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.

http://biz.yahoo.com/cnbc/080908/26603489.html

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….

Absolutely and totally agree. Without that it has been akin to the fox guarding the henhouse.

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.

“Government is your enemy, until you need a friend”.

But one day, the debt will have to be paid.

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).

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.

“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.

People don’t like to take responsibility for failures. Especially corporate executives. It’s a lot easier to blame congress.

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.”

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?

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.

so what would happen if the government didn’t back them?

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.

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.

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.

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.

I don’t think they could have done anything in this case.

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?

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

Gamble up!

“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.

And in other news, WaMu is canning the CEO. Woo-hoo!

And replacing him with the chairman of a mortgage brokerage. Good choice guys, I give you another month.

This is the key event that will effect everyone (at least in terms of housing). It’s time to deal with the consequences.

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.

They were told to make loans based on a social agenda rather than sound financial thinking.

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.

Also, keep an eye on mortgage interest rates…

All I can say is hang on for the ride.

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.

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.

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.

The up-shot of all of this is that the last of the building blocks have now fallen into place that makes the US government both the first and last resort of mortgage finance. Already something like 90% of all US mortgages have been made through either Fannie, Freddie, or FHA in the last few months. Now that the government is going to be making outright purchases of mortgage securities it won’t be long before the US government provides over 99% of mortgage finance. With the US treasury willing to buy mortgage securities for less than rates that private investors would be willing to, then how could there possibly be any space for private finance?

Ironically, the GSE conservatorship (and the decision to EXPAND the GSE portfolios) will almost inevitably destroy the rest of the private banking system, and FORCE even more conservatorships. No private institutions can possibly be profitable now that they have to compete with subsidized government lenders.

http://seattlebubble.com/forum/viewtopic.php?f=5&t=1783

Then again, real estate never goes down…

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.