US Govt To Seize FNM And FRE

[jyl]

The federal government is preparing to seize control of FNM and FRE, replace their management, wipe out common shareholders (who have already lost 90%), and explicitly guarantee their $5TR of debt. It is likely to happen over the weekend or next week.

This is according to the NYT and WSJ, which have probably received deliberate leaks from the government. http://www.nytimes.com/2008/09/06/business/06fannie.html?hp
http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news

The background is:
- FNM and FRE are nearly the only lenders left in the housing market. If FNM and FRE cease lending, there will effectively be no more new mortgages (or at least none at anything like current rates) meaning the housing market collapses. Not declines, as we've been seeing, but actually collapses.
- The agencies are technically near insolvent (as in, assets less than liabilities, at market values) so they have to raise new capital, probably $10-20BN each. No equity investor has been willing to inject capital into either, due to the risk of being wiped out by a subsequent govt seizure (as indeed is happening).
- FNM and FRE combined have big debt maturities this year (I think $100s of BNs), and they must continually sell new debt or default on the maturing debt. Investors are rapidly losing their appetite for buying FMN or FRE debt. Foreign govts have become big net sellers of the debt. The agencies have been managing to sell debt to private investors only through desperate arrangements like swapping new debt for old debt (i.e. no net buying).
- Foreign govts, US and foreign banks, pension funds, mutual funds, all hold $ trillions of agency debt. If FNM or FRE default, that would likely drive numerous banks to insolvency, wipe out many retirement savings, cause money market funds to break the buck
, and - worst case - trigger a buyers' strike for US Treasuries.

So, this is a crisis and the govt is resorting to desperate measures. It is not BSC, it is 10X or 100X more of a crisis than BSC. And there is no private entity big enough to step up and do what JPM did with BSC. If the govt doesn't act, it is Great Depression, Act 2.

Will be interesting to see how this develops. To say the least.

The optimistic view is that this seizure may not ultimately cost the federal govt that much - depends on how solid you think FNM and FRE-owned mortgages actually are. With the govt guaranteeing agency debt, financial institutions may be less concerned about counter party risk, thus improving liquidity.

The pessimistic view is that this could impact the credit-worthiness of the US of A itself, driving up rates on Treasuries. Rates move inverse to price, so the value of Treasuries could fall. And the only kind of debt more widely held throughout the world than agency debt, is Treasuries. Implications for the USD would be severe.

[turbo6bar]

Time to lay down the cards. A good hand = recession. A bad hand = depression. I really hope those guys know what the hell they're doing.

It is a shame the average American cannot or won't fathom the financial mess we lie in now. On the other hand, I really shouldn't be so elitist. My gloom and doom talk is what got us here.

[lendaddy]

I guess I picked a good time to be at the bottom????

[hardflex]

Easy Credit is gone, and not just in Real Estate. The wife mentioned this morning in her reading that the economy is going back to cash only, you can't buy it if you don't have the money in your account. Banks are drawing down credit limits on Credit Cards. Debit Cards will rule. It's all going to have a huge impact on the economy, not only in the US but the World. Are we heading for another Worldwide Depression?

[pwd72s]

Gee, no reduction in the limits of my credit cards....but then, I'm a "deadbeat"...one who pays the bill in full every month, so they want to suck me into the interest trap.

Freddie Mac, and Fanny Mae? I belive jyl had a post on them some time ago...and I mentioned that ONLY Ginny Mae had a federal guarantee on their loans.

Funny how Freddie and Fanny shares went in the tank, while Ginny stays stable, isn't it?

The beginning of the next depression? I don't think so...by that's only my opinion.

[tc-sacto]

This is going to be a serious issue for many banks who bought their preferred shares. Some banks have 20% of there capital in these companies. FNM/FRE have 36 billion of preferred shares outstanding and 19 million in Sub-Deb bonds.(watch out if these Credit default swaps trigger. 62 trillion in CDS's outstanding)

If you wipe out the current preferred and issue new ones those banks holing the old worhtless stock will be lining up at the FDIC window...at the very least severely restrict their ability to lend money to local business and consumers. The Feds are in a very tuff positioin.

[Porsche-O-Phile]

As I've been saying all along - the taxpayers will end up subsidizing the stupidity of the people who promulgated the real estate bubble.

I'm pissed, to say the least. As should be every taxpaying American.

[grudk]

The joke is that Wall St still talks of 'free markets,' and J6P buys into that. Lenin is laughing in his grave.

[Heel n Toe]

What do you mean by "wipe out common shareholders," and why is that being done?

And what are the implications of that?

[artplumber]

Originally Posted by Heel n Toe

What do you mean by "wipe out common shareholders," and why is that being done?

And what are the implications of that?

Common stock will be worthless. You will lose a lot of money if your financial instruments have exposure to these companies (almost everyone does including foreign governments, but they have preferred stock)

[Rick Lee]

Looks like I picked the wrong week to stop sniffing glue.

BTW, I've gotten some credit card limit INCREASE notices recently. When should I max them out with cash advances?

[djmcmath]

So should I buy a house now because I can still get a loan, or should I wait until after the crash, when my down payment money will be enough to buy a nice place?

Dan

[onewhippedpuppy]

Buy a big place now and play stupid, momma govt will bail you out.

[turbo6bar]

Originally Posted by tc-sacto

This is going to be a serious issue for many banks who bought their preferred shares. Some banks have 20% of there capital in these companies. FNM/FRE have 36 billion of preferred shares outstanding and 19 million in Sub-Deb bonds.(watch out if these Credit default swaps trigger. 62 trillion in CDS's outstanding)

If you wipe out the current preferred and issue new ones those banks holing the old worhtless stock will be lining up at the FDIC window...at the very least severely restrict their ability to lend money to local business and consumers. The Feds are in a very tuff positioin.

They have to support the preferred shares, because not doing so would create more defaults/failures and the government would have to step in again. It is a case of pay now or pay later with interest. In other words, bend over.

[turbo6bar]

Originally Posted by djmcmath

So should I buy a house now because I can still get a loan, or should I wait until after the crash, when my down payment money will be enough to buy a nice place?

Do you need to buy now? Are you planning to stay put for a while?

Let's ignore that for a moment. The only advantage to buying now is locking in lower rates. In exchange, you're locking up free cash into an asset that will likely be harder to liquidate in the future. In addition, that asset may even depreciate from current value. You'll have to evaluate the risk vs reward. You already know how I feel about this, but I must reiterate, "Cash is King." good luck, jurgen

[tc-sacto]

Originally Posted by turbo6bar

They have to support the preferred shares, because not doing so would create more defaults/failures and the government would have to step in again. It is a case of pay now or pay later with interest. In other words, bend over.

Yep, seems the decision is bailout the existing preferreds or wipe out the shareholders of a lot of banks and have the FDIC pick up the costs.

Either way we all get screwed on this deal. (Ultimately I don't see how the cost will be less than $100 Billioin at the least. At 5 trillion in mortgages a 1% loss due to forclosure is $50Billion + the above mention $55billion in pfd's & Sub-deb. )

Certainly things don't look good. Currently 2009 As reported EPS and Opertaing EPS for the S&P 500 carry a 40% spread! Wall St. expects many more wright downs for 2009.

[Porsche-O-Phile]

I'd stay far, far, far, far away. And then a few steps further than that.

Aside from the fact that eventually the government will either run out of money to stop bailing them out or there will be a public backlash preventing them from doing so, it's not ethical to simply "buy now, let everyone else pick up my slack later". It's just not the right thing to do.

If you can in good confidence say that you can absolutely afford the payments over the life of the loan (think unemployment, layoff, medical emergency, etc.) and not be in over your head requiring a bailout later, then go for it. But in most places prices are still way, way too high when compared to rental rates or to gross household incomes.

[deathpunk dan]

Originally Posted by turbo6bar

Time to lay down the cards. A good hand = recession. A bad hand = depression. I really hope those guys know what the hell they're doing.

It is a shame the average American cannot or won't fathom the financial mess we lie in now. On the other hand, I really shouldn't be so elitist. My gloom and doom talk is what got us here.

I cannot coherently articulate my feelings about the 'average american' without copious amounts of profanity. This is not because I'm a yankee elitist, but because the average american is so stupid, selfish, short sighted, and willing to bury their head in the sand because they've still got cable tv, leased luxury cars, and fancy cell phones.

[Noah930]

Originally Posted by Porsche-O-Phile

it's not ethical to simply "buy now, let everyone else pick up my slack later". It's just not the right thing to do.

F the ethics schpiel, Jeff. Some of us just wanna know how we can get the most stuff.

[Hugh R]

Market closes down 500 pt. on Monday.