or in a form I cannot expect. But what do I know? Why don't you look at all the financial ministers from the world's biggest economies who use terms like "end of the world" to describe the possibility.
Anyway, I'd be just as pissed at this if I weren't a US citizen. Most people don't realize just how much the US is gambling with. It's not only America's fate that is teetering with our balancing act. You Brits out there? If things melt down over here, you will be the next to follow, right along with the Japanese. You French are in our boat, too, though to a lesser extent.
^Fixed
www.marketwatch.com/news/story/fannie-freddie-ceo-severance-payouts/story.aspx
Daniel Mudd, the outgoing CEO of Fannie Mae, could receive more than $9 million in combined severance pay, retirement benefits and deferred compensation based on his employment agreement, according to executive compensation consulting firm James F. Reda & Associates.
Departing Freddie Mac CEO Richard Syron may collect as much as $14.1 million, the consulting firm said. The total includes an estimated $8.8 million tied to an unique provision in his contract that became effective last November, when Freddie's troubles had already come under scrutiny.
^Fixed
www.marketwatch.com/news/story/fannie-freddie-ceo-severance-payouts/story.aspx
Daniel Mudd, the outgoing CEO of Fannie Mae, could receive more than $9 million in combined severance pay, retirement benefits and deferred compensation based on his employment agreement, according to executive compensation consulting firm James F. Reda & Associates.
Departing Freddie Mac CEO Richard Syron may collect as much as $14.1 million, the consulting firm said. The total includes an estimated $8.8 million tied to an unique provision in his contract that became effective last November, when Freddie's troubles had already come under scrutiny.
That's all well and good, but nobody said anything when these people, and by that, I mean the leadership of the financial industry as a whole, were implementing the policies that caused this. In fact, everybody thought it was great. It never occurred to anybody, public or private, that you shouldn't take risks of this magnitude, since everybody was on a high as we rode the benefits of the bubble. I honestly don't think the public should complain if they're complicit with something while they get the benefits, only to act high and mighty when risky policies suddenly backfire. This is true even if they're too busy eating the mass media bullshit of the day to know what's going on when there are problems.
We're doing it right now, so I wouldn't act like you're above this. Look at all the people on this forum who talk about complete bullshit for politics day in and day out. Utter nonissues that both parties agree to use as a talking point. Yeah, it's an agreement, not any party calling the other out. Let me give you an example. Conservatives know from EIA reports that OCS and ANWR drilling won't lower gas prices and will not significantly increase domestic supply once developed. Liberals know it won't really harm the environment. Both sides play up the issue to feed their respective sheep.
In a few decades, when we're seeing the results of our catastrophic national debt and ruinous fiscal policies, and our grandkids are asking us why we fucked things over for them, we'll shrug and say, "But I wanted low taxes _and_ military superpower status _and_ expensive social programs. Besides, we had more important things to worry about, like fighting the evil [insert liberals/conservatives/your hated political enemies here]. It was the [political enemy]'s fault!" And then your grandchild will look at you and ask, "But then how come you won't let me have cake _and_ ice cream for dessert? And how come I can't blame my teacher for when I don't do my homework?" And you'll look at the little child, and you really won't have an answer for them because you're on their level, morally and intellectually.
What's funny is that if you went to a real conservative forty years ago, and told them of the massive government and deficits supported by "conservatives" in the future, they'd blow their brains out. If you went and told the liberals of that day how environmentalism would eventually be a vote-generating machine rather than a desire for sensible stewardship and how the super rich would have an effectively lower tax rate than the middle class in the future, they'd also blow their brains out. So yep, good thing we can smirk at those fucking CEO's and complain about how bad they are.
What I was specifically referring to was the FDICs troubled bank list. Indymac and Wamu were/are not on it. I was just drawing attention to that factoid.
I already know about most of the things in your post, I am familiar with most of the good outlets and have been tracking the situation for a bit over a year. And about F@F.
A global great depression, where the economy poker players have nukes and advanced technology. But here is the thing- I think that is probably going to happen anyway and all this has done is postponed it.
I understand just how bad this can be, believe me, I do. I just speak softly about the subject for a couple of reasons
On that subject- the FDIC, I kid you not, has been monitoring what people say and blog about on the internet. I kid you not. In an interview, that Sheila woman quoted one or two blogs that she has been eyeing and vaguely alluded to taking serious legal action against them...
Yeah.
And Russia, and Germany, and and...
The housing ponzi scheme was pretty much a world wide event (disaster). It is hard enough to believe that such a thing happened, for so long, in one place. Just really damn odd.
___________________
Sadly, I see storm clouds on the horizon. A faint stench of Vanguard is in the air.-Kien
http://www.penny-arcade.com/comic/2006/12/13/
Goodbye dollar, Amero here we come!
Don't be terrorized! You're more likely to die of a car accident, drowning, fire, or murder! More people die every year from prescription drugs than terrorism LOL!