The bailout continues....FNM and Fre are next

Parent Cafe
1

<p>At least they are firing some people…</p>

<p><a href=“http://www.nytimes.com/2008/09/06/business/06fannie.html?pagewanted=1&hp[/url]”>http://www.nytimes.com/2008/09/06/business/06fannie.html?pagewanted=1&hp&lt;/a&gt;&lt;/p&gt;

<p>"WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said. </p>

<p>The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said. </p>

<p>It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history. </p>

<p>The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount. </p>

<p>Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers."</p>

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<p>Strange that Fannie should be up almost 10% and Freddie up 3% when their shareholders will get wiped out with this plan. Should make for an interesting market on Monday. That’s about $10b of marketcap wiped out. Probably includes our asian friends.</p>

<p>Tens of billions might be a conservative amount. But the bailout affects a lot of little people and pension funds and endowments in Fannie and Freddie paper. And, of course, our asian friends.</p>

3

<p>The S&P futures are up over 1% after the close and after the plan was leaked.</p>

<p>Most financial stocks are up in after hours too. </p>

<p>FNM and FRE are down in after hours, but I have this feeling they are going to be down more.</p>

<p>FREDDIE MAC(NYSE: FRE)
After Hours: 4.04 -1.06 (20.78%)</p>

<p>FANNIE MAE(NYSE: FNM)
After Hours: 5.50 -1.54 (21.87%)</p>

<p>China has its own problems.</p>

<p><a href=“http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?em[/url]”>http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?em&lt;/a&gt;&lt;/p&gt;

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<p>The last empty bag-holder please turn off the lights? ;)</p>

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<p>Financial stocks are probably up because they hold F&F debt and now it’s backed up (by us). I have a friend that bought F&F for the pop. Hope he got out.</p>

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<p>I hate that hot potato aspect of the markets. Sure it reflects all available info (except for all that inside info that YOU don’t have…)</p>

<p>BTW, bce91, some people (and institutions) just trade for the day, and a few pennies on alot of shares starts to add up…</p>

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<p>Fannie and Freddie are now, Government owned. reported by NPR in a WSJ Weekend Ed, Sat, Sept 6, 2008.</p>

<p>Perhaps a bit more regulation and oversight earlier would have averted a raid on our taxes.</p>

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<p>“BTW, bce91, some people (and institutions) just trade for the day, and a few pennies on alot of shares starts to add up…”</p>

<p>That was the strategy at Long-Term Capital Mangement that nearly brought down the global financial system. Their name is funny given their trading approach.</p>

<p>[I hate that hot potato aspect of the markets. Sure it reflects all available info (except for all that inside info that YOU don’t have…)]</p>

<p>That’s why there is so many into technical trading.</p>

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<p>I was a mortgage underwriter 20 years ago. I turned down lots of loans because they didn’t meet FNMA guidelines. I hated the part of my job where we had to tell people who wanted to buy their dream home that they just didn’t qualify for the loan.</p>

<p>If FNMA and FHLMC would have just stuck to their OWN guidelines all these years, we wouldn’t be having to bail them out.</p>

10

<p>The details of the bailout are coming out. It looks like it will be awhile for all the details to be worked out.</p>

<p>Common shareholders and preferred shareholders will be diluted but won’t own worthless securites. Dividends will be suspended.</p>

<p>[Bloomberg.com:</a> Worldwide](<a href=“Bloomberg Politics - Bloomberg”>Bloomberg Politics - Bloomberg)</p>

<p>"Treasury Gets Stock </p>

<p>Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on the initial investments. </p>

<p>As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and securities backed by home loans. The portfolios ``shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,‘’ the Treasury said.

The government wasn't going to allow them to muddle through this mess,'' said Paul Miller, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia.No way were they going to be able to do that because the market was going to freeze up.''

New CEOs

Herbert Allison, 65, former chief executive officer of TIAA- Cref, will take over as Fannie's new CEO. David Moffett, 56, who was vice chairman of US Bancorp, will head Freddie, Lockhart said. They will work with existing management, he added.

Fannie CEO Daniel Mudd, 50, and Freddie CEO Richard Syron, 64, will serve in a transition period as consultants.

While common stockholders of Fannie and Freddie won't be eliminated under the conservatorships, they will be last in line for any claims, Paulson said. Preferred shareholders will be second in absorbing losses, he said.

Banks and insurance companies have typically purchased the two companies' preferred shares. The Federal Reserve and three other bank regulators said that they will work to develop capital restoration plans'' with thelimited number'' of smaller institutions that hold Fannie and Freddie shares as a significant share of their capital.

By ensuring that Fannie and Freddie maintain positive net worth, the Treasury will provide additional security'' to the owners of Fannie and Freddie bonds andadditional confidence'' for the holders of their mortgage-backed securities, it said.

Global Interest

The Treasury noted that Fannie and Freddie securities are held by central banks and ``investors around the world.'' </p>

<p>Lockhart added that interest and principal payments will continue to be made on the companies’ subordinated debt."</p>

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<p>I once owned stock in FNM. I bought it because of all the supposed federal guarantees and their limited number of competitors. I got out at a profit when it was disclosed that the CEO’s was cooking the books. I never expected FNM to go under, but I must stay I thought my risk was limited and that I had made a sound investment. Boy was I wrong.</p>

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<p>I’m seeing some articles stating that shareholders will be wiped out and some saying that they won’t be totally wiped out.</p>

<p>In the meantime, another bank was closed by the FDIC on Friday (Silver Star).</p>

<p>Deflation in automobile pricing and much bigger problems in mortgages.</p>

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<h1>11: “I once owned stock in FNM. I bought it because of all the supposed federal guarantees and their limited number of competitors.”</h1>

<p>When FNM and FM became stock companies, there was NO federal guarantees. To have a stock company being guaranteed by the Government/taxpayer is National Socialism, something nobody in a capitalist economy wants. ???</p>

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<p>Well razorsharp, I own AIG right now. Have a nice loss in it too. What was I thinking? :)</p>

<p>BCEagle91, as you know after a credit bubble, deflation is usually next. However since we are a credit society, the government is working very hard to prevent deflation from happening. The 10-year treasury is yielding around what, 3.6%? I’m curious to see how these bonds react next week to the government’s actions involving FNM and FRE.</p>

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<p>“When FNM and FM became stock companies, there was NO federal guarantees. To have a stock company being guaranteed by the Government/taxpayer is National Socialism, something nobody in a capitalist economy wants. ???”</p>

<p>We want socialism if that means the government will bail us out of our losses.</p>

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<p>^ which is anthema to the Republican mantra. I do however understand, that without a bailout, the entire faith and credit of the US would be questioned. Perhaps the World doesn’t believe in capitalism either?</p>

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<p>Mixed economies work best. One thing that drives me crazy about this whole bailout mess is the republicans keep talking publicly about free markets working best, and then praying deeply for government intervention.</p>

<p>The Hypocrisy blows my mind.</p>

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<p>There is no Republican hypocrisy here. FNM was set up by FDR as part of the New Deal, you know, a Democrat creating a limited monopoly. There was no free market to start with. </p>

<p>To be fair, I don’t know that the free market would have created something like FNM if FDR had not created it. Even if the free market would have created FNM, it doubt the market would have created FNM at the time FDR created it. </p>

<p>AIG is a mystery to me. It has has a history of sound business practices and steady growing dividend. Once Spitzer started threatening the CEO and thus forced him to resign, the stock has gone nowhere. Thanks for nothing Spitzer.</p>

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<p>Me, too, Dstark!</p>

<p>We’ve had more Republican administrations than Democratic. Why were Fannie and Freddy not dismantled? because the public thought that government oversight was a good thing, and if things went wrong, as they did, the government would step in, as it did. Hurray for the government!</p>

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<p>“as you know after a credit bubble, deflation is usually next.”</p>

<p>Unless you can find a bigger bubble. That’s proving to be quite a problem right now.</p>

<p>“However since we are a credit society, the government is working very hard to prevent deflation from happening.”</p>

<p>That’s a big challenge right now:
[New</a> auto prices are falling at a record rate, JPMorgan analysts say - Los Angeles Times](<a href=“http://www.latimes.com/business/la-fi-autos5-2008sep05,0,587397.story]New”>Rapid fall seen in auto prices)</p>

<p>“The 10-year treasury is yielding around what, 3.6%?”</p>

<p>Series EE bonds are paying 4% - tax free if you’re under the AGI amounts.</p>

<p>I’m curious about next week too. I’ve been listening to Pupluva’s show and one of his guests indicated the $HUI was at support. I’ll have to look for myself. Commercials are net short the dollar now just like they were net short gold before it crashed. I’d guess that it is inflationary on one side (government making quarterly infusions) and deflationary on the other side (wipeout of preferred and common shares). I heard that the common was $10B and preferred $36B. I haven’t seen the expected infusion amounts from the government into F&F.</p>