Fannie/Freddie Bailout – Who Gets Thrown Under the Bus?

Posted on August 22nd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The smell of ‘bailout’ is in the air. Like Pavlov’s dog, stocks are keying off the potential collapse of the nation’s two largest mortgage players who control about 75% of the market currently, looking for a bailout and subsequent rally. At any other time in history, this sort of event would have caused ripples through the financial markets.  But in this new age of ‘moral hazard’ brought about by Heli-Ben’s easy checkbook in which bailouts are great for stocks, anything goes and is a buying opportunity.

What will Paulson do? That is the question.  Does he throw the US Government, tax payer and Treasury Bond yields under the bus with an open-ended, retroactive bailout? A bailout designed to save the debt holders and/or the MBS holders such as China, Russia, Bill Gross and other rich investors who knew what they were buying?  Does he throw the investors under the bus in favor of the US Government’s and tax payer’s balance sheets? Or, does he do a combination of both?

It is of little question whether Fannie and Freddie will have to be bailed out.  Injecting capital into the firms and keeping them private is not an option because we are in the early innings of the housing and mortgage crisis and there simply is too much bad loan exposure. Remember, Fannie and Freddie have some $700 billion in subprime and Alt-A combined.  Much of their Prime paper is many grades lower than originally rated due to faulty automated underwriting systems during the bubble years. So, how do they do it? Many, including myself, think that nationalizing these firms and running them like FHA going forward is the least painful for everyone. Granted FHA is a mess but somewhat predictable and not as large of a mess as the Agencies.

Arguably, the Agencies are making some of the best loans ever that should actually be profitable.  Therefore, an ‘explicit’ guaranty going FORWARD would not be a horrible thing. With an explicit guaranty going forward and likely higher mortgage rates and spreads over Treasuries, investors should have no problem buying up the issues.  They would be in such hot demand that it could conceivably make actual mortgage rates cheaper on the front end than they are today. This sounds great, right! Not so fast. The foreigners and rich investors want their bailout too.

It is not about how this will operate going forward so much as it is about the $5.2 TRILLION in debt and mortgage-backed debt outstanding that has everyone in a tizzy.  The majority of outstanding Agency RMBS’s are owned by foreign governments such as China and Russia, investors such as PIMCO (Bill Gross), mutual funds, banks and pension funds. These are the smartest guys in the room and if they would have even glanced the way of an Agency RMBS prospectus, they would have seen it said this security is not backed by the US Government but rather the full faith and credit of two run-away, over-leveraged, quasi-Government, failing hedge funds.  

Without an explicit RETROACTIVE bailout that saddles the US tax payer with $5.2 TRILLION in liability, people are worried that these players, especially foreigners, will quit buying US Treasuries. Well, that’s the risk you take.  But at this point in time that is just speculation.  Many of these investors have already significantly lightened their US Treasury exposure.  Strangely enough, even more so around the time the news began to broke that the Government was considering retroactively backing $5.2 Trillion in Agency debt and RMBS’s.

What do you think happens to Treasuries if you do put the US at that great of a risk?  US Treasuries will still get hit but by a much larger pupulation of owners and for a much longer period of time. If you saddle the US with an open ended, retroactive bailout of the Agencies for some of the worst loans ever made from 2002-2007, a disaster will ensue.  We already know that GSE’s have significant subprime and Alt-A holding and much of their Prime paper is closer to Alt-A.  Defaults are soaring across all paper types.  Foreclosures could continue for years.

Just think about it for a minute.  If we back all of this, much of it toxic, there is the chance that every time a negative piece of housing data comes out in the future, Treasuries could actually sell off vs. rally because that’s more bad paper that the US Gov’t must make good, guaranteeing payments to these investors.  If we are in the early innings of this housing meltdown like many including myself think we are, then get ready for sky-high Bond yields because the only way to cover all of investors around the world will be through the sale of new Bonds.

We are in a ‘damned if we do and damned if we don’t’ situation.  But, I see signs of hope. Take the New FHA Bailout law for example. It requires banks to significantly write down the value of their mortgage notes to 90% of the new value and get nothing in return. That is the investor sharing the responsibility.

The same thing should happen here. These wealthy, global investors knew what they were buying and taking a haircut on their Agency MBS holdings is not the end of the world. The US Gov’t and tax payer retroactively backing mortgage paper that never had a guaranty in the first place without any idea of when this housing and credit crisis will be over would do much long-term damage and force higher mortgage rates in the US and interest rates across the globe. 

If we leave older vintage Agency securities to trade without a guaranty, investors would take losses because all older mortgage-backed debt has fallen in value given what has happened to the housing and credit markets over the past year and a half. But, these losses would not be massive and could be mitigated with ownership or warrants in the new and improved Fannie Mae and Freddie Mac that would be very valuable in the future, as the companies did well.

Activist hedge fund manager Bill Ackman talked about the bailout and a plan he has for the GSE’s. I like it. Below are the links. -Best, Mr Mortgage

Bill Ackman on Fannie/Freddie Bailout

 

Other Mr Mortgage Related Stories

Record Foreclosures Sweep CA in July – Breaking News

Pending Home Sales Number NOT Positive – Explained

Pay Option ARMs – Up to 48% Default Rate! First Federal Featu

Mr Mortgage on Fannie/Freddie Massively Underestimated Risks

Mr Mortgage: May CA Home Sales Report – Conditions Worsening

Look OUt! Here Comes the Alt-A Implosion

Mr Mortgage on Mortgage Modifications – You May Qualify!

Mr Mortgage onMortgage Modifications Part 2 – BEING FORWARD THINKING

40 Responses to “Fannie/Freddie Bailout – Who Gets Thrown Under the Bus?”

  1. But, hedgie, how do you know that that Friedi and spacked fannie are not the dumping grounds for all of these shit mortgages.
    It seems way to suspect, at best.
    Were there paper trades of mortgages?
    Both of the F’s forced to take them, based on wall street power?

    I am cooking some Michigan perch tonite. If I let it lay out for 3 days, it would still smell better that this whole and complete bullshit market.

  2. Don’t worry about the people “not buying treasuries” – operationally, it’s an impossibility. The U.S. government is a soverign issuer of currency in a floating exchange rate regime. That means that unlike you, me, GM, or the State of New York, it’s spending is NOT revenue constrained – it does not have to obtain dollars from anywhere else before it spends them. In fact, it’s the opposite: it must first issue dollars by spending them before they can be taxed or “borrowed”! It’s like a subway system selling tokens: it doesn’t collect the tokens in order to have the tokens, it collects them so there will be a demand for people to buy them. If people want to keep a few extra in their pockets, it will have to run a token “deficit” – issue more than it collects. The subway doesn’t worry about a looming “token debt”, and neither should the Federal government.

    In fact, if the U.S. Government decided tomorrow to simply stop selling new treasuries, the only immediate effect would be an immediate drop of interest rates to 0% as there would no longer be any way for bank reserves to be drained from the system, and the Fed Funds rate would drop to 0 as there would be no bids. Lest you think this is some sort of crazy theory, let me note that the Bank of Japan did this for years during the 90s. Interest rates stayed at 0% even as government debt climbed to over 150% of GDP (about twice what ours is).

    You write some good stuff here, but like most people (and most economists, sadly) you fundamentally misunderstand how the monetary system works. At best, you are operating under the assumptions of a fixed exchange rate or gold standard system – but under our current system, worrying about federal finances (as opposed to the effect of governement spending on the real economy – real demand, real suppply) is simply irrelevant.

  3. A bailout of the GSE’s would not require $5.2 Trillion as you shriekingly claim on your website. Many ANALYSTS have put the figure at $15B.

  4. response
    The GSEs have nearly that much in REO they will dump off to resellers at fire-sale prices in the next few months. They also have 2T in CDOs which Merrill just dumped at 0.05 on the dollar. With 50% of all loans written in 2006 already underwater we could easily see something like 25% of their $5T in loans go bad. At the fire-sale prices that’s another $1T. These morons could easily hit $3T in losses without even trying.
    They will also loose all their equity and a large chunk of their corporate debt.
    I am not an analyst, but $15B means somebody’s adding machine is broken.

  5. I think you should reread the blog. Mr Mortgage does not claim a $5.2 trillion loss TODAY, rather a $5.2 trillion POTENTIAL liability should the “Powers that Be” retroactively insure the toxic or soon to be toxic investments held by foriegn investors or large US investors.

  6. Mr. Mortgage, I think the word he used was liability and indeed that is exactly what it is. Obviously the Tax Payer would never have to assume the entire amount, but a big nut it will most definitely be. Say 5% default sold at 30% less value for starters and what do you have? This will be in the many 100’s of Billions before it is done. Do you seriously think that the 200+ Billion roll over coming up shortly will not come with much pain if it comes at all? It is a foregone conclusion we the Tax Payer will indeed “Bail Out” the GSEs at this point.

    So “WHO” is the real question here and I say the investors bare at minimum 80% of the bulk of losses. They knowingly invested in these agencies and have made mammoth profits overtime. When chasing those profits there is indeed “RISK” and they chose to ignore that risk as many have in many other investment situations. They could have gotten out at anytime, but chose to stay.

    What have the Tax Payer done to deserve this? NOTHING! We never were told or agreed to be the backstop for the investors losses. We never had a chance to “VOTE” on anything of this magnitude potentially affecting our wallets to this degree. Where was the representation of the people? I know we the people don’t have 100’s of lobbyist wining and dining these elite career politicians that we the people keep stupidly and ignorantly voting into office (“SHEEPLE”), but please give me a break!!! Just because it appears that the majority of voting americans are just plain dumb and wlak in line and order for the likes of Kerry, Kennedy, Dodd, Frank, Biden et al we still do not deserve to be rail roaded.

    NO tax payer funds should be used but realistically we will have to and that is the price we SHOULD pay for our stupidity in voting these idiots back into office over and over and over again!

    VOTE EACH AND EVERY SINGLE INCUMBANT OUT OF OFFICE IN 2008!!!

  7. To 5:31pm poster:

    The presumption of your statement is shriekingly wrong. The author never states the bailout will cost the $5.2 Trillion figure. He is considering the ramifications of shifting this burden to the Treasury.

  8. 1) The GSE’s don’t have any CDO’s
    2) A real analyst (which our host clearly is not) would consider assets & liabilities
    3) The true (not alarmist) exposure is what it would take to shore up the GSE’s. But since $5.2T is a more sensational number, that’s what mr. shrieker puts up.

  9. You can’t possibly be serious???

    1) Yes they do in principle

    2) He does as do many, many others

    3) Liability, which it truly will become and you will equaly be responsible for.

  10. PLEASE QUIT POSTING UNDER THE NAME MR MORTGAGE. THANKS.

  11. Mr. M. have you thought about a condo specific post. It would be quite revealing I would suspect…

  12. Hi Stu, yes sell now.

  13. Fair enough… that was a stupid question now that I really think about it, and who I was asking the question…

  14. Agree STU–

    Our “elected officials” don’t work for the taxpayer….they work for the banks and special interests…every one of their worthless a$$’s is bought and paid for!!

    If we don’t vote each and every incumbant out, we will soon be a third world country. They are selling us up the river to pad their own wallets and couldnt give a damn about our country, or our children’s future. It is an OUTRAGE!!!

  15. I understood the mr mortgage user name to be some someone OTHER than the amazing real mr mortgage.
    I read (I don’t remember where) that the GSE’s have a $2T portfolio of hedging instruments separate from their RMBS, mortgages and bonds and shares. It was my understanding that most of these were derivatives such as SIVs CDOs CDS etc. I apologize for not knowing the exact details. I don’t actually know if these instruments are of the same toxic ilk as the stuff Merrill just unloaded (does anybody?).
    Regardless, I beleive the two GSE’s have been so completely mis-managed there’s essentially no limit to their down side. And I resent like hell having to bailout what in principle amounts to, if not actually is, criminal behavior. They were allowed to operate far too irresponsibly and get far too large to be supported by an implicit government guarantee. Now we are all collectively stuck with what will almost certainly be a titanic bill.
    What the heck, the deficit is already $9T, what’s a few more?

  16. The ackman plan does seem like a viable one.

  17. Jimbo – Assuming I am not taking your words out of context, could you please clarify your comment ‘worrying about federal finances is simply irrelevant’? I’d be curious to hear your reply because some pretty smart guys like Friedman and Keynes would have (had) a field day debunking this notion.

    Personally, I get very worried when the Fed sets up three temporary auction facilities intended specifically to swap relatively worthless mortgage backed securities for US Treasury Securities – anonymously no less. You know all that collateral is going to be written off, right? This is tantamount to printing cash. Couple this with the recent $800 billion checking account granted Henry Paulson and I am beyond worried. I’m outright terrified. We live under the auspices of a democratically governed society but in reality we toil under the shadow of a privately controlled banking system that blows asset bubble after asset bubble then inflates its way out of it every time.

    So, I hope I am way off base and did in fact take you out of context, because we should all worry about our government’s finances. They hold the power to erode our standard of living in favor of theirs at the stroke of a pen.

    http://0182eb9.netsolhost.com/blog2/

  18. This crisis is almost surreal, the details of it read like a thriller, the figures being thrown around of billions and trillions are astounding to me. How on earth some of the smartest corporations and people got into this mess is beyond me, i hear the word greed being flung around all the time, but surely not every person in power or every banker is greedy. Human irrationality is to blame i reckon. The errors keep compouding, the world was lulled into a false sense of security over the past 16-17 years. The Great moderation they said and now we know the errors in the system have been building up to crazy proportions.

    All fiat currencies eventually go to ZERO, the route they take is whats interesting and we’re all set for this roller coaster to go on. The credit bubble took 28 years to wind up, does that mean it takes 28 years to wind down? given the symmetrical nature of bubbles?

  19. Some plan. Walk away from existing MBS, and guarantee future MBS. Problem is, you screw the current holders (PIMCO, China) who also happen to be the future buyers. How’s that going to work? Pissing off the current owners of MBS is not exactly the way to create a sound future market for the stuff. It’s not like there are a lot of investors out there with tons of cash, waiting to invest, even in the best of times. And right now is not the best of times. There’s no liquidity to start with. If Uncle Sam screws the few investors who are out there, he is only screwing himself.

  20. Insuring the current MBS is a critical part of ensuring a viable market for future MBS.

    Barron’s seems to get it far better than Mr Mortgage does:

    RARELY DOES A SINGLE STORY so dominate the market and indeed the national agenda as Barron’s Senior Editor Jon Laing’s blockbuster last week, “The Endgame Nears for Fannie and Freddie.”

    Securities of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) were roiled by the story, which quoted a Bush administration source saying that unless the government-sponsored enterprises raised a “credible” amount of equity, some $10 billion each, a Treasury capital infusion that would wipe out the common shareholders would be increasingly likely.

    Given the long odds of that happening, Fannie and Freddie’s preferred shares plunged along with the common (see Follow-Up and The Trader for the gory details) while their subordinated and senior debt issues also took a hit initially. But the senior debt recovered and ended the week stronger than where it started.

    The preferred shares came into focus Friday after Moody’s Investors Service slashed its ratings five whole notches — to Baa3, the last rung above junk, from A1, a respectable investment-grade rating.

    Yet the preferreds actually bounced in the wake of the Moody’s action on the notion that the biggest losers if the preferreds were wiped out in a Treasury recapitalization of Fannie and Freddie would be scores of regional banks. Imperiling the financial strength of already shaky banks, even though they effectively doubled down on their bet on housing and real estate via the preferred, would only add to regulators’ headaches.

    The GSEs’ preferreds were pounded nearly as hard as the common for most of the week. But Friday, Fannie’s series S preferred (FNM-S) was up 23 cents, or 2.1%, to 11.29. For the week, however, this actively traded preferred was down 25.7%, about two-thirds as big as the common’s hit. Freddie’s series Z preferred (FRE-Z) Friday popped 1.08, or 10.7%, to 11.20, but lost 26.6% on the week, or nearly half the halving in the common’s value.

    Not only would regulators be concerned about the impact on banks from a wipeout of Fannie and Freddie preferreds, but they also probably would be mindful of what that could mean for the overall preferred market. This has been a major source of capital for beleaguered banks and brokers looking to shore up balance sheets devastated by subprime-related credit losses, one that regulators ought to be loath to cut off.

    Similarly, the cost of insuring Fannie and Freddie subordinated debt blipped up initially but settled back. At the peak at midweek, their credit-default swaps hit 350 basis points (3.50 percentage points, equal to a cost of $350,000 to insure $10 million of debt against default for five years). By week’s end, the CDS on Fannie and Freddie subordinated debt tightened to under 300 basis points.

    Meanwhile, CDS on Fannie and Freddie senior debt actually tightened 10 basis points, to 39 basis points, over the course of the week, according to Markit Inc., on the same assumption that battered the equities — that the U.S. government would stand behind this debt.

    The key reason to pump taxpayer money into Fannie and Freddie is to ensure their senior debt and the mortgage-backed securities they insured continue to trade as gilt-edged quality.

    Their securities account for billions in assets of foreign central banks and other institutions that assume the federal government will stand behind the GSEs’ debentures and MBS. Foreigners’ willingness to hold U.S. paper is an important support for the dollar.

    Indeed, a former adviser to China’s central bank said if Fannie and Freddie were allowed to fail, the consequences will be “catastrophic.” Yu Yongding told Bloomberg News, “If it is not the end of the world, it is the end of the current international financial system.”

    While that may be hyperbole, foreign central banks and other agencies have been quietly paring their holdings of U.S. agency securities, even after Treasury Secretary Henry Paulson outlined plans for the federal government to shore up Fannie and Freddie. Custody holdings of agencies at the New York Federal Reserve Bank had fallen to $984 million as of Wednesday from $975 million on July 20. Meanwhile, they sharply increased their holdings of Treasuries, to $1,430.9 billion from $1,364 billion over that period.

    Fannie and Freddie also have become the source of most new mortgage credit now that banks have tightened the availability of home loans, whether prime, subprime or something in between, according to the Fed’s quarterly survey of loan officers.

    That’s why preserving Fannie and Freddie, if not their shareholders, has become a priority in Washington.

  21. You idiot if the Government issues more subway tokens it does not affect the value of the tokens. Someone with ten tokens can’t bid up the price. They can still be exchanged only for one ride at a fixed rate. Not true with debt or dollar bills. Sorry but we DO have to pay that money back, either with revenues or inflated money supply. In your terms, it’s not just “the effect of government spending on the economy…”, it’s what’s already BEEN spent that hasn’t really been payed for but borrowed.

  22. Both FNM and FRE need to borrow capital constantly to help pay maturing debt and in order to continue purchasing mortgages.

    So far, they have improved the quality controls of recently purchased mortgages. They have also increased the fees they charge for repurchasing mortgages.
    Even though the recent sale of FRE bonds showed an increase in the spread between treasuries and FRE debt, there is still a market for those. Higher borrowing costs is the most likely outcome of this mess.

    It does not really matter that much if FNM and FRE go bankrupt or are taken over. As long as there is a market for mortgages (even with restrictions) things will improve over time – with population going higher being the longer term trend.

    And let’s not forget that most of the existing portfolio will be repaid. Yes, there will be losses, foreclosures, REO’s, but they will not be $5.2T. They will be orders of magniuted less than that.

    Disclaimer: I have no relationshiop to FRE and FNM and am glad to see some healthy scepticism and risk consideration return to the mortgage markets.

  23. Viv-

    When you say all fiat currencies eventually go to zero, what do you mean by the word “eventually”?

    Also the RISE in the dollar is completely consistent with the asset deflation scenario that is unwinding. Gold is CRASHING and the DOLLAR is soaring. Your models need to explain this major trend. It is NOT an anomaly.

    Gold cannot be a perfect hedge against BOTH deflation AND inflation at the same time.

    That’s not logical.

    Tony

  24. If the US government stopped selling Treasuries tomorrow, the immediate effect would be that China would start spending its trillions in reserves on whatever useful thing we have, causing asset prices to rise so much that much of the US population would be in dire circumstances. Please don’t downplay the mess we’re in with flip b.s. like we need not worry about the federal debt. Everyone knows the Government can print whatever it needs.

  25. Mr Mortgage, excellent analysis. What’s frustrating is that this whole thing isn’t really getting that much coverage in the main stream press. Sure Bill Ackman may have good opinions on cnbc, but the average tax payer isn’t watching that.

    I noticed however that there’s at least a one-off treatment in the NYTimes: . I wonder if the author knows that he has a topic that he could expand on into a whole series of articles.

    The author is inviting comments at his blog at Asking in particular, “let me know how you would solve the Fannie/Freddie problem. I’m all ears.”

  26. Gold is a hedge against inflation. The longest duration Treasury bonds are the best hedge against deflation.

  27. Tony, the central problem with the current monetary system is that it must must continually expand, forever. Every single dollar in circulation is loaned into existence by a bank, with interest charged on the amount loaned.

    But if all money is loaned into existence, with interest charged on the amount loaned, how does the interest get paid? The money for paying the interest comes from from additional loans!!

    As a direct result there can never be enough money to repay principal and pay interest unless debt is continually expanded…forever, If not than liquidation occurs.

    Hence the result being that the dollar has lost 98% of it’s value since the Federal Reserve was created in 1913 through monetary inflation. Every passing year brings about more and more dollars into the system and eventually there will be so many dollars that they will have virtually no value. All fiat currencies eventually tend to their intrinsic value of zero, it is a mathematical certainty.

  28. HousingRealist, you are exactly correct and that is why gold is falling and bonds are selling. Inflation is not an issue right now, but deflation certainly is. The people in the know… know this, hence the market correction on gold.

    Are Lehman and Freddie both going to make it through the weeknd? I think one or both are surely going under before the opening bell on Monday…

  29. Stu – you could be right. Something has to be underway. If things proceed down their current path there will be an ‘event’ and then it will be too late. The Agency debt market is looking awefully shaky. So is the UST market.

  30. Jimbo,

    Right on! Thanks for trying to increase the understanding
    of Mr. Mortgage and his readers. I hope they are spurred to do some basic research rather than just feel insulted. For anyone who dares to know the ugly truth I recommend Chrismartenson.com. On the upper left hand side of the page you will see “Learn”. Just go through the topics and get the equivalent of several college educations in real, not university taught economics.
    Finally, Mr. Mortgage, within his area of expertise, is the best out there.

  31. I’ll get to the rest of the article in a second, but did everyone miss this joke?

    (It is of little question whether Fannie and Freddie will have to be bailed out. But, how do they do it? Many, including myself, think that nationalizing these firms and running them like FHA going forward is the least painful for everyone.)

    Mr. Mortgage, you must be joking or possibly you have never dealt with FHA. That agency is an absolute joke and has been for over the 25 years that I have dealt with them. If “nationalizing” Fannie & Freddie means they will be run like FHA we are far better off just letting them fail now. Isn’t FHA about to fail too? Running anything like FHA is clearly not the answer and I can assure you would be very painful for everyone!

    Russia and China hold about 1 Trillion between them and they can afford the hair cut. Why would the U.S. tax payer want to bail them out? Didn’t we learn anything from WW II? Does anyone recall what the U.S. was selling to japan before WW II? (Ship load after ship load, TONS of the stuff called “SCRAP METAL”) WONDER WHAT THEY WERE MAKING WITH THAT?

    Don’t kid yourselves Russia and China are not our friends. Bailing them out and keeping them strong while weakening ourselves is a receipt for disaster.

  32. Another edition of simple answers to simple questions:

    Fannie/Freddie bailout – who gets thrown under the bus?

    You and me. Middle and working class Americans and their children. We will have the pleasure of paying for all this while those that created the mess get to keep on making bigger messes.

  33. Jim T, while I agree that Russia and China do own a lot of Fannie and
    Freddie, I do not think it is quite at the level that you suggest. Actually China owns by far the most (I would estimate 450 Billion or so) and Russia a much smaller amount (I would estimate 150 Billion or so). Russia has sold off 50 Billion or more this year alone and although they have bought some short term paper back of late the long term amount held is still quite small. I could be wrong, but that is my understanding. At any rate I do agree it is still a lot of money!

    The problem with your suggestion of letting these countries take the losses are many, but the most important is this. Where are we going to get money from to lend and roll over existing debt if we don’t get it from China? Who do you think has allowed us to get into this mess by lending us money either directly or by buying treasuries and agency debt? This would be the classic case of killing the goose that lays the golden egg. As sad as it may be to say, this country can ill afford to lose China as a source of money. In fact we would ourselves be screwed by doing so and much worse off than if we just have the American Tax Payer foot the bill, which we will in the end.

    That is the entire point of the 800 Billion blank check Paulson holds in his hand made out to Fannie and Freddie. They will need in my estimation 100 Billion right out of the gate and another 200 Billion or so by quarters end. Roughly 300 Billion for starters would be my guess and depending on how and when they unwind the bad paper you could be talking another 100 – 200 Billion by years end. All in all roughly 450 Billion is my guess. They will take another 250 Billion or so and pass that along to the FDIC to support the roughly 200 bank failures that have now started to take place and another 100 Billion to support the write downs on the bad paper the Fed is currently holding. The rest will be for whatever else shakes out along the way. In other words it will all be used and used fairly quickly. It is amazing the amounts of money we are talking about here…

    The only option Paulson has is for the investors to take a pretty big hit and for the Tax Payer to foot the bill for the bond holders. There is no other option. That is why he is waiting and waiting to pull the trigger. The American Tax Payer will not be happy and some in the press are going to completely crush them when it is eventually announced. They will as some say “Get Hammered”

    As Jim Cramer says however, and rarely do I agree with him, the insiders know what is going on and trading needs to be haulted due to the money involved and underlying things taking place behind the scenes. Some of this is just Paulson lineing things up for the take over, but some is insider stuff that if learned will not be pretty for those involved. We are talking about the largest Government “Bail Out” on Tax PAyers backs in history and more money than is even imaginable leaving the table. This is HUGE!!!

  34. test

  35. Test complete…

    What a completely horrible, and so entrenched establishment pick for a so called “CHANGE” candidate…

    He may have just given McCain a silver spoon to victory… Next up John’s VP???

  36. Well is today “THE DAY”

    What’s it going to be Lehman?

    How about you Freddie?

    A quick question though… Can a company actually keep trading even though they are technically insolvent? Who would buy into that? Why would one buy into that?

    I suppose much like in housing there are “SHEEPLE” everywhere and for some rather very strange reasons, they are willing to catch falling knives until they bleed to death… A slow death, but death still the same.

  37. How Much A Bail Out Will Cost – Bloomberg Story

    Freddie, Fannie Decline Diminishes Prospects of New Investors

    By Dawn Kopecki and Shannon D. Harrington

    Aug. 25 (Bloomberg) — The cost to Freddie Mac and Fannie Mae of raising capital is getting more prohibitive by the day, making it likely that the government will have to inject cash into the largest U.S. mortgage finance companies.

    Declines in the common stocks of the government-chartered companies accelerated last week to more than 90 percent for the year and yields on their preferred shares more than doubled on speculation Treasury Secretary Henry Paulson may need to bail them out, reducing or wiping out the value of the securities.

    As long as a rescue is likely, investors will be reluctant to take part in any offering, said Richard Hofmann, an analyst at CreditSights Inc., a bond research firm in New York.

    “The stocks’ freefall becomes sort of a self-fulfilling prophecy if it goes far enough, and we’re getting pretty close to far enough,” Hofmann said.

    McLean, Virginia-based Freddie fell 52 percent last week to $2.81 on the New York Stock Exchange and Fannie of Washington dropped 37 percent to $5. Their preferred shares are trading as low as 19 cents on the dollar on speculation their dividends may be suspended.

    The companies were created by Congress to boost homeownership and profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities.

    Losses Grow

    The two companies, which own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding, posted combined losses of $14.9 billion in the past four quarters as delinquencies rose to record levels. The losses depleted their capital and sparked concern they may not be able to weather the biggest housing slump since the Great Depression.

    Freddie agreed in May to raise $5.5 billion of capital to appease regulators, though has yet to complete the financing. Fannie raised $7.4 billion that month in a similar agreement.

    Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie’s capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.

    The companies may need to raise at least $15 billion to convince investors they have enough capital, said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, estimates the Treasury will probably be forced to buy a combined $60 billion of preferred shares by October.

    `Propitious Time’?

    Freddie Chief Executive Officer Richard Syron told investors earlier this year he was waiting for the “propitious time” before raising money. That time may not come, Hofmann said.

    Freddie has reached out to potential investors, spokeswoman Sharon McHale said last week. Private-equity firms TPG Inc., Kohlberg Kravis Roberts & Co., the Carlyle Group and the Blackstone Group LP told the company they are unwilling to invest in the company until it’s clear what steps Paulson may take, The New York Times reported on Aug. 23.

    Carlyle spokeswoman Ellen Gonda, Blackstone spokesman John Ford and TPG spokesman Owen Blicksilver all declined to comment.

    Fannie spokesman Brian Faith declined to comment.

    Moody’s Investors Service on Aug. 22 cut Fannie and Freddie’s $36 billion in preferred stock five levels to Baa3, the lowest investment-grade, saying a bailout that causes dividend payments to be halted is increasingly likely.

    Holders `Panicking’

    “Any additional capital raises by Fannie and Freddie were going to have trouble being absorbed in the financial system without some intervention by the government,” Peoples Bancorp Inc. Chief Financial Officer Edward Sloane said in an interview.

    Marietta, Ohio-based Peoples sold its $12.1 million of preferred shares in Freddie and Fannie, recording a pretax loss of about $1.04 million.

    While Paulson said he was trying to “add stability and buy some time” by seeking authority to pump unlimited amounts of capital into the companies through a credit line or equity investment, the opposite is happening because “the holders at the bottom of the capital structure are panicking,” Hofmann said.

    “They’ve got themselves in this negative loop where the only way they can raise capital is for the Treasury to put something in” first, said Friedman Billings’ Miller.

    `Lack of Clarity’

    The yields Freddie would have to offer to attract investors are two to three times what Fannie paid in its $7.4 billion preferred offering in May. Fannie gave investors a yield of 8.75 percent on 51.8 million shares of preferred stock that can be converted into common shares.

    Freddie’s $1.1 billion of 5.57 percent preferred stock dropped 36 percent last week to $7.40, pushing the yield to 19.5 percent. Fannie’s $7 billion of 8.25 percent perpetual preferred stock fell 26 percent to $11.29 as the yield rose to 18.9 percent.

    “It is the lack of clarity of what exactly the government is going to do,” said Axel Merk, president of Merck Investments LLC in Palo Alto, California. “To make this politically viable, why would the government even think about coming in junior to somebody else?”

    To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

  38. […] there are a great deal more issues in play than the players want to discuss, and there will be more casualties than any of them will ever […]

  39. Who ? Well. The taxpayer firt and foremost.

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