Menu

Michael Gracie

Waving goodbye to Fannie Mae and Freddie Mac

Can’t bear to watch, but you do get some choice quotes…

The understatement of the day, from The Independent:

The US Treasury is close to a deal to prop up the mortgage finance giants Fannie Mae and Freddie Mac, whose crumbling finances have put the US housing market in jeopardy and threatened to turn an economic slowdown into a deep recession.

Prop up? Just a few months ago Congress was trying to use the GSEs to “prop” everyone else up. As for the housing market “being in jeopardy” I’m speechless.

Jim “Beach Oil Barron” Cramer says ‘stop the madness‘:

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

I can’t figure out if he is eluding to the fact that GSE paper is underwater along with so many homeowners, or that Conoco-Phillips should immediately start doing energy exploration in everyone’s backyard.

But Blogging Stocks got the headline spot on – Government to wipe out Fannie/Freddie shareholders by Sunday:

And now what could become history’s biggest transfer of tax dollars to bail out bad lending begins.

Yep.

PIMCO still whining – now attempting humor as well

Bill Gross of bond fame has been whining for some time. Reason: his portfolio at the PIMCO Total Return Fund is full of GSE bonds and he knows it’s going down, down, down.

His latest blathering is veiled in an attempt at humor (more like an inane distraction, but bear with me) – the entree is some ludicrous poll comparing Louis Rukeyser with Jim Cramer. I don’t much care for “investment media”, mostly because I believe they are nothing but stock shills being compensated somewhere, someplace. In other words, a lot are frauds, skirting securities law for the dis-benefit of the gullible investing public. Added…Gross thinks Cramer is a daring pundit (because he was once a money manager himself). Sure – and a money manager that blew up (but saved his own ass via his oft-touted ‘trust’) just like Bill Gross will probably do. But Cramer does have a house on the beach with oil under it – some are impressed so I guess that makes him okay.

Bottom line – Fannie Mae and Freddie Mac were the closest thing to socialized medicine for the housing sickness of the late 80’s/early 90’s as anyone could imagine who lived through the New Deal Era. Gross became the famed bond investor while riding the wave of easy money – now management ineptitude (and basic economics) are coming back to haunt the GSEs and their investors, and Gross is begging for the US Treasury to bail him out.

If I was the CIO of an insurer or pension fund, I’d be running from the GSE-overweighted bond portfolios like you might if approached at a cocktail party by someone that was recently busted cheating on their spouse with a farm animal.

And after reading Bill Gross’s diatribe, which at once beckoned for a new bull market in bonds while simultaneously putting the onus on the Fed to make it happen, maybe he should think about a new poll – that which decides whether investing in GSE paper is more like running with bulls…or sleeping with sheep.

MORE: Barry Ritholtz asks “WTF is up with PIMCO?” and notes that the “quasi-homage to Cramer” was just plain “weird”.

Fannie’s Perilous Pursuit of Excuses (and Shills)

Daniel Mudd wanted the loans to “optimize the business“…

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Hmm. Just a few weeks back, Paul Krugman said (emphasis mine)…

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

You’d think a professor of economics (at Princeton University no less) might have some idea what he is talking about, particularly when allowed to regularly op-ed at the New York Times. Note that this wasn’t supposition – it was an attempt to relay facts well after the events.

Even though they’ve long been THE largest purchaser of mortgages, maybe the fact that Fannie Mae didn’t originate the pile of bad loans equates to “had nothing to do with”? I wish I knew the answer, but I’m no famed academic.

UPDATE: Oops…h/t to Paul Kedrosky on the Post story.

Countrywide’s “Other Friends” – Fannie Mae and Freddie Mac

Via The Wall Street Journal:

Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, “What you need to know here is that the right — the WSJ editorial page, Heritage, etc. — hates, hates, hates Fannie and Freddie. Why? Because they don’t want quasi-public entities competing with Angelo Mozilo.”

That’s a howler even by Mr. Krugman’s standards. Fannie Mae and Mr. Mozilo weren’t competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk.

And cracks are appearing that show this to be true.

Fannie, Freddie, and the Fed: Robbing Paul to Pay Peter

From the Economist (emphasis mine):

After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.

The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.

That would certainly solve the problem of fewer open-market buyers for the GSEs’ paper.

Fannie Mae and Freddie Mac as cartoon characters

This question posted on LinkedIn was too good to pass up:

Does anyone else think Fanny May and Freddie Mac sound more like cartoon characters than finance companies?

I’m thinking Wile E. Coyote and Homer Simpson, only not quite as funny.

Your thoughts?

Contradicting thyself on Fannie Mae and Freddie Mac

As previous noted, Paul Krugman of the New York Times tried wishing away Fannie Mae and Freddie Mac’s problems by pinning the housing crisis on sub-prime. Now the guy is contradicting himself, while claiming more informed statements are non-contradictory.

Krugman said…

Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco.

And the better informed laughed…

Fannie and Freddie had about as much to with the “explosion of high-risk lending” as they could get away with.

Considering the GSEs touch almost half of the mortgages in America, it’s quite improbable for them not to have at least minor complicity. Nonetheless, Krugman is again explaining away…this time the glaring difference of opinion – it’s not contradictory!

Well, at least he got the S&L bit right. But I wonder who he’s going to be covering for when the liar-leveraged McMansions start falling.

Mortgage giants may enter conservatorship

According to a New York Times report from early this morning, the Bush Administration is considering taking temporary control of Fannie Mae and Freddie Mac. That was quick.

First and foremost, this doesn’t mean bankruptcy, but it does mean the equity holders would get wiped out. It sounds like “receivership” too, but it’s not that – a receiver is generally engaged with an enterprise to extract what’s owed to creditors, particularly where those creditors have liens on the entity’s assets. No, we’re talking something more akin to a judge designating a guardian for a mentally incapacitated adult. A conservator monitors, and steps in with power of attorney to make decisions as need be. In this case, it’s going to be a lot like having a new board of directors, potentially new management, and likely a guarantee of bond payments. Or at least let’s hope.

SIDE NOTE: What this may also mean is that liquidity for home mortgages, including the wild bailout notions that the government conjured, is going to dry up. While the government guarantee might stir reason for Fannie and Freddie’s borrowing costs to go down (i.e. the spread between their paper and that of the US Treasury should shrink to nothing) and hence mortgage rates to follow, I contend the markets have a way of surprising people. The prime lending rate actually remained fairly stable during a big portion of the housing run up (some analysis will follow in a later post). What really set things afire was the liquidity that securitization provided – Fannie and Freddie were a big cog in that liquidity engine, while the banks and brokers reaped the benefits. The GSEs and their partners are now hamstrung, meaning the previous buyers of that paper (the investors that never seemed to be at the negotiating table during the bailout talks) will be hard pressed to continue the buying spree.

UPDATE: Still tumbling:

Investors appeared unimpressed by a statement from Treasury Secretary Henry Paulson, who said the government’s focus is ensuring that Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission. Some investors had been hoping that the government would announce plans to take over one or both of the companies.

I think Hank Paulson is too intelligent to believe the concept that Fannie Mae and Freddie Mac will remain in business-as-usual mode and/or be capable of assisting struggling homeowners. Even if the GSEs are able to raise more capital on the back of a government guarantee, the credit markets suggest that the yields will have to be higher. This means either F & F will have to pass on that cost to homeowners or suffer continuing losses.

In other words, without buyers for those bonds there is no housing bailout.

UPDATE 2: Of course, Congress critters and their lobbyist pals are still enthusiastic. This may mean the GSEs now go straight to liquidation.

Today’s Rundown on Fannie and Freddie

Following up on the “insolvency” bit

  • Hank Paulson sidesteps questions on the issue. Let’s also note that “government-sponsored” does not mean government guaranteed, and obviously Mr. Paulson knows this.
  • The doomsday scenario, noting the government is counting on the siblings to fix the housing problem. Raising those caps isn’t looking like such a bright idea, just months later.
  • The Legg Mason Value Trust and its manager Bill Miller are feeling the pain. I feel a bit sorry for the fund owners – buying into drops is rarely a good idea.  What goes down can hit the ground – gravity rules us all.
  • But everyone breath easy – as has been said time and time again, they’re “adequately capitalized“…

Fannie Mae, Freddie Mac insolvent under fair value accounting

Via Bloomberg:

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

Raising additional capital here is a tricky issue. Existing equity holders have been decimated, and infusions are going to cut them off at the knees. They’d like their knees. But new money is a foregone conclusion if bondholders are to continue getting paid. Plus, the equity holders would have to walk in a restructuring situation, but at the same time the right side of the balance sheet is byzantine – there would be more classes of creditors than you could waggle a telephone pole at.

These are GSEs – sovereign wealth funds will not be stepping up to the plate; the Fed, maybe with the cooperation of money center banks, will most certainly be taking some action, and soon.

UPDATE: You have to step back a few years to find Fortunes’ blow by blow on the GSEs (around accounting scandal time). Good stuff, and well worth the read. I’m guessing nobody read it back then.