The AP reports a federal takeover of Fannie Mae and Freddie Mac:
Government assumes control over mortgage giants Fannie Mae and Freddie MacWASHINGTON (AP) — The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.
Officials announced that the executives and board of directors of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.
Treasury Secretary Henry Paulson says the historic actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious. . . .
Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie. . . .
Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure. . . .
The companies own or guarantee about $5 trillion in home loans, about half the nation's total. . . .
Lockhart said in order to conserve about $2 billion in capital the dividend payments on both common and preferred stock would be eliminated. He said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.
The transcript of the official statement is here. Several regulatory changes are announced.
UPDATE: As a reminder, Fannie Mae was involved in a lot more than "lobbying." There was the Enron-style accounting and the thuggish behavior.
Well WTF were the management and Boards responsible for then?
i.e. GSE management / board membership appears to be nice work if you can get it.
If there is evidence of punishable wrongdoing, I earnestly hope it will be pursued.
US stock index futures went up strongly, however, on the leaked news.
So the likeliest outcome on Monday is market UP, but one never knows. Certainly, that's the way I bet on Friday afternoon before the market close.
Cashing their paychecks, I suppose.
Paulson's absolution of mgt is really hard to understand. If you're in the business of lending money against collateral, isn't it important to make sure the collateral is good?
If the whole operation is so mechanical that they couldn't do anything about it, why is it necessary to pay millions to get someone capable of running it. There are lots of capable administrators in the world who could do that for a fraction of what the CEO's got paid.
I'm not with it either, let them fail. Don't take my tax money to save stupid people.
Second, I just have a sense that when the historians of the future look back at the 'Post-empire era of the United States', September 8th, 2008 (or maybe the 6th) will be one of those dates that freshmen have to memorize for their history exam.
I'd be interested in knowing what "economic laws" you are talking about. What about this law: "All economists that can predict the market ahead of time are billionaires."
Best thing ever was when Rubin called O'Neal to get him to bail out Enron and he said no. And he let the thing fail. And the world did not melt down.
Now, we have bail out after bailout. Disgusting.
Bingo. Give that man 10 silver dollars. When you read the bio of Charles Ponzi, you get the feeling he was the founder of modern finance. It's all there: 1. arbitrage as in his International Postal Reply scam; 2. bank fraud; 3. Florida real estate scams. How modern can you get?
We really have no means to put a value on a stock sold in the secondary markets. The Gordon Dividend discount model looks good except stocks that don't pay dividends should have a zero price and they don't. You buy a stock because you hope someone will buy it from you at a higher price in the future. Or you hope the company will do a buy back of its shares or another company will buy your shares.
Here, the "bailout" makes more sense to me. It certainly seems as if non-preferred shareholders will lose mostly everthing. And, the plan calls for a reduction in the assets of either FM over many years--it seems today's "buyout" is the first step in unwinding (or at least shrinking) the GSEs. I can't understand why TCO is so "miserable" about this situation. What would have been a better outcome?
Could their existence be challenged under the 10th Amendment?
This would have essentially ended the capacity of the US economy to provide mortgages to its citizens, at least as I understand things. Of course, in the wake of the FM explosions I'm sure eventually new mortgagers would appear and old ones would gain a lot of market share. But wouldn't it be bad if the capacity to finance mortgages to US citizens disappeared for a few months (or at least shrank considerably)?
Maybe not. I'm no economist, so maybe there's a good reason why such concerns are overblown. If so, I'd love to hear it.
You don't expect neocons to obey the law, do ya?
For those who are interested, I have prepared a summary of what’s happened, including quoting and linking to Jim Lindgren’s earlier post.
(1) The GSE's don't loan money to anyone. They buy loans other people make, guarantee their performance, and resell them to investors.
(2) The GSE's didn't create their business model with it's dual purposes, Congress did. That's why Paulson said it's not the GSE's fault.
(3) the old chestnut that the GSE's represented "private profit/socialized risk" is a crock -- the private profit part (i.e.: the shareholders) were just wiped out. Some private profit. Paulson just private-profitted me out of $5k.
(4) there is no law authorizing the government to seize private companies like this, and yes, it is fascist.
For what was once a libertarian blog there are a lot of big government conservatives posting for four more years of this mess.
Thanks for the clarification that the GSEs do not make loans themselves, but rather simply guarantee them. I for one was unclear on that point.
Regarding your other points though:
2 and 3. The FM issue is definitely a big mess and I'm sorry to hear your investments went sour. That's never any fun for anyone. But was it really Paulson who private-profitted you out of $5k? For example, what board members did you vote for at the last shareholder meeting, or the meetings before that? Or, do you share Paulson's view that the Board and the management of your particular FM weren't responsible for anything? My point is, sure there was private profit available in the FMs, right up until today (or whenever the deal goes through). It's not clear to me that anyone's gain or loss is Paulson's responsibility. Wouldn't it be the companies'?
4. What about the law that Paulson mentioned in his statement today? The specific authorization that Congress gave him? He and others seem to be convinced that that law is enough. It also doesn't sound like this move has anything to do with fascism, at least as I understand its definition.
Best,
Ben
There are major repurcussions to allowing financial giants to fail. It took $100 oil for Houston to recover from the loss of Enron and those companies that were damaged when it fell. Of course Sarbanes Oxley didn't help.
Imagine the stupid legislative fixes that we'd get in a world where multi-trillion dollar entities were allowed to fail. If we get out of this with a cost of a couple of hundred million dollars to the taxpayers, we will have done OK. That's a lot less money than was spent to bail out the Savings and Loans 20 years ago.
If Ken Lay deserved jail (and apparently he did), I don't see how this management team should be any different.
While the rationale for these actions is that they are "to big to fail" and the liquidation would cause massive disruption of world financial markets (parenthetically, China is the largest holder of their securities), perhaps what is needed is a "shock to the system" and end the myth that everyone should own a home.
You make a great point. The fact is that banks are in the business of taking in people’s depot money and then lending it out to people making used car loans, making a profit on the spread. If you realized that that’s how your money is being used would you put your money in CDs without FDIC?
I would love to see the cretins moaning about FRE and FNM lose their savings in their local S&L. Without FDIC I wouldn’t allow my checking account to hold more than a thousand dollars.
The political hacks that were in charge of FRE and FNM deserve to quick trip to the slammer. The only thing keeping them out is that most of them were part of previous Democrat administrations and they take care of their own.
"depot"should be "deposit"If that's what happens, I would not call it a bail out. I lived through the savings and loan crisis in Texas, frequently grimacing when people spoke of the savings and loan bail out. Look around to see how many savings and loans are still around after the "bail out." The depositors, not the savings and loans, were bailed out.
Fannie and Freddie operated with an implicit federal guaranty. They laid down with the devil, and he has come for his due--as in this case he should have. The government's proper role here is an orderly disposition of assets, minimizing losses to others. That's what the RTC did in Texas and elsewhere.
The RTC was ruthless; we regarded the whole process as a second Reconstruction. As with most government activities, it used a meat cleaver when a scalpel would often have done, but it purged the problem, and the economy has moved on. Given that the feds are necessarily involved, that's probably the best outcome we can hope for here. Not that we're guaranteed the best.
I'm actually amazed that people don't understand this. But then again Volokh had no clue what went down in the Hanoi Hilton (so it's good that McCain covered it).
Now, however, I gather that the rapid decline in the housing market meant that their capital cushions (particularly with respect to subprime mortgages) were seriously overstated. I think Freddie and Fannie were a flawed structure: a government sponsored entity, that got too large to fail, but in which the risk was supposed to be borne by private investors, that was serving a public need. Probably we are much better off to get rid of this type of structure if we are not going to let them fail. Otherwise, we taxpayers wind up assuming the risk but not sharing in the rewards.
See that is the kind of thinking that will get you in trouble.
The roman empire failed. Herds of Buffalo were stampeded over cliffs. All who followed were meat. Classic fail.
I believe that you spoke of “managing earnings” as sort of an innocent thing done by most large companies. I also believe you are referring to General Electric under Jack Welch as using that technique. If you were talking about some other company, let me know.
The end result of Welch’s “earnings management” is that GE’s stock is now 50% below what is was 8 years ago since Jeff Immelt took over and stopped “managing earnings” a la Welch. I happened to see how this was done on the micro – not macro – level and it was simply crooked. Truckloads of goods leaving the factory on the last business day of the quarter, stopping outside the plant gates so that the business unit could book a “sale.” The next day the truck returned, with the good still loaded. Then on to “managing” the next quarter.
Then of course there were provisions for returns, provisions for repairs, provisions for etc., etc. etc.
It’s wrong, it leads to lies being told on balance sheets, it leads to investors being deceived, and it should lead to fines or jail for those perpetrating this fraud on the markets.
There’s no excuse for it even if the juvenile excuse is that “everybody does it.” The fact is that everybody does not do it – and few did it on the scale that FRE and FNM did it, with the exception of Enron and Worldcom. I want to see vigorous prosecution of the people involved, the disgorgement of illegal profits and compensation, and a few more felons to occupy “Club Fed.”
And, by the way, I am very much involved in the financial services business and that’s why I don’t take this as a business-as-usual attitude.
And yes, I think that the government has done the right thing by placing them in receivership. But that is only the first step to making sure this never happens again.
If someone else, who has the resources to do it, is promising to make good on all your bad loans, with no end in sight, no, it's not really important.
Of course, the Freddie Mac and Fannie Mae boards didn't imagine a situation where Uncle Sam tired of being a sugar daddy, kicked them out of the house, and took back all the
things he cosigned for.
Nick
The GSE had capital, loan loss reserves, and debt that was selling at more or less LIBOR rates (the rates that other banks lend to each other, higher than treasury but still low). Failure of the GSEs was in no way imminent. GSEs, in calculating capital, are expected to account for the expected value of all future losses (which is pure guess work, no way around it.) Some of the accounting requires you to use the resale value of securities, even if you expect not to sell it ever, and keep collecting your expected interest payments. My point is that even if the GSEs were negatively valued in their accounting (which they can be by some measures), They won't actually fail until the expected losses actually occur, and may be able to make up for those future losses with future business profits.
things he cosigned for."
The GSEs, as I understand it, have never used a penny of federal money. They just took advantage of an implicit guarantee that the Feds would continue paying on Agency bonds if the companies ever failed. The agencies have never defaulted on a bond, though. This includes the recent "back-stop"/old "bailout" that opened up the Treasury to the GSEs, which they haven't needed to take advantage of because the sales of GSE debt weren't so bad as to warrant the higher rates on the treasury window.
Actually we can thank OFHEO (now FHFA) for the GSEs owning so much subprime paper, as they required it as part of their affordable housing charter.
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