Great write up in the Wall Street Journal on the Fannie, Freddie crisis.
As the crisis worsens for mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson is insisting that any potential government rescue plan not benefit the companies’ shareholders, according to people familiar with the matter.
The two stockholder-owned, government-sponsored companies, whose operations are vital to the functioning of the U.S. housing market, faced a severe crisis of confidence after a week in which their stocks each lost nearly half their value. On Friday, Freddie Mac finished the day at $7.75 a share, and Fannie Mae at $10.25.
The discussions at Treasury highlight the dilemma created by the financial crisis gripping the U.S: Some institutions are considered too big to fail, but propping them up could erode the market’s incentive to properly judge risk by offering investors a false sense of security.
After a week of near panic among shareholders of the two companies — and a stomach-churning day on Wall Street Friday — the next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations.
It’s a quagmire.
ADDED: Fed opens discount window to Fannie and Freddie.
ADDED: Discussion here.
{ 19 comments… read them below or add one }
Dustin 07.13.08 at 10:23 am
Interesting, Paulson did something similar with Bear Stearns where Morgan Stanley was (supposedly) willing to buy Bear fro $4 to $5 a share, but Paulson insisted that it hurt more for Stearns investors. (the quote I mentioned is on page 7 of the article).
Brian McMorris 07.13.08 at 6:42 pm
Sorry, CBass, but the Feds have come to the rescue. From a Bloomberg story today (Sunday, July 13): “Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages. ”
It looks like the common stock shareholders may get wiped out, or at least severely hurt. “Today’s announcement may not offer much help for shareholders, said Andrew Parmentier, a senior policy analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia”, so at least the Feds are not creating “Moral Hazard” among stock holders.
It appears the Feds will take an ownership (equity) position in Freddie and Fannie, displacing / diluting the current common stockholders. “Paulson proposed that Congress give the Treasury temporary authority to buy equity in the firms”. And, to solve the current funding deficits, the Feds will buy debt offerings, since the private market for GSE debt appears frozen: “(they have the authority) to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months, a Treasury official told reporters on a conference call on condition of anonymity.”
“Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow, and Paulson’s comments indicate a concern about a collapse in private investors’ willingness to fund the firms.”
The result of the above actions is that the dollar is strengthening against foreign currencies, for now. Though, these moves are really dollar-depreciating by increasing national debt, as CBass has pointed out.
But expect the stock markets to like this move and have a strong day on Monday. But I wouldn’t want to be a stockholder in FNM or FRE right now.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSNZaHL2vs4A&refer=home
ks 07.13.08 at 9:52 pm
Now it gets interesting.
Some people will make a lot of money this week in the market. Some people will lose a lot of money.
This will be fun to watch from the sidelines.
Gotta go buy some popcorn!
RE Investor 07.14.08 at 9:29 am
Well, hopefully noones 401K holds any Fannie and Freddie paper. Something that a lot of the “moral hazard” crowd does not realize is that it is not just hedge funds and rich speculators in these markets - it is regular folks retirement plans as well. This is the perfect worst of both worlds - frankly like every other “fix” the government has had. They come in and do just enough to bolster a dying patient for a few more quarters (putting tax payer money at further risk) erode a little more confidence in the stock market (putting our economy and retirements all at risk) and really doing nothing to fix the problem once and for all.
Like I said in a previous post - a 3 ring circus with no leadership. Either let this whole thing fail quickly so we can all go on with our lives, or do a big bailout to fix it once and for all. But this consistent knee jerk trickle rescue plan is far more expensive (stock value, tax payer risk) than if they would just decively act boldly one way or the other. At least people would know where they stand. I guess in an election year, you cannot expect any kind of actual leadership, since you may piss someone off. You cannot please all of the people all of the time, and it appears when this is all done, everyone is going to be pissed.
ks 07.14.08 at 11:14 am
Who is the “moral hazard” crowd? What does this mean? Is this code for something?
It is not possible for the market to guarantee that pension funds not lose money. It is sad when people lose out in the markets. Right now, only the brave, rich, or stupid belong in this market. If people lose money in the stock market, it is entirely their fault. No one is being forced to participate in the madness. The only reason that people get involved in the market is that they wish to make more money than they can in boring old Treasuries. The price for this potential windfall over Treasuries is a risk premium. The operative word being RISK. Take a RISK and potentially be rewarded, OR potentially lose money. Sound money management is all about weighing risks and rewards. A moral hazard occurs when the risk has been diverted to the citizens of the United States. This is not only unfair to tax payers, this moral hazard increases peoples RISK appetite. This causes an escalation of problems.
It is flat out wrong to socialize loses but privitize gains.
Capitalism is not always pretty or fun.
RE Investor 07.14.08 at 11:45 am
“Moral Hazard crowd” is not “code” for anything. It just seems that a lot of the people talking about “no bailout whatsover” don’t realize the collateral damage that is caused when you simply “wipe out shareholders”. The more angst happens on Wall Street, the tighter that the economy will get on “Main street”. And then the MORE knee jerk economics you get from Washington, and it ends up costing far more than just addressing the issue when it first rears it’s ugly head. The train has already left the tracks, but to let it just crash in to the town and kill everyone is simply irresponsible. I just don’t believe this is as simple as throwing money at the problem, or choking the banks and gaining some type of revenge on Wall Street.
And as far as people in this market, sometimes you have very little choice what you are in. It is not like people can just march up to HR and say “I want out”. And even if they could, then what? Then we go back to pensions and depend on social security? All I am saying is that this type of knee jerk reaction to problems has gotten our country nothing but a locust affect of money in certain sectors, and carnage after they break.
We are in as much of a crisis in leadership as we are in a crisis of finances.
ks 07.14.08 at 12:48 pm
I did not mean to be harsh. I was just curious as to the “moral hazard crowd” statement.
We already have a system in place for dealing with bank failures. The current system is reasonable and protects most people from losses in their bank accounts.
You should not worry too much about the pensions with regards to these bank failures. The vast majority of the pensions are well diversified. The people managing pension funds are -for the most part- not crazy. The bank failures should just be a blip on the radar.
As an example:
Here is the asset allocation policy for the Arizona State Retirement System:
* U.S. Equity: 45%
o Large Cap: 31%
o Mid Cap: 7%
o Small Cap: 7%
* U.S. Fixed Income: 26%
* International Equity: 18%
* Real Estate: 6%
* Private Equity: 5%
The ASRS Investment Rates of Return for fiscal year 2006-07 are as follows:
1 Year : 17.8%
3 Years : 11.9%
5 Years : 11.0%
10 Years : 8.4%
As far as pensions holding RMBS issued from Freddie and Fannie, these are going to be just fine. I agree that it is silly and wrong to have an “implicit” garantee for these securities. The government is still playing games with regards to the “implicit” garantee, but it is becoming very clear that there is no way that these institutions will be allowed to fail. This is fine by me. I just hope that there is better regulation and management at Fannie and Freddy.
Where I have a problem is when people feel that the government should bail out the stock market in any way what so ever. The place for the government is to regulate the markets and to help maintain a viable banking system. The government did a very poor job in regulating the banks and now we have the problems that we see today. The banks that got too greedy and irresponsible are going to die off and that is how it ought to be. The share holders of the bank stocks will get whatever the market says. This is how it ought to be.
The time when leadership could have been of best use has come and gone. It would have taken real courage and leadership skills to have slowed the wild crazy ride when it looked like any person could flip houses for big money with little risk. Now, it would take real courage and leadership to let the excesses work through the system while simply doing some clean up work along the way.
It is important for the people in Washington to look as though they are on top of every situation and will fix all of our problems. This is especialy true during an election year. That is the true crisis in leadership that we face.
ks 07.14.08 at 1:01 pm
Correction:
I should not have written:
“As far as pensions holding RMBS issued from Freddie and Fannie, these are going to be just fine. ”
Instead, I meant:
As far as pensions holding bonds issued from Freddie and Fannie, these are going to be just fine.
Brian McMorris 07.14.08 at 2:46 pm
Here is a paradox that might be appropriate for this political season: Fannie and Freddie were “poorly managed” many have said in the press and here on this blog. They were not well regulated by the Federal agencies responsible for that regulation (Treasury?)
But was that by accident (apathy), or by design? The Democrat run Congress for most of the past several years and also during the early Clinton years, was on record that Fannie and Freddie are instruments to democtratize home ownership. There were pressures on both institutions to allow easy terms for inner city housing.
Now many of those mortgages are imploding. So, isn’t this a case of sowing what was reaped?
John Wake - Real Estate 07.14.08 at 6:41 pm
Brian, you really are trying to cause trouble!
Everyone has wanted to increase homeownership. The peak set in 2006 (?) may never be beaten. I think we found that there can be too much homeownership, that the standards had to go so low to increase homeownership that it was dangerous to the entire mortgage industry.
ks 07.14.08 at 9:09 pm
It is sad that some people want to view this episode as a Republican vs. Democrat. The truth is that both parties are guilty of hiding their heads in the sand.
There is plenty of blame to go around. Let us set up the Blame Queue and pick out the “other” party for blame.
As far as Republicans go: Who are these people? I remember when the Republican party was all about fiscal responsibility and smaller government. Now it is all about culture war. During the Republican controlled congress and white house we had had the largest expansion of the fedral government since FDR. We have brand new entitlement programs. We have brand new intrusions into our freedoms. Whoever these new Republicans are, they are no better than the Democrats. Some times it is hard to tell the two parties apart.
Party loyalty is for fools.
Cbass 07.15.08 at 6:51 am
KS the stock market is not a 100% guaranteed ROI. Is it sad that some people lose money? Sure it is but I don’t see you down at the homeless shelter handing out your excesses now do I? Not everyone gets to have a happy ending and be rich. PLEASE give me a break with your stuff… If you want to live in a socialist country wait another six months!
Also as one of the “Moral Hazard” crowd I believe it is code word for something…
wikipedia.org/wiki/Moral_hazard
RE Investor 07.15.08 at 9:25 am
“Also as one of the “Moral Hazard” crowd I believe it is code word for something…”
I think it is code word for “I have mine, so I don’t care if you lose yours”.
CBass - I cannot agree with you on your points at all. Unfortunately you “Moral Hazard” people only see things in black and white. Either it is socialism or capitalism. But nothing is that simple. Due to the fact that we are an asset and credit based economy, (like it or not) it is entirely irresponsible to just take the hardline - and I would bet that you have your money in other things (although nothing is safe right now) and are not feeling this downturn personally. Perspective tends to change perception and opinion.
I agree wholeheartedly that if a person makes a bad investment, they should not be bailed out. However, we are way past the point of just “some shareholders” losing “some money” on “bad investments” - we are seeing banks fail and be taken over by the FDIC and a systemic problem. That is WAY beyond the point of just bad investments, and many people are losing and their only “investment” was making a deposit or having a job. When it gets to that point, you either change the system, or fix the one that is broken. If you stand by and let things continue to deteriorate because of ideals, besides being morally irresponsible, you simply make it more expensive to fix later on and erode international confidence, which we soarly can afford right now. I would like nothing better than to see the people responsible for this mess to go down hard - unfortunately, like always, the executives responsible walk away with multimillion dollar severence, and live out their retirement just fine, and the real brunt of these messes ends up hurting the folks that never profited in the first place. Moral Hazard is a great philosophy as long as the effects of your “wringing out excesses” wrings out someone elses excesses, but when it is your job or life savings that gets “wrung out” then all of a sudden “moral hazard” gives way to “someone needs to do something”. Just realize that no problem is ever Black or White - there is always gray.
ks 07.16.08 at 12:19 am
RE Investor,
You seem like a good guy. I am sure that if one of your tenants loses a job -due to circumstances beyond their control- you just let them live rent free until they get back on their feet. Am I right? Probably let people live rent free when tenants get big medical bills.
You The Man.
I like you.
Gas prices are killing me. I work hard and have done nothing to deserve having to pay what I do. Could you help me out?
Come on RE Investor, give me some cash. I need it and I deserve it. Circumstances beyond my control are costing me money.
Break out with the money.
ks 07.16.08 at 12:32 am
Cbass,
I wonder if you can read. You comments to me make no sense at all. Did you read what I wrote?
You wrote:
KS the stock market is not a 100% guaranteed ROI.
I reply: Are you stupid? Did you read what I wrote?
You wrote:
Is it sad that some people lose money? Sure it is but I don’t see you down at the homeless shelter handing out your excesses now do I?
I reply: I am now sure that you either are stupid, or did not read what I wrote. By the way, how would you know if I was at the homeless shelter? Do you know who I am? I bet that you are never at the homeless shelter.
You wrote:
Not everyone gets to have a happy ending and be rich. PLEASE give me a break with your stuff…
I reply: I am now absolutely certain that you are not too bright. Learn how to read and comprehend what you read. Then go and read what I wrote and see for yourself how silly your comments are.
You wrote:
If you want to live in a socialist country wait another six months!
I reply: Whatever, you monster wind bag.
ks 07.16.08 at 12:53 am
Dear Cbass and RE Investor,
Sometimes I get snarky, or even flat out mean. It is a character flaw that I am trying to work on. On the internet, I find it far too easy to behave like a jerk. I need to think a little more before I hit the submit button.
Please accept my sincere apology for my previous two comments.
Cbass 07.16.08 at 6:52 am
KS,
So you think I am “Stupid” and a “wind bag?” Clearly you should issue an apology or give my you number so we can arrange to meet up and lets have you tell me that in person.
Brian McMorris 07.16.08 at 8:14 am
John, it is fun to stir it up a little when we find a topic that gets passion flowing ;o)
It is interesting that you as a real estate marketer would concede that we may have found the limits of home ownership as a percentage of population. I agree with the idea that we can have too much of a good thing with low cost and easy mortgages, but my livlihood does not depend on selling houses. Once again you demonstrate your integrity!
RE Investor 07.16.08 at 9:06 am
“RE Investor, You seem like a good guy. I am sure that if one of your tenants loses a job -due to circumstances beyond their control- you just let them live rent free until they get back on their feet. Am I right? Probably let people live rent free when tenants get big medical bills.
You The Man.
I like you.”
ks - Say what you like, however know this. I own 7 properties in the Phoenix area, in 5 years I have had one tenant turnover, re-rented in 16 days at a higher rent. The remaining 6 tenants have paid on time, and I have been able to raise rents in a market where other landlords are either in bankruptcy court, or are being forced to rent to anyone just to get cash flow. I have never had any tenant damage beyond basic wear and tear items and I have owned properties in Phoenix Metro for 10 years. I must not be too flawed in my thinking, or I am very lucky. The reason I have the insight that I do is that I actually listen to people - not CNN, not our dopey “leadership” in Washington, and then analyze the issues for myself. Period. Then make a decision based on the facts.
“Gas prices are killing me. I work hard and have done nothing to deserve having to pay what I do. Could you help me out?”
You could help yourself. I am sure that you are being very sarcastic, however instead of complaining about it - I figured out last February the reason for gas prices going up - the same speculators that caused housing to go up now found another bubble. Then I bought about 700 shares of USO. Since then I have been completely hedged against rising gas prices. I am, on a hedged basis paying still about 1.95 a gallon due to making about 40% ROI on USO.
My point is not that I am better at investing, my point is that by not taking a hard line on anything or follow a certain idealogy without considering all the circumstances and collateral damage (including compassion for people), it not only makes you a better person, it makes you a much more successful investor and critical thinker. 100% socialism is definitely not good, but 100% capitalism gets you what you have today. The “capitalist” and “moral hazard” crowd think everything is great when it does not effect them directly. It is a recession when your neighbor loses their job - it is a depression when you lose yours.