July 11, 2008 5:53PM
A Rescue Plan for Freddie Mac and Fannie Mae
By Elizabeth MacDonald
The Dow industrials broke through the 11,000 level, a level investors have not seen since summer 2006, ending just a bit above that threshold.
Tensions over the perilous health of the U.S. mortgage finance giants Fannie Mae and Freddie Mac added to a chaotic close. Despite an earlier wire report to the contrary, the Federal Reserve announced after the close that it does not plan to extend the discount lending facility to these troubled institutions.
So what to do about these twin pillars of housing finance, so key now to Congress’s housing bailout?
Here’s what you do, if needed. Give them a 10-year loan similar to the one given to JPMorgan Chase (JPM) when JP parked its ambulance in front of Bear Stearns on St. Patrick’s Day, did a cat scan on Bear’s assets and said wait a second, $30 bn of Bear’s stuff is truly rotten, give us a 10-year Fed loan (at a cheap rate of just over 2%), backed by these assets, or no deal.
You sell a Fannie-Freddie loan to the taxpayer and the stock market by saying, the US government will make money on this loan, we’ll get that money back and then some by charging an interest rate, pegged, say, two percentage points above the 10-year treasury, and then we get to sell some assets off too. Make the taxpayer and the market believe the government will profit off any rescue. That’s the key.
Just like Federal Reserve chairman Ben Bernanke did in explaining away in testimony before Congress its orchestrated, shotgun marriage between JPMorgan and Bear, where he reiterated that the Fed will make money on its loan to JPMorgan and the collateral sale too (now overseen by Black Rock). The size of the loan is another matter-some say $50 bn, others say $100 bn.
The taxpayer and the markets must be reassured that the government simply doesn’t let things fall to pieces, that the government will profit from any rescue.
These two simply cannot go under, nor can the US take them on its balance sheets. Fannie and Freddie buy mortgages from banks so banks can then turn around and have more money to make loans to borrowers. They also sell mortgages to investors as securities, and they get paid a fee to guarantee these securities if they go bad.
Fannie Mae and Freddie Mac, own or guarantee about half of the $12 trillion of US mortgages. They provide funding for nearly three-quarters of new US mortgages.
And together they now oversee 83% of mortgage backed securities, up from 33% just a couple of years back.
Together they have $81 bn in core capital and $54 bn in shareholder equity supporting that $5.3 tn, which equates to the entire US public debt held in private hands (not including the off balance sheet items).
Get this, another $3.3 tn worth of their debt and assets sits in off balance sheet vehicles. The hot zone in their books are the $260bn in sub prime and what are called Alt-A loans, which sit between the rotten subprime stuff and the prime loans.
Neither of these mortgage giants is backed by the government, however. They each have a $2.25 bn pipeline into the Treasury in the form of a credit line.
I don’t think we are headed for a calamitous nationalization of these two giants. The credit rating for the entire country would drop to junk status, the dollar would fly off a cliff, and oil would go higher than $200, as oil is priced in dollars.
The government will not allow this national nervous breakdown.
Besides the idea I gave at the top, there is a way to avoid a financial nuclear winter in the midst of this heated market and a hot summer.
And sit tight, too, as the financials, whose rotten profit results have been stinking up place, will see Merrill Lynch (MER) and Citigroup (C), already struggling with bombed out share prices, out with their latest quarterly earnings next week.
A rights offering to Fannie and Freddie shareholders has been discussed, where stock is sold at a discount to investors, with any leftover rights not exercised bought by US government. That’s a good idea. Other ideas involve the Treasury buying stock in the companies, or a purchase by the Fed of some of their debt or mortgage-backed securities. Stay tuned.
Comment by Bob
Jul 11th, 2008 at 6:32 pm
Come on! A bailout is hardly free enterprise. If they fail, they fail–just let free enterprise happen!
Comment by Earl Tomlinson
Jul 11th, 2008 at 8:38 pm
Your analysis and remedy seems reasonable. The government must prop up these financial organizations because they are critical to the mortage business. Politics aside, the US is weaker than it has been in years at least in the perception of the world. The weak dollar, transfer of wealth to the middle east, china, nigeria etc only makes it worse. We are still a can do nation but we must pull together more than we have in the past. Our cultural differences are minor compared to the train wreck of a broken economy, high interest rates and high unemployment. Let’s roll up our sleeves and “git er done”!
Comment by Justin
Jul 11th, 2008 at 9:58 pm
The Fed not coming out with the truth until after the markets closed has all the makings of a conspiracy. This is nuts. I think it was an attempt to squeeze the shorts and prevent Freddie and Fannie from taking too much collateral damage in one day. This is financial armageddon. If somehow the investment banks manage to report better than expected earnings (or posting smaller losses than expected in this case) by using every accounting cheat in their arsenal, you can bet I’ll be looking for a rally to short into. This is nuts, I’ll say it again. The FDIC better get those printing presses ready. We’ve just begun to see the runs on the banks.
Comment by Bob Meyer
Jul 12th, 2008 at 3:25 am
Protecting Fannie Mae and Freddy Mac is almost as bad an idea as the Smoot-Hawley Tariffs were during the Great Depression.
When private capital markets began to balk at continuing their investments in housing, Freddy an Fanny picked up the slack and ultimately this was the cause of the insane housing bubble. These two organizations caused the mis-investment of trillions of dollars that could have gone into factories, research or any number of better things than making housing un-affordable.
Now, after this waste of an almost inconceivable amount of wealth, we are supposed to protect Freddy and Fanny so that they can continue to destroy capital through more mis-investment. How can making the bubble bigger possibly help anyone?
The only way out of this mess is to let Freddy and Fanny pass into history. These are terrible institutions guided by political favor instead of the market. Far from causing a depression, the death of these wealth destroyers assure that the recession will be short-lived because the capital will be there to rebuild. If a new house costs the new owner $1500 per month instead of $2500 there is a thousand dollars per month available for new purchases and this will create new jobs in new industries.
New is the key here. It is into new areas that economy has to enter if it is to survive. The old economy is dying from entrepreneurial senility of the Fanny Mae / Freddy Mac kind. A home is not an investment, it is just a place to live. It should not appreciate in value any more than cars, clothes, electronics or anything else that doesn’t produce wealth. A twenty year old house should cost less today in real dollar terms than it did when it was new.
If a non wealth producing commodity appreciates in value you can be sure that the government is diddling with the supply or demand somewhere. Freddy and Fanny are just the most recent examples of this.
Comment by Psychic Advice
Jul 12th, 2008 at 7:29 am
Great blog, but i couldnt understand where can i subscribe to your rss feed?
Comment by Greedom
Jul 12th, 2008 at 9:55 am
Did you say 260bn ?
Wow - if I could potentially owe 260 billion and have at MOST ? 60 billion around to cover my debt ?
well, I wouldn’t.
spells bad news.
I don’t expect Merril OR Citi will have good news.
When Citi sold off their student loan unit 2 months ago - I thought, ok, if they sell off Citi Financial next, they’re goin’ under.
So far no Citi Financial to my knowledge. That’s their nastyburger sub prime unit, you see them in strip malls.
The push CRA, they give 35% loans to people who can’t afford them. Just an evil company, Citi.
If Citi comes out and announces an earning loss, and has to go under, good riddance.
Comment by Greedom
Jul 12th, 2008 at 10:05 am
Hearing the sound bites in the interview here on this subject
Ms Macdonald makes me think I’m watching Chris Walken here !
“Yikes” “Ouch” “Skyrocketing”
Good stuff though, these two are in trouble - with the sub prime.
How to buffer against the waste.
I think you’re on the money to stop and check this scene out !
But I think the resets coming is still the hottest subject out there.
Comment by Greedom
Jul 12th, 2008 at 10:59 am
One thing for sure
5.x trillion is desertly hillbilly money.
for sure.
indeed ? a mass equiv. to public debt in many ways ?
making that 10 trillion now ON the books ?
I just don’t know.
that’s 4 to 5 OIF’s according to budget predictions, maybe 3 to 4, if you don’t skip the armor etc.
so, everyone would ask, why again ? should I be even considered to pay for this ?
and the answer is that you are
(owen wilson tone of voice)
it’s that you’re not.
Still 5 trillion is a lot to even consider, I’m sure that’s simply not an option in any sane world.
Maybe rebundle everything with mineral rights if they’re not included but I’m sure those ventures are included ?
hmm
Abu Dhabi has this 2.x trillion I read for investment in the US.
5 trillion ?
Maybe they could get a deal, 33% on the USD - for 1.5 trillion cash in on say 1/2 of both companies combined or maybe a total buyout of one ? hmm…
I mean to suggest approaching owning the US housing sector via these two offerings at crazy larry’s low low prices today.
You know the USD may still be pegged in the middle east, so Abu Dhabi can benefit I suppose approaching - but where is money like that ? that could just pour in, turn on those pumps of cash abu dhabi ?
Who knows, maybe someone will say for one sake or another - we will pick up Freddie and the whole gang at the bus stop and then buy the whole bus.
final price tag ? I bet a 50% score could be made either side.
so what is it ? over $260bn written above in the article ? for toxic debt ?
I don’t know, I AM just waking up for the day and I to think if a buyer for the entire company could be found, foreign or not, problem solved if they bring real solutions.
What would be wrong with having 1/2 of the US mortgages offshored in Abu Dhabi ?
this would be in line with Saudi interests I observe to becoming the world’s financial center.
Maybe someone with even what ? 350 ? 400 billion tops in cash ? or able to buyout entirely ? why not, I wager plenty of solutions exist for sell offs of these companies.
at HOW MUCH per share did I see ?
$4 ? Sheesh, who might NOT be about saying, sure these two will resurface, count me in on acquiring as much as I can at Crazy Larry’s basement prices.
I don’t offer brokerage services but if I did, calling them Crazy Larry’s basement prices might create the perfect snow storm for a new client to be who will be investing more than they may have considered.
When they walk out ? Crazy Larry’s will have the deed to the home etc.
Now, replace Crazy Larry’s with what you want.
the buyer of this 260 billion USD
? eh ?
Does this mean nastyburger unload time at the fed ? to IT taking over this debt ?
article said 2.5 billion pipeline into the blah blah….
260 billion though is a different scenario
I bet hmm - what ? loan services will be used heh - but drawing 1/4 trillion USD debt in loan product ? just to cover the toxic debt.
hmm
Comment by Greedom
Jul 12th, 2008 at 11:13 am
from article:
“I don’t think we are headed for a calamitous nationalization of these two giants. ”
I still ask why not sell off - I find irony on offshored US home mortgages in any excess of say- HALF ? ya think ?
all for what ? What WOULD the stock holders settle for ?
Well- no Microsoft for this yahoo in this case.
except the alternative - one big fat loan from the fed for what ? min ? 260 billion ?
Comment by Greedom
Jul 12th, 2008 at 11:29 am
can’t resist this one:
Other ideas involve the Treasury buying stock in the companies,
ouch
I vote for a Chris Walken redo of your last coverage using Yikes and Ouch
use of ‘SkyRocketing’
I can only imagine -
would be priceless
I don’t know about printing, lending AND buying stocks all in one government sector.
Imagine a corporation if IT could mint its own money, buy stocks into other corporations, AND spend the rest of the time lending at nice spreads ?
Comment by jeronne
Jul 12th, 2008 at 4:04 pm
If Freddie/Fannie get sweetheart loans then they should be limited as to their rate of expansion in the future and their profit margins.. Any margin above what they are making when the loans are approved should be used to reduce the loans.. Why should we reward bad management with sweetheart loans that will just enable them to return more quickly to the same old way of doing business?? Unconventional sweetheart loans should never be authorized to finance conventional business.. Otherwise, it’s just another screwing of the taxpayers …
Comment by TJ
Jul 12th, 2008 at 5:05 pm
Looks like a no win situation.
I like your promo commercials they are running on FBC. You write great blogs and do very well on TV. Congratulations!
Comment by Greedom
Jul 12th, 2008 at 9:46 pm
Hey Liz,
What’s up
Alexis’s comments say Currently Closed
was just a few posts on Gates Creative Capitalism - odd
no content regarding chances are Gates and Buffett combined make most aspiring billionaires the trailor trash they are.
Materistic, hollow beans that will NEVER sprout.
Always after the yacht. When they get the yacht they think then they will impress their friends - and then ? they get the yacht and they DO impress their friends.
Either way, Gates work in the Bill and Melinda Gates Foundation, and Buffett’s work on contributions after he passes away are excellent contributions to how we can really make the best of being in deep black cold space - so far to date the only known planet eh ?
trailor trash - most everywhere
seeking BMW’s - summer homes - ‘things’ for desperate people.
Oh well - Alexis’s comments say ‘closed’ so I thought I’d post that over here, then maybe it will finding it’s way back to there.
In fact ? I wager 1 day of Gates compared to the running around of so many on wall street to make it appear as if they came out ahead - whether lucking out on a short, WHO knows…. I still say - Gates practices - Buffett practice what I support - which is RESPONSIBLE capitalism.
I say beware your teleological commitment to the source of the almighty dollar - without that - you’re living in a fantasy land.
That Warren is giving away 38 billion ? to some degree ?
of all places he said it, was on Fox Business to respond to ‘why’ with:
‘It was never mine’
now that is someone that understand the function and value of money in life, and not life in money.
Comment by Greedom
Jul 12th, 2008 at 9:56 pm
Did anyone see IndyMac today ?
from marketwatch article:
Regulators said the “immediate cause” of IndyMac’s failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac’s soundness.
Gee
one letter - one story
one bank out of business
Hope this senator doesn’t have a list of banks he thinks are not so well off.
Comment by Greedom
Jul 12th, 2008 at 9:56 pm
from article on indymac:
“The institution failed today due to a liquidity crisis,” said OTS Director John Reich.
Sheesh
that’s going to sum up SO many institutions.
if not nation state
Comment by Greedom
Jul 13th, 2008 at 2:04 am
wha wha wha
I guess down goes IndyMac
no use of the borrowing window or too quick on the draw on the deposits.
Amazing how one bad review cavalcades too.
X is in trouble - now X IS in trouble.
Run on deposits.
Who’s next ?
Comment by Michael Splinter
Jul 13th, 2008 at 10:32 am
Great Article! We need more media outlets to bring us clear facts and real options to the financial struggles we are currently facing. When media outlets sensationalize in order to achieve ratings, it has a very damaging effect on the good of the country. We need calm thinking and then a rational response that will correct mistakes made. Placing blame and pointing fingers will not help the innocent Americans who are affected by the few greedy politicians and speculative investors who put us in this delicate and dangerous financial situation. The correct decisions will contain a lot of short term pain and there will be many innocent victims but long term the majority will prevail and come out financially more stable and a stronger country over all.
Comment by doug marcus
Jul 13th, 2008 at 11:32 am
next time the govt wants to send out $100-billion stimulus, it should be used to recapitalize the banking sector as that is where the source of pain resides. a well funded capital market coupled w/ smarter regulation will right the ship. but at the end of this, there will be a much needed discussion on the market distortion that govt plicies like the gse, the ethanol mandates etc.
a sad state to be in nonetheless.
Comment by Sarah Wright
Jul 13th, 2008 at 3:41 pm
Liz I can’t thank you enough for your brilliant analysis not just in this story, but in all of your coverage of Wall Street. Through your writing you have helped so many people lead better lives, be it the IRS, taxes, bad accounting at companies that investors should avoid, Congress’s wasteful spending. It’s clear you are a humanitarian, and a gifted one. You aim to protect. I applaud you, I have been a big fan of yours for years, I think you’re great. You are a beautiful person inside and out. Many thanks, and please keep these great stories, insights and analysis coming, we desperately need you!
Comment by Greedom
Jul 13th, 2008 at 10:36 pm
#
Comment by Sarah Wright
Jul 13th, 2008 at 3:41 pm
Liz I can’t thank you enough for your brilliant analysis not just in this story, but in all of your coverage of Wall Street. Through your writing you have helped so many people lead better lives, be it the IRS, taxes, bad accounting at companies that investors should avoid, Congress’s wasteful spending. It’s clear you are a humanitarian, and a gifted one. You aim to protect. I applaud you, I have been a big fan of yours for years, I think you’re great. You are a beautiful person inside and out. Many thanks, and please keep these great stories, insights and analysis coming, we desperately need you!
yeah, what she said.
Comment by Greedom
Jul 14th, 2008 at 2:51 am
Wait a second
How is it these two companies accrued 260 billion in bad toxic loan products ?
Is there sane accountability being missed here ?
who in their right mind bought or insured these loans ?
Comment by Greedom
Jul 14th, 2008 at 2:55 am
Before Paulson starts giving away stock purchase infusions and loan gateways to the treasury ?
Maybe it should be spelled out of the near 300 billion HERE as well -remember CountryWide and BoA have their 300 billion problem too ( hmm last I recall, Bernanke had 600 billion to play with for bailouts, 300 + 300 - hmmm
Just why would such a LARGE amount of BAD loans be allowed to be treated otherwise ?
I’d say if there was mal intent and some yayhoo was sitting around making billions off this ? prosecute - nail em to the wall.
Someone - SOMEWHERE is responsible for rubber stamping those 260 billion in toxic waste that’s hurting these two companies. Maybe spread over departments, or different time periods with full rotation of the employees -heh - jk.
I question who signed on for this toxic waste that’s now bobbing up to shore.
Comment by Greedom
Jul 14th, 2008 at 2:57 am
For me
at some point
I might as well just get out the monopoly board.
Comment by Greedom
Jul 14th, 2008 at 3:54 am
In follow up with IndyMac and others to follow- and let’s face it - the run on deposits happened as a mere flippant remark apparently - reckless perhaps by a US NY senator.
I promote a change of the title to
A Rescue Plan for the Federal Reserve
?
Comment by Greedom
Jul 14th, 2008 at 3:56 am
Or perhaps with cross-hairs on humor here
a Rescue Plan for the FDIC
Comment by Greedom
Jul 14th, 2008 at 4:28 am
Apparently confidence is everything !
Comment by Jim Taylor
Jul 14th, 2008 at 8:50 am
Our well managed govt. printing more of our fiat currency to help the well managed home loan/banking sector. Somehow i don’t see this helping to strengthen the dollar. Maybe the govt. should just go after the few profitable industries the U.S. has left.
Comment by Geoff
Jul 14th, 2008 at 11:51 am
The first signs that Fannie/Freddie were experiencing “irregularities” surfaced well over a year ago.. Who are the Congressmen on the oversight committee?? And, where have they been?? This is another disgrace for Congress.. The oversight committee members responsible should be dismissed and jailed …
Comment by chuck
Jul 14th, 2008 at 12:42 pm
Why not let these mortgage instutions fail in the stock market? Already the question socialism and communism is coming up over this new attempt to bail them out. Like IndyMac which the FDIC saved Friday evening, why didn’t the Treasury Department create an equilivant to save secure and save mortgage banks? I agree with Eric Bolling over the fact let the market work itself out; instead of a bail out on the issue. What will happen down the road when regional and local banks are affected?
Comment by Kurt9
Jul 15th, 2008 at 8:21 pm
The best course of action is to simply place Freddie and Fannie in receivership and liquidate them in exactly the same manner as was done with the Resolution Trust Corporation in the early 90’s when the S&L’s went bust. This is the only logical course of action.
Comment by John Allen Shaw
Jul 16th, 2008 at 11:21 am
It appears that this lady received her business degree from a socialist made cracker jack box
Comment by John Allen Shaw
Jul 16th, 2008 at 11:27 am
Hey, Elizabeth. Just sit down and be quiet and take a lesson from financial professionals like William Ackman who has an ingenius plan. Please just report the news don’t make up philosophical quick fixes that are fundamentally flawed, please.
Comment by JOANNA
Jul 16th, 2008 at 5:16 pm
IF MY BUSINESS FAILS, WILL THE US GOVERNMENT BAIL ME OUT? I THINK NOT. OUR TAX DOLLARS ARE WASTED ENOUGH. OUR GOVERNMENT IS TAKING CARE OF THE WORLD INSTEAD OF IT’S OWN. WE SHOULD NOT BE IN ANOTHER COUNTRY. WHY ARE AMERICANS SO STUPID THAT THEY CAN’T SEE THAT THE US IS BROKE. TAKING MORE OF OUR TAXES TO BAIL OUT A BUSINESS NO MATTER WHAT THE SITUATION IS REDICULOUS. I AM OUTRAGED!!!!!