This is pretty big news (to put it lightly), so I don’t want to ignore it even though I try to focus on Seattle-specific news here usually.
On Friday news came out that Fannie Mae and Freddie Mac will basically be taken over by the US Government this week. I don’t see any point in rehashing the commentary and news you can find elsewhere, so I’ll just point you to some useful posts on the topic.
Calculated Risk: Original story, follow-up, follow-up, follow-up
Rain City Guide Post by Jillayne, follow-up
Market Ticker: Main story, follow-up, follow-up
I’m sure we’ll be talking about this plenty this week. Yikes.
Oh, one more, be sure to check out the forum thread on this subject that’s been going strong all weekend: Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie
Jump to the bottom to add your comment. ↓
44 responses so far ↓
1
Matthew
// Sep 7, 2008 at 3:13 pm
looks like the preferred and common stock are going to end up being worthless in order to salvage the bonds.
The wealth distribution from the tax payers to the pigmen continues.
Another scary fact is that the Treasury is going to be buying MBS… I don’t see how Treasury yields could not skyrocket on this. Going to be very interesting to see how the market reacts to this, but I would expect to see a short term bump.
2
Buceri
// Sep 7, 2008 at 3:50 pm
Well; when the treasury asked for a blank check 6 weeks ago, they were not going to using it. It was only to “show investors (foreign mainly) that the US gov was behind these companies.” And until recently, there was not a chance of having to have a take over.
Then again, real estate never goes down…
3
Sniglet
// Sep 7, 2008 at 4:45 pm
I have written up my thoughts on the subject at the forum thread below.
http://seattlebubble.com/forum/viewtopic.php?f=5&t=1783
4
shane
// Sep 7, 2008 at 4:50 pm
Think there will ever be a time when the Bubble Deniers admit they were wrong in the previous years? Our financial system is imploding and still these fools act like it was some accident that was impossible to foresee. Oh well, they (form Wall Street crook to the lowest RE agent) got all their commissions and bonuses during these fraudulent years, so what the hell do they care. Bastards.
5
richie
// Sep 7, 2008 at 4:59 pm
WaMu is holding 7.8 million common shares of Freddie at the cost of $128 million and 25.5 million common shares of Fannie at the cost of $499 million. I don’t know if it is holding preferred shares too. This is on top all the sour Alt-A notes and subprime notes they are holding. WaMu used to be the best thrift in the country until the current greedy, reckless executives stepped in a few years ago. Had it been in the bloody Mary dates, they would have been hung.
Be realistic, how WaMu can stay as a going concern. How many jobs does it need to cut in Seattle when the Fed is taking over? Some of them may have to lose their nice homes in Greenlake, Queen Ann areas.
6
Ira Sacharoff
// Sep 7, 2008 at 5:01 pm
So let me get this straight:
The shareholders of Freddie and Fannie and essentially going to be left with nothing as the government takes over those companies and puts them into a conservanship.
You can’t blame the socialists for this one.
7
Scotsman
// Sep 7, 2008 at 5:06 pm
Just another brick in the wall….
Let’s see, the .gov is providing my mortgage subsidy, my health care, my retirement, my prescription drugs, my heating oil subsidy, my eco friendly
car subsidy, etc….. Oh and of course they’re doing all of this much more cost effectively than the private sector could, because all the .gov workers are unionized with free health care and retirement incomes that may exceed what they earned during the working years. Oh yes, this is going to end well.
The revolution starts when the checks bounce.
8
richie
// Sep 7, 2008 at 5:50 pm
Ira:
FRE and FNM are de facto in Chapter 11. They cannot go under because the stake is too high. Therefore, the government invented “the conservatorship.” The government will initially issue $1 billion (a token) super preferred shares to be senior than existing preferred and common shares. Most people predict that Uncle Sam needs $100 billion more at least. In other words, the equity of current shareholders, current or preferred, will be wiped out.
9
johnnybigspenda
// Sep 7, 2008 at 6:02 pm
there is actually a lot of debate over what the stocks will trade at on monday morning. It would seem strange to have the government guaranteeing $1B, but then have the market cap fall by $4B… some actually say that the common stands to rise as a result of this backing by the government. Will be an interesting week in the stock market.
Also, keep an eye on mortgage interest rates…
All I can say is hang on for the ride.
10
Thomas B.
// Sep 7, 2008 at 6:15 pm
Well… I haven’t seen anything like this since the S&L collapse in the 1980s. I think there is going to be a similar effect on housing. Prices will be stagnant for years and people will have trouble buying homes. Boys and girls, this is not a cyclical reset of prices, but something serious. The housing collapse is just beginning and it will be a long one. Seattle will not be immune. Mortgage rates will go up and the requirements for mortgages will be more onerous.
The fundamental problem is that housing prices were overblown. The reason… there is enough blame to cover a lot of people; the flippers, the speculators, the real estate agents, the mortgage firms, the banks, etc. In the end, people got greedy and didn’t think about what is going on. The smart people got out in 2005 and shorted mortgage backed securities. The sheep continued to flip, lie, and ignore the signs. The smart people made billions in short options. The sheep were slaughtered when the market imploded.
This is the key event that will effect everyone (at least in terms of housing). It’s time to deal with the consequences. As I see it, a couple of things need to happen. Housing prices need to come off their speculative highs and return to the point where regular people can afford housing. That means the housing price must match the ability of a median family to pay for a down payment and get a loan on reasonable terms. Median income needs to increase to enable people to buy homes in the new credit market, which will have much higher rates and higher qualification standards. In the alternative, the cost of getting a home needs to decrease through tax credits or deductions, or real estate taxes need to decrease. Finally, real estate agents and sellers need to settle for losses. Not just small losses, but significant losses. Someone has to pay for the losses, and buyers aren’t going to pay for it, since they are already paying for it in terms of higher rates and more difficult terms.
11
jon
// Sep 7, 2008 at 6:18 pm
“You can’t blame the socialists for this one.”
They were told to make loans based on a social agenda rather than sound financial thinking.
12
David McManus
// Sep 7, 2008 at 6:18 pm
The problem is our government doesn’t believe in the concept of moral hazard anymore and will do anything and everything to not let people feel any pain. That’s why I feel that this is going to be worse than it really needs to be.
13
Chris
// Sep 7, 2008 at 6:27 pm
And in other news, WaMu is canning the CEO. Woo-hoo!
14
David McManus
// Sep 7, 2008 at 6:38 pm
And replacing him with the chairman of a mortgage brokerage. Good choice guys, I give you another month.
15
Thomas B.
// Sep 7, 2008 at 6:50 pm
Okay… I have to chime in about politicians and the mortgage market. Even though I hate it when they lie, obscure the truth, and not provide leadership, I don’t think they could have done anything in this case. Although, they could have done something about the budget shortfalls. I think any statement implicating any politician as the reason for the housing mess is not a valid argument. The problem started back in 2005 with irrational exuberance. It’s like trying to stop people from going nuts at a Ricky Martin concert. (He’s got nice hair). We, as the public at large, got swept up in the hysteria. Now we have to pay for the hysteria, sorta like paying for a good night out with a hangover. So in short, don’t blame the politicians, despite their stupidity. Government can’t dig our way out of the problem, although it can mitigate the delirious effects. The market will have to work itself out.
16
Ira Sacharoff
// Sep 7, 2008 at 7:04 pm
“You can’t blame the socialists for this one.”
“They were told to make loans based on a social agenda rather than sound financial thinking.”
So they were ordered by the government to make loans to poor people?
Nah, I think it’s more a case or pure unadulterated greed run amok.
17
Ray Pepper
// Sep 7, 2008 at 8:02 pm
I’m long 6150 shares of WB at 11.67. I’m holding. I see a bump up to 20 in the short term. I always loved World Savings and their conservative appraisals. I don’t think they are near as bad off as the street will lead you to think. Kramer pumped it on Friday!!!
Gamble up!
18
Jillayne Schlicke
// Sep 7, 2008 at 8:04 pm
Hey Richie,
Thanks for the WaMu math.
CR is reporting, via the WSJ, that Kerry Killinger, WaMu’s CEO is going to be shown the door in the morning.
http://calculatedrisk.blogspot.com/2008/09/wsj-wamu-ousts-ceo.html
19
Sniglet
// Sep 7, 2008 at 8:06 pm
I agree that this result was inevitable regardless of which politicians were in power. No politician wants to go down as the one blamed for causing an economic catastrophe (whether they were really responsible is beside the point, its the blame they want to avoid). Thus, it is always preferable to delay and try and make it someone else’s problem. That is all this is.
Nevertheless, that doesn’t make it right. Bailing out the GSEs, and putting tax-payers on the hook for all real-estate finance will just wind up making the economic crisis worse, and far longer in duration.
Actually, what the politicians are doing with the GSEs isn’t any different from how the various business managers are doing with their organizations that are saddled with toxic assets. Throughout this entire credit crunch everyone keeps trying to avoid marking assets to market, and delays having to come to terms for as long as possible.
It is all perfectly understandable. Admitting that your bank is defunct (i.e. by truly recognizing losses) will mean you are out of a job tomorrow (and possibly brought up on charges for possible jail terms). Why not try and delay, and hope against hope that some miracle will occur in the economy to bail you out?
20
david losh
// Sep 7, 2008 at 8:44 pm
These excerpts are from
What Are the Origins of Freddie Mac and Fannie Mae?
By Rob Alford
The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs). This means that, although the two companies are privately owned and operated by shareholders, they are protected financially by the support of the Federal Government.
Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties that they may be having. In the event that there was some sort of financial collapse within either of these companies, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts.
Now, why are we so surprised? This is the culmination of the entire scheme from beginning to end. WA MU, out of business? I think all the banks will have a rebirth. Even if banks fail, they are no longer the holders of your deposits to lend to the masses.
Your loans are bought sold and trade like Real Estate used to be. For a paperless society we now trade in paper. Stocks, bonds, securities, all the things you hold on to for future wealth are bought sold and traded globally.
No, banks have been out of business for decades. They are the mom and pop groceries that Wal Mart killed. Fannie and Freddie were your governments promise that everything would be OK. The buck stops there.
Rates will lower, new instruments will be created, FHA will be relieved, reprieved, and now prices can come down. Prices can settle to actual value, they no longer have to prop up worthless paper securities, the government guarantees it.
21
BrianL
// Sep 7, 2008 at 9:22 pm
Okay, so what would happen if the government didn’t back them?:
Investors would be screwed. This includes foreign groups that hold a bunch of dollars as well as banks. Banks would probably close in bulk. Foreign governments are the real problem.
If they decided they wanted to collect on the debt we owe them, if they decided to stop lending to us as our investments aren’t safe, the US gov and all of us would be in a world of pain.
We aren’t nationalizing them because it is the right thing to do. We are doing it to avoid a giant dollar blowup that would happen if the investments turned out to be unsafe to people who have power over US policy due to the amount of money we owe them.
22
BrianL
// Sep 7, 2008 at 9:30 pm
As an aside, I believe the best course of action is to nationalize them and, as quickly as possible, ramp them down. Take them out of the mortgage buisness and let other (banks, etc) be the lenders. This will probably take several years.
Discontinuing all new loans immediately is an option, but we don’t have the banks/etc in place to deal with the volume of loans tht would need to be originated due to the volume they handled. I don’t know if a wind down or instantly shutting it down is safer. I’d guess we take the conservative route and go with the slow rampdown.
23
Sniglet
// Sep 7, 2008 at 9:35 pm
Sure, things would be bad if the US government didn’t bail-out the GSEs. However, things will be worse because of the bail-out. All this bail-out will do is wind up making it harder for the broader financial system to heal itself.
In fact, the bail-out of the GSEs will almost certainly drive a great many banks over the edge. There is NO way the private banking system will be able to recover until they can start issuing loans and credit with interest rates commesurate to the actual risk. Unfortunately, the government’s decision to start buying mortgage securities effectively eliminates the ability of any private entities to issue loans of their own at true market rates.
After all, who would want to get a mortgage from a private bank for 12% when they can get one from the GSEs for 6%?
Yes, it would be painful to let the GSEs go bust, but the end-result of destroying the whole financial system will be even worse, just more drawn out.
24
richie
// Sep 7, 2008 at 9:43 pm
In summer 2005, I visited a friend in SF. He rented a 2400 square-feet Victorian house for about $2,000 a month. While we were walking in the neighborhood, we spotted another 2000 square-feet Victorian house for sale for $995,000. The flyer said Buyer could get a “Smart Financing” or a negative amortization mortgage for $2,500 a month (60% less than a conventional mortgage payment) from WaMu. Crazy Californian buyers typically paid well above the asking price then. We were surprised that the house was sold for $1.3 million later.
Deals like that were abundant in west coast. WaMu was one of the main culprits to architect the ponzi scheme. Our government has never tried to interfere. Now, you and I have to pick the tap.
25
Apartments Seattle
// Sep 7, 2008 at 10:17 pm
I think it’s been a long time coming, but Kerry Killinger just lost his job as CEO of WAMU. I know he has been the architect of that banks rise for over 17 years, but the destruction of wealth as WAMU went from a 40 Billion to 6 Billion Dollar company (market cap) has been epic. WAMU was egregiously pushing high risk mortgages all the way through late fall of 2007 and now that they are sitting on a mountain of worthless mortgages their financial situation is in dire straits. The collapse of Fannie and Freddie may be enough to push them over the edge, which is unfortunate, but might now be inevitable.
26
Charles Dean
// Sep 7, 2008 at 10:21 pm
“You can’t blame the socialists for this one.”
They were told to make loans based on a social agenda rather than sound financial thinking.”
This is truly amazing. Total deregulation in banking and pure free markets. Then when it collapses it’s the "golly" commies who caused the problems.
It was crazy free markets and deregulation that caused this. Investors around the world were buying the bonds at such a ridiculous rate, that they made up loans just to satiate the free market and the hunger for mortgage backed securities.
Exactly what “social agenda” are you referring to?
27
jon
// Sep 7, 2008 at 10:41 pm
Exactly what “social agenda” are you referring to?
http://www.nytimes.com/2008/08/05/business/05freddie.html?hp
“Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing. In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans.”
28
Joel
// Sep 7, 2008 at 10:48 pm
With GSE’s common and preferred divies eliminated it’s hard to imagine their stock going up. The treasury is only buying new MBS, not existing. Watch as long term treasury yields go up and mortgage rates follow.
29
Ira Sacharoff
// Sep 7, 2008 at 11:03 pm
Freddie Mac is a shareholder owned company. The CEO is responsible to enhance shareholder value, not do congress’ bidding, and the next line of the NY Times story is:
“Others, however, dismiss that explanation. “Sure, it’s hard to deal with the pressures of Congress and shareholders and regulators,” said a former high-ranking Freddie Mac executive. “But that’s why executives get paid so much. It’s not acceptable to blame those pressures for making bad choices.”
People don’t like to take responsibility for failures. Especially corporate executives. It’s a lot easier to blame congress.
30
Yesler Hill
// Sep 7, 2008 at 11:28 pm
I think these institutions should remain a federal agency. This will create a more secure mortgage system. We’ve now seen what letting these sorts of financial be run as private enterprises causes.
31
economist
// Sep 7, 2008 at 11:33 pm
Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing
“Leaned” on them? They would say that, wouldn’t they? Don’t you think F/F execs would take any opportunity to pass the buck?
What statutory requirement was there for F/F to buy risky mortgages? In fact F/F were precluded from buying subprime, i.e. the riskiest loans.
32
Charles Dean
// Sep 8, 2008 at 12:12 am
Interesting Jon, that you left out the very next paragraph in that story:
Others, however, dismiss that explanation. “Sure, it’s hard to deal with the pressures of Congress and shareholders and regulators,” said a former high-ranking Freddie Mac executive. “But that’s why executives get paid so much. It’s not acceptable to blame those pressures for making bad choices.”
Funny how he fails to site any actual examples of congress doing this.
Fannie/Freddie didn’t buy the worst subprime loans. Wall Street did, because there was such an enormous demand worldwide for mortgage backed securities in the FREE MARKETS.
It was lack of regulation that made this happen. Not some “social agenda” from congress. Which I should point out, Congress, Senate and the Presidency were all controlled by the Republicans during this time.
33
Jay
// Sep 8, 2008 at 2:14 am
I think it has been proven time and time again that total free markets eventually lead to disasters. Why? Because people are inherently greedy AND more importantly, always make predictions of future based on past performance, which every now and then turns out to be incorrect. Markets need to be regulated and monitored. It is a recipe for disaster to let things go their merry ways guided by the Invisible Hand.
People who argue against the takeover of Fannie and Freddie, because such intervention would hinder the progress of free markets, are really not that different from those who argued for continued deregulation and/or lack of oversight in the mortgage industry because such actions would hinder the workings of the almighty free markets. The system is broken precisely because of the free market.
I think this is the beginning of the end for the housing crisis. Now that the implicit guarantee of the $5 trillion of mortgage debt has been made clearly explicit, the U.S. government would have to become a lot more active in stabilizing the housing market, as defaults and foreclosures rise more in the next few months. Eventually, I think there will be more regulation and oversight in mortgage industry, and risk will finally be priced correctly.
Regarding Fannie and Freddie, I think they are likely to be allowed to serve only the most prime of prime loans. However, because of the U.S. government guarantee, they will be able to produce quite a bit of profit once all the losses have been taken out. It’s still likely that their shareholder equity will eventually be wiped out before they become profitable again, but if the stabilization comes sooner, there may be some gains to be had for current shareholders (especially for FNM).
34
Buceri
// Sep 8, 2008 at 7:08 am
Don’t worry folks. Wall St. opened up 200 points. They hate regulations; but they sure love tax payers’ money.
“Government is your enemy, until you need a friend”.
But one day, the debt will have to be paid.
35
Garth
// Sep 8, 2008 at 7:40 am
There will be a cost, but most of the cost will be realized 20 years from now as the full impact of these regulatory changes and the work-a-rounds developed by the markets.
The S&L bailout cost the government $170 billion, when they were trying to figure out how to deal with the bad debt they owned they invented the CDO which enabled them to quickly sell the debt.
This time they had to craft a bailout of the vehicle they created to solve the last major financial crisis, which is the same thing they were doing in 1989.
36
Captain Kirkland
// Sep 8, 2008 at 7:43 am
Interesting Fact: 3,083 of the 12,000+ listings in King County are on the market for more than 800,000. Get a clue sellers!!!….If you haven’t noticed, there is a slight real estate problem across our country. Seattle is not in a bubble,!!!…. but its real estate is.
37
david losh
// Sep 8, 2008 at 8:50 am
Fannie Mae should have stayed a government agency. A part of the governments function is to regulate systems that are in place to protect the people. We all hate bankers, lawyers, and politicians, but at some point it is the politicians we have some control over in a government for the people.
If you believe there is a housing price bubble, and further if that bubble extends beyond the United States, the Fannie Mae, Freddie Mac government guarantees are something no other country has.
In my opinion this move by the government only strengthens our dollar and place in the new global economy.
38
Charles Dean
// Sep 8, 2008 at 9:01 am
Funny thing about the money to bail out fannie mae, if we get out of Iraq, that’s about $150 billion a year.
39
Ira Sacharoff
// Sep 8, 2008 at 9:06 am
“Fannie Mae should have stayed a government agency.”
Absolutely and totally agree. Without that it has been akin to the fox guarding the henhouse.
40
Charles Dean
// Sep 8, 2008 at 11:06 am
I have a feeling that it may go back to being just that.
41
softwarengineer
// Sep 8, 2008 at 11:21 am
I HEAR THE FRE/FAN BAIL OUT IS $200 BILLION
With another $1.3Trillion still left in bad loans.
The Hedge Funds mess make this look like a walk in the park and its not even in the planning stages for a fix. We could have better used the $200Billion bulldozing the excess houses; at least this would have created jobs. Bailouts mainly go as welfare to the rich and the stock holders, we might as well as piled $200Billion in a pile and lit a match to it.
I see stocks zoomed up 250 pts on the DOW this morning, only to collapse to about 120 pts so far today and on a downward slide from the false euphoria of lighting a match to the money stack….
42
Buceri
// Sep 8, 2008 at 11:44 am
Interesting, to say the least.
http://biz.yahoo.com/cnbc/080908/26603489.html
43
mukoh
// Sep 8, 2008 at 3:28 pm
Interest rates dropped to 5.5 fixed 30yr now. Thats not bad for this.
44
MacAttack
// Sep 8, 2008 at 6:31 pm
”
Let’s see, the .gov is providing my mortgage subsidy, my health care, my retirement, my prescription drugs, my heating oil subsidy, my eco friendly
car subsidy, etc….. Oh and of course they’re doing all of this much more cost effectively than the private sector could, because all the .gov workers are unionized with free health care and retirement incomes that may exceed what they earned during the working years. Oh yes, this is going to end well.”
Say what? Ever heard of KBR and the privatization of the military? Why should I pay a Guardsman $11.25 an hour to drive a tanker when I can pay a privateer $250K a year (netting the $125K tax-free he receives).
Privatization = big opportunity for CORRUPTION.
Jump to the top of the comments. ↑
Leave a Comment