The market is in steep decline again with news of Freddie Mac and Fannie Mae eating it:
Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, plummeted again on Friday morning, as senior Bush administration officials consider a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, according to people briefed about the plan.
Fannie Mae stock was down 36 percent in early trading compared with Thursday’s closing price; Freddie Mac stock was down 41 percent.
Fannie Mae and Freddie Mac, respectively.
Calculated Risk is AWOL, so I do not know where to turn to make sense of all this. I guess I can just cross my fingers and hope things don’t get worse. There is this, though, of a CNBC reporter shocked about the drop in Freddie Mac’s price:
This was footage from yesterday. Good thing he didn’t put out a buy.
Gregory
All together, now: Privatize the profit; socialize the risk.
Feh.
Laughingriver
Here you go John, The Automatic Earth is by far one of the best sources for financial information on the net these days…
MattF
And Felix Salmon’s blog Market Movers is always good. ‘Specially when he says nasty things about Ben Stein.
Punchy
Uh….yeah. MSNBC is reporting that the J-times has an article that says Israeli airplanes are now doing practice runs in Iraq, using US bases. This would jive with Cheney’s plan to make our involvement look “necessary”, even though he can rightly say we didn’t start it.
This is all driving the price of oil crazy.
Wilfred
Q: Bbbbut what about free markets and, gasp, the holy of holies, Capitalism?
A: A minor correction is in order: a 700 quintabajillion bail-out oughta do ‘er, I reckon. Whiners.
ThymeZone
My barometer is the grocery store. At the grocery store, all the factors come together in a nexus of combined cause and effect. Energy, housing, food, transportation, all reflected in the price of bread, milk, eggs, meat-fish-poultry, and produce.
Let me say this: Don’t go to the grocery store if you have a weak heart. The skyrocketing prices and down-content packaging (the same package that used to contain 12 ounces of product now contains 10 ounces, and costs more), will scare the crap out of you. Which will cost you money because Depends are up along with everything else.
The drain on wallets at the supermarket and gas station translate directly into a collapse of discretionary spending. And that translates into recession.
Luckily, our government is ginning up a war with Iran to take our minds off it.
Pb
Let the Bailouts Begin — bonddad
Fannie and Freddie Waterfalls are Too Big to Bail — Michael Shedlock, Seeking Alpha
El Cid
God bless the fiscal conservative Republicans who always manage to save the taxpayers money and grow the economy with their heroic deregulation and tax cuts for the super awesome.
gopher2b
I think the shareholders of Fannie and Freddie would disagree with you on that one.
Dennis - SGMM
Earlier this week, McCain called Social Security a “disgrace” because younger workers have to pay for the benefits of retirees. It’ll be more like extortion when everyone who pays taxes will be levied to bail out the institutions that created the sub-prime debacle.
Congratulations to us all on our enhanced responsibilities: citizens, taxpayers, bagholders.
Gregory
Fannie Mae used to be a government agency, and a successful one at that. After its privatization (which also spun off Freddie Mac to avoid a monopoly). The companies made nice profits as privatized entities.
Is there any doubt that until the crisis, what you’d have been likely to hear from its shareholders was calls for cuts in the captial gains tax — certainly not calls for increased Federal intervention?
Sure, the shareholders would like a government bailout now that the corporations are tanking. That’s only rational. But can we stop pretending the so-called “ownership society” is made up of rugged individualists?
They may disagree all they please, but I don’t see how it makes the characterization “privatize the profit; socialize the risk” a bit inaccurate.
Dug Jay
As atrios would say: WHEEEEEEEEEEEEEEEEEEEEEEE! Let the bad times roll.
Duros Hussein 62
MSNBC is reporting that the J-times has an article that says Israeli airplanes are now doing practice runs in Iraq, using US bases.
I’ll bet the Iraqis are really pleased about that, too.
I heard on NPR this morning that Fannie Mae and Freddie Mac account for about 50% of the national debt right now. How does one bail that out?
4tehlulz
How do I shat bed?
Face
I was stunned at the price of shit the last time I went. Now I just give a bunch of cash to the ol’ lady and tell her to buy the stuff; last time I was there, I upset a bunch of people due to my constant and involuntary f-bombs caused by looking at what I wanted, knowing what it “should” cost, then looking at the new price.
southpaw
Can anyone explain why, if everyone thinks a government bailout is inevitable, the stock prices are still tanking? If the taxpayers are going to guarantee Fanny and Freddie, then that’s essentially a riskless investment, right? What am I missing here?
Xoebe
I wonder if Robert Mugabe is a Republican? Seems about right.
binzinerator
From the NYT article John linked to:
Yup, we’re about to be given an even bigger bag to hold, one that will be double what Junior has already given us.
Dennis - SGMM
One thing I’ve read is that if the government puts F&F under a conservator then their shares will be effectively worthless. A conservator would be free to reorganize F&F and do about anything else short of shutting them down. On the other hand, if the government decides to act as the underwriter of F&F’s five trillion in mortgage holdings then the five trillion would be added to the National Debt. Although F&F does have a relationship with the government the gov is not officially the underwriter of last resort even though some investors act as if it would be.
Eural Joiner
Really? Cause I make some for free (or close to it) everyday if you’re interested.
Ha, ha – sorry, I just couldn’t resist.
fester
Southpaw — good question — if there is a bailout, we could probably assume it will something along the lines of the Bear Stearns deal — the stockholders are fundamentally wiped out; maybe given enough to shut up and not sue, maybe not. After that new stock could be issued in a few years at a different price, but the current stockholders would be SOL.
The bailout would be on the Fannie and Freddie Debt obligations, so the government would be paying out to the current bond holders.
Chris Johnson
I’m seeing some friends flip out because they believe massive nuclear strikes on Iran are coming (look up Bent Spear and Empty Quiver). I’m trying to explain that a lot of the activity they’re seeing can be attributed to the collapse of Freddie Mac and Fannie Mae.
Also seeing word that all the guys that were on that famous unsanctioned flight of nuclear weapons to a base staging them for Iran are now dead- or all but one I think it was. Wouldn’t that be a thing, if the failed ‘soldiers’ for that hit are all being whacked?
The impression I get, just in a general sense, is that the military is fighting on two fronts, one in the Gulf theater and then also against civilian neocons that want to take suicidal, high-stakes high-risk military gambles. Our guys in the armed forces are holding the line and have so far been able to argue down the neocon madmen, and have already caught at least one ‘Bent Spear’ attempt to run an attack outside the military chain of command.
I believe they’re doing this only partly because their oath to the Constitution demands it, but also because they do not believe the US would survive an aggressive war with Iran. In simple terms, we’d break our back, and we’d be fucked. We would lose a big chunk of our navy to Sunburn missiles, we’d have no allies, and our people in the theater, already demoralized and overextended, would be decimated.
I guess what this means is, never mind worrying about the morality of American Empire because we can’t have that. We can politely back down and try to weather our economic hurts, or we can fall prey to another round of neocon ambition and blow all the fuses at once and be absolutely fucked. I hope it’s gonna be the former, but one way or anothr the world’s nightmare is gradually coming to an end.
fester
Southpaw — good question — if there is a bailout, we could probably assume it will something along the lines of the Bear Stearns deal — the stockholders are fundamentally wiped out; maybe given enough to shut up and not sue, maybe not. After that new stock could be issued in a few years at a different price, but the current stockholders would be SOL.
The bailout would be on the Fannie and Freddie Debt obligations, so the government would be paying out to the current bond holders.
Nicholas Weaver
Fannie/Freddie aren’t necessarily insolvent: The key test: is the money coming in sufficient to pay their debts? If so, yes. If not, no…
The reason the stock price is being hammered is that any bailout is a bailout for the BONDholders: the debt will be honored. But in a bailout, equity (stockholder) share will probably go to 0
Dreggas
Well no shit WRT Fannie and Freddie. Remember they were asked to help bailout the Subprime parts of Big Shit Pile and did so so it’s no wonder they’re tanking as well.
Dennis - SGMM
Under fair value accounting (What would be realized if it had to sell all of its assets today) Freddie is technically insolvent.
Laughingriver
Your right, the issue is the investors who are holding 5 plus trillion in mortgage backed securties that will be bailed out. This in affect will add 5 plus trillion to the national debt and is defacto monetization of debt which will lead to hyper-inflation. Typically investors have understood that the two most secure places to put their money was in US treasuries and Mortgage backed securties sold by Fannie Mae and Freddie Mac. All of that is about to be proven to be as fasle as the entire idea of conservative economics. The problem is that since the sub-prime meltdown these two institutions have had their regulations significantly relaxed in order to keep the mortgage market going, they have increasingly taken on more and more of the debt to keep it going, once they fail the entire and I mean the entire housing market in the US will freeze up. Everyone has known this was going to happen since last year, but they were encouraged to take on more and more debt all the while the powers to be knew that a tax payer bailout was on the way, thus they take on bad debt, they sell this bad debt to investors at higher and higher rates and you and I will pay everyone back.
Of course the implications of adding an additional 5 plus trillion to the debt balance of the US government is going to have even bigger implications than this…
Tsulagi
Just the Bush ownership society plan in action. Stay the course.
jake
We. Are. Fucked.
You’re welcome.
montysano
If the govt bails out F&F, they’re essentially adding over 50% to the national debt. Instantly. Right now. The market doesn’t see that as good news.
Perhaps this analogy is simplistic, but: let’s say you make $50K a year, and you’re already $50K in debt. Suddenly you find out you’re going another $25K deeper. How would you feel? US GDP = about $10T. US debt = about $9.5T. F&F’s obligations are about $5T (50% of the US housing market). In addition, F&F are highly leveraged, i.e. reserves/obligations ratio not favorable.
Financial geeks: feel free to correct me if I’m off base.
DBrown
The cost of groceries now gives a new meaning to the ‘food for fuel programs’ (especially this winter when so many will choose between them)… gotta love the idea of converting corn to fuel to get ‘A’-rabs off our backs.
Wait, we need to import just about as much fuel to make the corn based fuel as we get from the damn stuff – if American’s 20 percenters (can that really be used as a noun? Or is it even a word?) aren’t the dumbest, stupidest fuckers on earth, then bushwhack is brillent; but why do the demo-rats still support this tax on the poor and middle class? I guess the demo-rats are only good at caving and can once more support another bushwhack program or they can just throw in the towel and get behind McSame; then we can all sing, (to the Beach boys tune) bomb, bomb, bomb, (pause) bomb Iran … together as gas goes above $8 – $10/gallon.
The Thinking Man's Mel Torme
The local (local being SW Florida, where the real estate market is full-bore shrieking panic) fishwrapper has a commentary section where the mouthbreathers get to sharpen their cranial points. Some comments there recently, as well as those of another blog (R.X. Cringely) lead me to believe there’s a new conservative meme developing with respect to the mortage mess. Specifically, the Clinton HUD overreacted to claims of discriminatory lending practices and forced the big mortgage lenders (Countrywide &c) to loosen their standards so that “minorities” could buy homes. This had the collateral effect of “forcing” these same lenders to write rafts of bad loans.
Smells strongly of organized talking points to me, as it has many of the wingnut standards in one tidy package: the Clenis, big government meddling in markets, and shiftless coloreds. The text is also near-boilerplate in every instance I’ve seen.
Anyone else seen instances of this?
jcricket
I know, the sensible financial advice is to keep investing, because in the long-run the dollar-cost-averaging works in your favor. But how long is long-term? How long do I have to watch my money essentially trade sideways (big runups followed by crashes in 3-5 year increments)? We’re going on 15+ years now, with a blip in-between where I happened to get some money out of the market, and that was sheer luck. I got laid off, and was forced to sell my options, luckily that was before the market crashed. I can’t claim any financial genius.
Otherwise, unless I’m mistaken, all my IRA/401k investments are worth exactly as much as the dollars I put in (starting in 1995-ish). And don’t get my started on the 529 – that’s worth even less than the money I put in.
I’m on board with the idea that the government shouldn’t provide 100% of our retirements, or 100% of the liquidity in the market. But it’s times like these that prove to me the private sector has serious limits. There are things the private sector cannot provide:
* We need a stronger regulatory hand to prevent these crises from growing so out of control in the first place.
* We need stronger Social Security so that people have a reasonable “floor” in retirement.
* We need single-payer (think universal Medicare with a proper funding base) healthcare so people aren’t regularly declaring bankruptcy due to health costs, or in what feels like debtor’s prisons their whole lives because they get sick when they’re unemployed.
* We need a better funded safety net. One that isn’t gutted the first time tax revenues shrink due to a recession. This might offer unemployment insurance that actually pays a reasonable amount and lasts until you can find another job. Food stamp and housing voucher programs that help people a reasonable amount, etc.
At this point I can only conclude Republicans and Libertarians are idiots. Fucking idiots. Morons. Anyone who believes the government is incapable of being anything but a source of problems doesn’t deserve to be listened to anymore.
4tehlulz
>>Specifically, the Clinton HUD overreacted to claims of discriminatory lending practices and forced the big mortgage lenders (Countrywide &c) to loosen their standards so that “minorities” could buy homes.
I’ve heard this floated around other places. Doesn’t seem to gain traction.
Though in Florida, I wouldn’t be surprised if it did.
Svensker
This is just the fault of a bunch of psychologically pussy whipped whiners egged on by the liberal media. In Bush World, everything is hunky AND dory, cuz now he’s not only the Decider, he’s the Polluter! Boo yeah!
southpaw
Okay, so as I’m understanding this, Fannie and Freddie will need to remain going concerns in some sense (as the lender of last resort). Everyone thinks this will be effected by nationalizing both of them, taking over their obligations, and declaring their stock certificates valueless or purchasing them for a pittance.
I guess I see what you’re saying. But that would be an awfully tough pill for a supposedly conservative administration to swallow. And, given that F&F were forced to relax their lending standards earlier this year, I’m pretty sure a bailout along these lines would end up in court. Is there some reason people think this is more likely than just giving Fannie and Freddie a fresh injection or injections of low cost liquidity at taxpayer expense?
jcricket
BTW – I work in the private sector. For all its benefits, anyone who can’t see that waste, overage, mistakes, cronyism, corruption and lack of productivity exist in plentiful quantities within the private sector is also an idiot.
As I said, I’m not arguing the government should be given unlimited money or unlimited power. Just that services we do have should be properly funded (rather than improperly funded and then claiming that the program “doesn’t work and should be killed”). That there are plenty of things the government can do better than the private sector (I think healthcare is quite clearly one of them). And as importantly, that the private sector will never ever ever ever ever properly restrain itself without regulation.
Dennis - SGMM
Blaming this one on the Clinton-era HUD implies that Bushco was either unaware of the situation or unwilling to do anything about it. In either case this would become another part of the Bush Legacy. It’s doubtful that it will be much more than fodder for chain emails.
southpaw
Bloomberg:
Svensker
My husband and I had money in Freddie Mae. But when Frank Raines got retired as its head with a huge shit load of money and nobody went after him for his malfeasance, we saw the writing on the wall and bailed out.
We’re a couple of not very savvy NJ suburbanites living in a small 50s Cape Cod with vinyl siding, driving an 8 year old Ford, but somehow we saw this coming. Guess the geniuses on Wall Street and in DC didn’t.
stickler
Jcricket:
Those Republicans and Libertarians who actually believe that are, indeed, idiots. But plenty of people have done quite well financially over the last 8 to 10 years, thank you very much. Those folks are not idiots: they’re rational. Sure, the rest of us are screwed, but they’ve done just fine.
4tehlulz
>>President George W. Bush told reporters separately that the two firms are “very important institutions’’ and that he discussed market “concerns’’ with Paulson earlier today.
In sum, they’ll go tits up after close.
The Thinking Man's Mel Torme
Like 9/11 was because the Clenis didn’t vaporize the Arabian Peninsula after the U.S.S. Cole bombing.
Like the first Bush economic slump was fallout from the Clenis “causing” the dot com bubble.
Like the current oil runup is because
the Clenisalgore wouldn’t allow offshore drilling.for more on this topic, see, “No one could have foreseen…”
Perry Como
That’s been floating around for the last year or so. It’s always been brought up by mouth breathing conservatards that have the economic knowledge of mollusk.
mantis
We just got the call that our mortgage is going through (our first; no more renting), which just so happens to be an FHA/Freddie Mac loan. I’ve been sweating it out all week as we waited and the companies’ stocks plummeted, even though I don’t know if it would actually affect us.
I just hope nothing gets completely fucked between now and closing in two weeks. Glad they’re giving me money instead of the other way around.
4tehlulz
FDIC takes over IndyMac Bankcorp
I guess the government can handle only one Mac at a time.
Dennis - SGMM
Yes, these guys:
Study, and pay for it for the next several generations.
Rome Again
Next up is commercial real estate which is held mostly by commercial banks.
I’ve been reading a lot of economic news recently, they say that Fannie Mae and Freddie Mac are the tipping point, we’re going nowhere but down now.
Harvard-Educated Mollusk
Oh go fuck yerself.
Rome Again
I don’t know why, economic blogs have been predicting this.
anonymous 37
Actually, you’d be sitting on a 20% gain if you bought F-Mac when he made that comment.
None of which changes the uglier big picture, of course.
jcricket
Fine, anyone who associated with republican/libertarian parties solely because they want to enrich themselves, and doesn’t care about the environment or the long-term damage to the country, they are rational (if short-sighted).
But anyone who believes any Republican or Libertarian economic policy, is as I put it, an idiot.
Rome Again
As I understand it they’re going to hold off on it for as long as possible and make it Obama’s fault.
Dreggas
Just shows how completely ‘tarded they are. I worked in the industry, it had nothing to do with HUD, it had to do with greed.
Rome Again
From CNBC Newsticker: Dem Leaders state they have confidence in Fannie Mae and Freddie Mac.
OMFG!
It’s the end of the world as we know it, I feel fine…
Ned Raggett
Earlier today I found a perfect photo for all this and I happily invite everyone’s input:
Caption this photo.
pharniel
i had a phd economics prof hit me with that spew, and even i was dumpstruck with the stupid.
also, ‘who could have forseen’ in the financial world is ‘hocoodanode’ courtasy of Calculated risk and The Tan Man (that’s hoo-cood-a-node)
The Other Steve
Pure greed. And it was really stupid greed to boot. Short term, but no long term thinking at all.
I too worked in the industry.
Rome Again
The Fed states they’re not prepared to talk about the range of options available… uhhh yeah, because if they did then they couldn’t stick the blame for this on Obama in the future.
The discount window is NOT closed, it’s not officially open, but it’s not closed.
Hmmmmmm!!!
Rome Again
So now they’re floating the idea of creating an entity that can help F&F because nobody is big enough to do that, but, to do that, where does that capital come from?
The Moar You Know
I’ve seen this too, think it’s a viral email. It does not seem to be gaining any traction. The notion is ludicrous – it’s not “minorities” defaulting in droves on these mortgages, it’s HELOC-abusing SoCal residents who ought to be going to jail for fraud, mortgage writers who also ought to be going to jail for fraud, and people of all colors who grabbed the kool-aid, drank it down with a grin and asked for more.
Xenos
The solution is obvious. Let them fail, let the
shareholdersbagholders eat shite sandwiches, and don’t guarantee a goddam penny with taxpayer dollars (implied backing of taxpayer — ever hear of a corporation paying an implied debt?).And when everything goes to shit, open up a new non-privatized agency, call it FMAE II, with actual, non-implied taxpayer backing, to act as market maker for properly underwritten home loans with at least 30% down-payments and for no more than $300,000 in loan amount.
Let ten million inexpensive houses bloom. Everybody else can go climb a tree, or file bankruptcy, or both.
Clutch414
IndyMac Bancorp was seized by federal regulators (Subsctiption Required)
From Wikipedia:
Clutch414
Sorry about the kinda, sorta OT nature of my last post…
Rome Again
Don’t be sorry about that Clutch, it’s only the second biggest bank failure in history, and considering the topic, I think it’s not really OT at all.
Clutch414
Thanks, Rome.
Here’s the info about the seizure from the FDIC.
gopher2b
If you really believe what you are saying then why don’t you buy stock in the FMs? They are publicy traded. Put you money where your mouth is.
It is widely reported that if the goverment “bails out” (i.e capitalizes) either or both companies, the stock holder equity will be wiped out. That is not socialing the risk. That is the government stepping in to take over a bankrupt company in order to prevent a complete collapse of the national real estate market. What do you think conservatorship means?
gopher2b
Jesus, calm the fuck down. This is a liquidity problem plain in simple. At the end of the day there are still assets there. This isn’t Enron or the internet bubble where there is literally nothing left. The market will reset itself and we will all move on….unless everyone stays scared shitless and won’t loan money to anyone body else. Then we have Great Depression II
BTW, this isn’t the Republicans and Libertarians fault anymore than its Democrats. Do you think think there is housing collapse in Kansas? Nebraska? Last time I checked the biggest collapses were in pretty deep blue regions. You want to blame someone blame the idiots who bought houses they couldn’t afford with paper they didn’t read and the stupid fucking bankers who gave people hundreds of thousands of dollars and didn’t bother to check if they had a job. Last time I checked, both of theose parties are getting fucked pretty bad.
gopher2b
FM guarantees mortgages, it doesn’t pay them. You 5.5 trillion national debt figure assumes that every 50% of U.S. mortgages (all mortgages guaranteed by the FMs) would go into default. If this happened, we would have bigger problems than the national debt.