Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.

Posted on September 6th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

A picture is indeed worth a thousand words and in this case, a potentially large haircut for its owners. Why do you think Bill Gross has been making the circuit harder than ever over the past couple of weeks.

Why again should the $5 trillion in Fannie Mae/Freddie Mac senior mortgage backed debt be backed by the US taxpayer?  I can’t believe that China, Russia and Bill Gross have never actually seen a Pass-through before. The one that says “ARE NOT GUARANTEED BY THE UNITED STATES, AND DO NOT CONSTITUTE A DEBT OR OBLIGATION OF THE UNITED STATES OR ANY OF ITS AGENCIES OR INSTRUMENTALITIES OTHER THAN FANNIE MAE”.  The one below is from July 2008. They invested in these higher-risk securities for a higher payout. Simple.

Look at the big ‘ol black letters right below the Fannie Mae Logo and security description.  That is what they call a ‘disclaimer’, investors. Bill Gross has been out for months scooping these securities at depressed prices hoping the tax payers make him a profit.

If .gov backstops everything, open-ended and retroactive, US Treasuries sit in a precarious position. WHAT IF spreads go the wrong way due to a buyers strike on Treasuries. If they back this debt, there is no going back.

Of the $5 trillion, we know that about $1.2 trillion is Alt-A and Subprime and another $1 – 1.5 trillion plus could act much closer to Alt-A and Subprime in the future.  This is due to faulty automated underwriting systems called DU and LP respectively, set to ‘way too easy’ mode during the bubble years. $5 trillion is equal to the entire public float of the US Treasury with $1 trillion owned by foreign central banks. They undoubtedly bought this stuff with full knowledge it was not backed by the Government.

I put out a story on this earlier: Fannie/ Freddie: Now We Wait for Help or Hell

Actual Fannie Mae MBS Issued July 2008

 Fannie Actual MBS page 2

19 Responses to “Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.”

  1. Bill Gross/PIMCO gets bailed.

    We(taxpayers) get screwed.

    I think it was Lilly Tomlin who said something to the effect of “As I get older, I keep getting more cynical, but it just never seems to be enough.”

  2. Mr. M, why don’t you get it? Well, let’s start the conversation here:

    1. Why should MBS be guaranteed?

    Three primary reasons:

    First, it’s cheaper (for the taxpayers/citizens) than the alternative. You yourself have made the spiraling-asset price decline case pretty well. Systemic risk trumps moral hazard every time. Look it up.

    Second, Fannie has always guaranteed its MBS, and as of two months ago the feds guaranteed Fannie’s existence, so you are fighting against something that is already fact.

    Third, your current MBS holders are your future MBS buyers. If you’ve ever run a business, you know that you don’t stay in business by pissing off your customers. Easy to understand, right?

    2. US Treasuries sit in a precarious position if Fan and Fred are bailed out.

    Are you serious? This bailout is two-month old news. It was signed into law in July. Let’s agree that it is pretty much priced into Treasuries already.

    3. It’s $5 trillion stacked on top of $5 trillion!

    Come on, you know better. The current US debt is principal and interest that is owed and paid by us taxpayers every day of the week. The taxpayers are NOT going to start paying $5 trillion of mortgage principal and interest next week. Or the week after. Those payments will be made by homeowners, and Fan and Fred stockholders, preferred holders, and bond holders, and then new homeowners via foreclosure before one penny comes out of the Treasury.

    You are pretty slippery on this last point. You know you can’t equate $5 trillion of current debt with $5 trillion of guarantees, but you sure do try.

    4. This is a one-way trip straight to hell.

    Um, you need to realize that time, and economic adjustments, cure a lot of ills. The price of oil was supposed to go straight from $100 to $150 to $200 this year. Why didn’t it? Because our very robust economic system adjusts. It is not static. It is not linear.

    Grow up.

  3. Ditto, what stevenks says. We the people will eat the loss for the gse debt speculators. The little guys get screwed over, always have and always will.

  4. The market should like this as it was expected. But it wont stop real estate from being crushed in 2009. And of course, a bunch of banks with it.

  5. […] Comments Gregg Masters on Fannie/Freddie…Now We Wait For Help or HELLpeterb on Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.twilight in the desert on Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not […]

  6. Jaybee,

    Are you Bill Gross’ niece?

    I think you should start shorting Treasury puts with your own AND your uncle’s $$$.

  7. Jaybee makes some excellent points. 5T of UST are not = to 5T of MBS. For example, fannie defaults rise to 15% = 750 bil. With a loss of 25% of the 750b being made up by taxpayers. This equals backstop of 225b to US taxpayer. I’ve hated the thought of this from the start. However, like Jaybee suggests, systemic risk does trump the moral hazard. Willing to have US taxpayer backstop to make sure no depression!

  8. Maybe there is an upside to all this. We can have an agency to ensure equitable access to home ownership – the gov can become a “co-signer” for those who are economically disadvantaged. This may lead to a lender who does not discriminate based on Race, Gender or fiscal class status.

  9. Jaybee,

    “The price of oil was supposed to go straight from $100 to $150 to $200 this year. Why didn’t it? Because our very robust economic system adjusts. It is not static. It is not linear.”

    Ummm, actually you are absolutely wrong on this point. Demand has actually gone down. Have you taken a look at GM and Ford stock. I suggest you fire up your browser and load a stock chart of both. You may be surprised since you need some education here.

    As for the robust economy, how does a 6.1% unemployment rate and 605,000 jobs lost for the year sound? Seems like you need to grow up and also get yourself an education in the robust economy.

  10. That’s right, HousingRealist. And let’s remember, this is really the taxpayers bailing out the taxpayers. Who does MR Mortgage think owns all those PIMCO funds? Who does Mr Mortgage think owns all the homes that even he thinks would be collateral damage if this thing spirals out of control? This is really the taxpayers bailing out the taxpayers.

  11. http://dailybriefing.blogs.fortune.cnn.com/2008/09/04/pimcos-gross-wants-household-bailouts/

  12. Whoa, this story above, the fraud needs to be brought to the attention of the american people. Every person should know about the crooks that are running this country. Will this be another spin job?
    Isn’t the CEO of Freddie or Fannie a classmate of George Bush’s? and I think he was paid $11million a year? Why hasn’t he been fired. Didn’t GB want to privatize Freedie and or Fannie this last January?
    Maybe someone will find those answers for me.

    thanks
    Willie

  13. The problem is that Bill Gross will take a much bigger commission than you dear bonholder of PIMPCO. Bill will get a big fat management commission for doing strictly NOTHING.

    Bill wil probably not pay one cent of income taxes either. As for you dear ordinary american slave taxpayer you will be paying higher taxes, higher interests rates and get as a premium higher inflation and unemployment too. That’s why Bill Gross bailout’s is nice for him not for you dear PIMPCO bondholder or/and taxpayer. You will get the crumbs and Bill will get the cake.

  14. Marc, please share with us the incredibly in-depth analysis that you did in support of those claims!

    Got data? Or get slander suit?

    (I love the part about not paying any taxes. Where did you come up with that one?)

  15. Somewhere there is trillions in over the counter derivatives awaiting completion of this bailout (already deemed lawful), derivatives leveraged far more than a taxpayer/homeowner could possibly leverage.

    Using the analogy that if you don’t upgrade the fire system in my house the whole block or city will burn down in case of fire. Unfortunately there is not enough funds to upgrade all the houses. One saved the rest burn.

  16. jaybee said
    The taxpayers are NOT going to start paying $5 trillion of mortgage principal and interest next week. Or the week after. Those payments will be made by homeowners, and Fan and Fred stockholders, preferred holders, and bond holders, and then new homeowners via foreclosure before one penny comes out of the Treasury.

    jaybee – have you read the proposal yet or are you just spouting off the top of your head.
    First of all the deal allows the Treasury to purchase up to $100 Billion of F&F stock. Since when is the Federal gov’t allowed to speculate in the market?
    Secondly the deal they plan to implement is to give homeowners at risk lower than real interest rates.
    If only 10% of homeowners are causing this meltdown, offering at risk homeowners that shouldn’t have bought better rates than the rest of the FHA mortgage borrowers just what do you think that is going to cause? I’ll tell ya.
    A tidal wave of new foreclosures pollyanna.

  17. “what if” the sky is falling….

    “What if” the sun doesn’t come up….

    “What if” aliens land and take you all back to the mother ship….

  18. […] FateFannie/Freddie – Massive Fraud BreakdownFannie/Freddie – The Game Has Changed. ENRON on SteriodsFannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.Fannie/Freddie…Now We Wait For Help or HELL9% of All Mortgages in […]

  19. […] FateFannie/Freddie – Massive Fraud BreakdownFannie/Freddie – The Game Has Changed. ENRON on SteriodsFannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have.Fannie/Freddie…Now We Wait For Help or HELL9% of All Mortgages in […]

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