Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Next Bailout CandidateAnd the winner is...The Federal Housing Administration (FHA)! Lest it be forgotten, as the article duly notes:The FHA and the government-sponsored housing agencies Fannie Mae and Freddie Mac currently provide about 90 per cent of all new mortgages in the US housing market. From The Financial Times: Defaults pose risks to US housing agency By Saskia Scholtes in New York Published: November 12 2009 21:12 | Last updated: November 12 2009 21:12 The Federal Housing Administration, the government agency that insured $360bn of US single-family mortgages last year, said on Thursday that its insurance reserves had fallen below its congressionally mandated threshold to their lowest level ever. Amid depressed house prices and mounting losses on insured mortgages, the FHA's capital reserve ratio, which measures reserves after accounting for projected losses, fell to 0.53 per cent in the 12 months to September 30--well below the 2 per cent cushion it is required by Congress to maintain. Last year its capital ratio stood at 3 per cent, and it was 6.4 per cent in 2007. Rising defaults on FHA loans have prompted fears that the agency will need a taxpayer bailout. Defaults on FHA-backed loans reached 8.24 per cent in September--up from 8.1 per cent in August and 6.1 per cent a year ago. Shaun Donovan, secretary for housing and urban development, whose office oversees the FHA, said the economy was worse than housing officials had expected. He projected that claims against the insurance fund would be higher than forecast and said action would be needed to shore up the agency's reserves. The FHA's total reserves were more than $31bn, or more than 4.5 per cent of the insurance it had written, the agency said. Mr Donovan said that in almost every economic situation examined in an actuarial study, the FHA still had enough reserves to cover projected claims on outstanding loans. Read the rest of the article Labels: Fannie Mae, Federal Housing Administration, financial crisis, financial crisis bailout, Freddie Mac, housing market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Steep Increase In Fannie/Freddie DelinquenciesThis is bad news: Fannie and Freddie mainly deal in prime, not subprime, mortgages. Job losses are the culprit. From The Wall Street Journal:By JAMES R. HAGERTY JUNE 29, 2009, 4:44 P.M. ET Wall Street Journal Fannie Sees Jump in Overdue Home Loans Fannie Mae reported a steep increase in the percentage of home mortgages with overdue payments. The government-backed mortgage investor said in a monthly summary released Monday that 3.42% of the single-family mortgages it owns or guarantees were 90 days or more delinquent in April, up from 3.15% a month before. Fannie's main rival, Freddie Mac, reported last week that its single-family delinquency rate for May was 2.62%, up from 2.44% in April. Fannie and Freddie are the main providers of funding for U.S. home mortgages. Although the two companies bought many of the riskier types of home loans in recent years, their main business is in prime mortgages. More prime borrowers have been falling behind as they lose jobs or their incomes fall. Richard DeKaser, an independent economist in Washington, D.C., blamed the continuing rise in loan delinquencies on the spike in job losses and on what her termed the "evaporation" of home equity amid falling home prices, leaving many borrowers without a cushion when they lose their jobs. Read the rest of the article Labels: economic indicators, Fannie Mae, financial crisis, Fredddie Mac, housing market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fed Spends Another $1.2 Trillion On BailoutAnother trillion plus to lower mortgage rates? Is this really supposed to help anything?From the Washington Post: The Federal Reserve said today that it will deploy an additional $1.2 trillion to try to lower interest rates and stimulate the economy, an aggressive move aimed at containing the recession. Labels: bailout, bond market, Fannie Mae, Federal Reserve, financial crisis bailout, Freddie Mac, mortgage backed securities, Treasury bonds, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). US and UK Increase Stakes in BanksFrom Reuters, again:Governments tighten grip on banksFri Feb 27, 2009 11:55am EST Reuters By Steven C. JohnsonNEW YORK (Reuters) Governments on both sides of the Atlantic moved to tighten their grip over banks on Friday to stem a financial crisis that has pushed the U.S. economy into its deepest contraction in more than a quarter century. U.S. stocks sank to a 12-year low after Washington struck a deal in which it could end up with more than a third of crisis-hit Citigroup. The World Bank and other development banks launched a $32 billion lending plan to help east European banks and businesses survive a deepening recession. Citigroup (C.N) shares tumbled some 30 percent after the U.S. Treasury struck a deal to convert $25 billion of its preferred stock to common shares, which could give it a stake of up to 36 percent in the bank by diluting existing investors. While the government will not add to the $45 billion it has already invested in what was once the world's largest bank, the stock conversion will shore up the most conservative gauge of the bank's health. The U.S. government is struggling to shore up its banks as part of its approach to restoring growth. Data showed the U.S. economy shrank a staggering 6.2 percent in the last three months of 2008, its biggest slide since the first quarter of 1982, as exports fell and consumers cut spending. "The fear is the government having a big stake in the company will create obstacles for Citigroup to be competitive, and there remain questions about the viability of the financial system," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. "The (gross domestic product) number," he added, "just threw gasoline on the fire." Across the Atlantic, investors were eyeing Lloyd's Banking Group (LLOY.L) as the second major British financial firm lining up to tap a government-backed insurance scheme. The bank, which revealed a 10 billion pound ($14.28 billion) loss for 2008, said it had not finalized a plan yet but said talks with the UK government were "well advanced." On Thursday, Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland (RBS.L) to 95 percent. Global development banks also launched a two-year plan to lend up to 25 billion euros to shore up troubled banks and businesses in eastern and central Europe. The crisis has dried up credit and capital flows into the once-booming region, pressuring exchange rates and forcing some countries to seek help from the International Monetary Fund. Fannie Mae (FNM.P), the government-controlled company seen by the U.S. administration as a key conduit to stabilize the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury Read the rest of the article Labels: bailout, banking crisis, banking system, Citibank, Fannie Mae, financial crisis, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Delasantellis on Foreclosure EndgameHe has some great observations about US politics setting the upper middle class against the working and lower classes as well. From his Asia Times column:A scam at the heart of the US By Julian Delasantellis Asia Times, February 26th, 2009 Travelers visiting New York city from Americas's rural heartland in the 1980s might have been able to regale the folks back home with tales of encounters with knife-wielding drug addicts and/or disease-scourged prostitutes, but it's not like their predecessors who made the same trek back in the 1950s didn't have a tale to tell around the cracker barrel as well. They might have come back to the square dance and talked about playing and losing at the game of three-card monte. Set up on rapidly movable folding card tables, in order to remain mobile against the disproving eyes of the constabulatory, three-card monte games were operated by New York sharpies who, when spying a rural rube from Racine, Wisconsin, or maybe Red Wash, Utah, would invite the visitor to play a simple card game. Three cards from a deck would be dealt face up-one a face cardsuch as a King or Queen. Then the cards would be turned face down, the "dealer" would arrange and re-arrange them on the table, and, the contestant would be invited to chance a wager as to which card was the face card. This was a lot harder than it seemed, especially with the dealer usually employing sleight of hand to hide the face card in his sleeve. No matter how hard he tried, no matter with how much concentration he watched the dealer's hands, the contest could never be won by its very nature; the player was destined to lose the card and his wager - rather like the chances of those facing foreclosure in the current mortgage and financial crisis of ever gaining relief from their hardship. Read the rest of the article Labels: Fannie Mae, financial crisis bailout, Fredddie Mac, housing market, Julian delasantellis, mortgage innsurance, mortgage meltdown, securitization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Mortgage Relief PlanReuters just posted a preview of the plan to be delivered later today:Obama mortgage plan to aid up to 9 million families Wed Feb 18, 2009 9:52am EST WASHINGTON (Reuters) President Barack Obama's much-anticipated plan to deal with the U.S. housing crisis aims to help as many as 9 million families avoid foreclosure on their homes, one of the root causes of the global financial meltdown. "The plan not only helps responsible homeowners on the verge of defaulting but prevents neighborhoods and communities from being pulled over the edge too," according to a summary of the plan that Obama is due to formally unveil at 12:15 p.m. EST in Mesa, Arizona. It aims to help 4 million to 5 million "responsible homeowners" to refinance and another 3 million to 4 million homeowners by lowering the risk of imminent default with a $75 billion "homeowner stability initiative" that will help to reduce their monthly payments. The Obama administration's summary said the plan could offer a buffer of up to $6,000 against value declines on the average home. The plan also aims to increase confidence in mortgage giants Fannie Mae and Freddie Mac through Treasury funding to "ensure the strength and security of the mortgage market and to help maintain mortgage affordability," the plan summary said. "This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly," the summary said. As part of the housing rescue plan, the Treasury Department will double its financial support for housing finance giants Fannie Mae and Freddie Mac to allow them to play a bigger role supporting housing as part of a fresh foreclosure mitigation plan. The Treasury said it was increasing its preferred stock purchase agreements with the two government-controlled companies to $200 billion each from $100 billion. It also said it was raising the limit on the size of the mortgage portfolios the two companies can hold by $50 billion to $900 billion each, along with a corresponding increase in their allowable debt outstanding. (Editing by Bill Trott) Labels: Barack Obama, Fannie Mae, financial crisis bailout, Fredddie Mac, housing market, mortgage meltdown Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Hindrance Than Help?From Reuters:Fannie, Freddie to channel mortgage rescue: sources Sun Feb 8, 2009 1:50pm EST Reuters By Patrick Rucker WASHINGTON (Reuters) - The Obama administration is crafting a mortgage-rescue program that would see Fannie Mae and Freddie Mac ease payments for hundreds of thousands of borrowers and offer a model for Wall Street to do the same, sources familiar with the plan said. Late last week, officials from the Treasury Department and Department of Housing and Urban Development worked with the companies' regulator to agree on standards for who could get relief and how they might coax other finance companies to follow their lead, said two industry sources familiar with the deliberations. Those discussions were still going on over the weekend with Treasury officials trying to weigh the merits and costs of several possible approaches, said one source familiar with the talks. Washington's two largest foreclosure-prevention initiatives of the last 12 months have fallen flat with only a handful of borrowers having been helped despite promises that hundreds of thousands would qualify. Officials hope to clear the red tape and rigid terms that have doomed past mortgage-aid efforts without burdening taxpayers with many billions of dollars in funding costs. "They want to get rid of all the high-cost mortgages out there and figure that there are 1.5 million people who could stay in their homes this year if their loans were modified," said one industry source who asked for anonymity. "But it's just really complicated and expensive to do these kind of workouts." Since Fannie Mae and Freddie Mac were nationalized in September, the government-controlled companies have been retooled as agencies for delivering housing aid. Both put a moratorium on foreclosures late last year, and are pioneering programs to let borrowers rent their homes after default. But while Fannie Mae and Freddie Mac have had some success with stopgap measures to keep people in their homes, the companies' effort to rewrite home loans announced in November has been a disappointment, industry sources said. Read the rest of the article Labels: bailout, Fannie Mae, financial crisis, Freddie Mac, mortgage meltdown Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Big Mac's Heart AttackThe Treasury is pumping in billions of dollars into mortgage giants Fannie Mae and Freddie Mac (now under federal control for an initial $100 billion stake). But the money isn't going in as fast as it's going out.Freddie Mac just posted a $25 billion loss from July to September. These losses, together with the red ink spilled since the start of the housing meltdown, have virtually wiped out its gains from the past ten years. Fannie Mae posted an even larger $29 billion loss on Monday. The Washington Post reports that the government is set to give $14 billion to Freddie Mac to shore up its balance sheet. But most analysts predict this will just be a drop in the bucket, as Fannie and Freddie are given larger mandates to help struggling homeowners. Labels: Fannie Mae, financial crisis bailout, Freddie Mac, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fannie/Freddie Relief Plan for HomeownersFrom International Herald TribuneFannie Mae and Freddie Mac plan to help U.S. homeowners By Edmund L. Andrews Tuesday, November 11, 2008 WASHINGTON: Fannie Mae and Freddie Mac, the mortgage-finance giants now controlled by the U.S. government, said Tuesday that they planned a broad new effort to reduce the loan burdens of homeowners facing foreclosure. The program will be offered to people who are at least 90 days behind on their payments, according to government officials. The goal will be to modify the mortgage - most likely by reducing the interest rate - so that the monthly loan payment is no higher than 38 percent of the borrower's monthly income. The government plan could help as many as 300,000 families that are delinquent in their mortgage payments, and the costs would ultimately be picked up by taxpayers. But people with knowledge of the details said Tuesday that it was more limited than a program advocated by Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. The plan may apply only to so-called conforming mortgages that Fannie Mae and Freddie Mac have guaranteed. While there are trillions of dollars worth of those loans, they are far more conservative than, and generally separate from, the bulk of subprime loans that are at the heart of the nation's foreclosure crisis. The foreclosure rate on loans owned by Fannie Mae is about 1.72 percent. By contrast, the foreclosure rate on adjustable-rate subprime loans is nearly 20 percent, according to the Mortgage Bankers Association. Nevertheless, officials said the new program amounted to the biggest ever government-funded effort to refinance people with substantially less-expensive mortgages in order to keep them in their homes. Read the rest of the article Labels: bailout, Fannie Mae, financial crisis, Freddie Mac, housing bubble, International Herald Tribune Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). $600 Billion Plan: Not Enough to Sustain RallyDespite a stimulus plan of historic scale, the announcement of China's $600 billion program, though sufficient to fuel major rallies on equity markets in Asia and, to a lesser degree, Europe early, has been eclipsed by a continuing stream of bad bad news from the US. And the article doesn't even mention Circuit City's filing for bankruptcy. From Reuters:Oil falls, recession concerns outweigh China plan Mon Nov 10, 2008 1:46pm EST By Edward McAllister NEW YORK (Reuters) - Oil prices fell on Monday as concerns about the mounting global financial crisis offset Saudi Arabia's move to cut supplies and China's launch of a $600 billion economic stimulus plan. U.S. stocks cut gains as General Motors shares slumped, Fannie Mae recorded a record $29 billion loss and the United States pledged further support for struggling insurer AIG. U.S. crude fell 91 cents to $60.13 a barrel by 12:41 p.m. EST, after rising as high as $65.56 on news of China's stimulus plan. London Brent crude was down 63 cents at $56.72. "The crude futures rally didn't last even half a day today because the oil markets are vulnerable to the steady drumbeat of bad economic data," said Gene Mcgillian, an analyst at Tradition Energy in Stamford, Connecticut. "Bad news from Fannie Mae, AIG and earlier GM all point to demand destruction," he added. The U.S. government restructured its bailout of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant. China's spending package aims to boost domestic demand and help the world's forth largest economy ride out the credit crisis, but analysts said it would take time to filter through to the energy markets. "If you step back, you realize China's stimulus could take months, or even years, to affect energy markets," said Phil Flynn, an analyst at Alaron Trading. "After the initial boost to the market, the excitement is wearing off. It's an admission that China's economy is slowing." Saudi Arabia told refiners in Asia it would cut December supplies by 5 percent, signaling its adherence to an OPEC plan to cut output. Oil prices fell nearly 10 percent last week and dipped below $60 the previous week to their lowest level since March 2007, after a string of dismal economic reports from the United States sharpened fears of a protracted recession. (Additional reporting by Gene Ramos and Robert Gibbons in New York, Fayen Wong in Perth and Barbara Lewis and Alex Lawler in London; Editing by Walter Bagley) Labels: AIG, China, Circuit City, Fannie Mae, financial crisis, financial crisis bailout, General Motors Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Related Post on Fed Balance SheetFrom Brad Setser:One easy thing China could do to help stabilize global markets: buy Agencies! Posted on Saturday, October 25th, 2008 by bsetser There is constant talk -- too much, in my view -- about whether sovereign funds will come to the rescue of western financial institutions. Qatar did put a large sum of money into Credit Suisse recently, but in general the Gulf funds are reeling from large losses on their existing portfolio even as they are facing increased domestic demands (see Mufson and Pan of the Washington Post and Steven Johnson of Reuters) . "Rescuing*" US banks but not your own countries' markets -- and our own countries financial institutions -- is hard. And some Gulf countries' ability to carry out their ambitious local development plans will hinge on the availability of financing from their sovereign funds is oil stays at its current levels. China is still cash rich. But the CIC has yet to prove that it can manage a $100 billion balance sheet (its "frozen" investment in the Reserve Primary Fund is the latest case in point) let alone manage a US or European financial institution with a far larger balance sheet. Moreover, it would seem a bit bizarre -- at least to me --for the US taxpayer to guarantee the liabilities (and thus be on the hook for most future losses) of an institution that is effectively owned by China's government. As Uwe Reinhardt notes, US taxpayers are already on the hook for most of the downside -- and handing over both the upside and control to another country's government (typically a non-democratic government) hardly achieves the goal of keeping major financial institutions in private hands. Read the rest of the post Labels: currencies, Fannie Mae, Fredddie Mac, People's Bank of China, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Some Quick Opening Comments, October 17thThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Asian and European markets generally followed the US upwards after the big late afternoon rally on Wall Street yesterday afternoon, showing that some buyers are finally probing the market for bargains. This sentiment is no doubt fortified by the improvements in the interbank and commercial paper markets, which have finally, after several weeks, shown signs of revival, albeit of a frustratingly tentative sort so far. Then again, it's a bit much to expect confidence to return to these markets amidst volatility of unprecedented levels and a bleak economic outlook that gets bleaker daily, and is in fact spreading geographically at a phenomenal rate. Other causes for concern: US mortgage rates have spiked, as holders of US agency (the recently nationalized Fannie Mae/Freddie Mac) debt have, in response to US plans to recapitalize the banks, sold off and piled into riskier, higher-yielding bank assets. As US recovery seems predicated on the eventual revival of the housing market (so that house prices will find a floor, and repossessions/payment defaults stop), this rise, as the Financial Times noted in breaking the story, is a pernicious effect of the plan to recapitalize the banks, and shows how complicated, and risky, this plan can be. Also, hedge funds are selling their assets at a rapid pace to pay off investors headed for the exits, creating a spiral of losses and further sell-offs that has led to a number of funds being closed, and this trend is set to accelerate at a potentially alarming rate. That means downward pressure on stocks, though hedge funds' unwinding of their huge speculative positions in oil and commodities should keep inflation falling, barring a brutal Northern hemisphere winter or geopolitical event of some magnitude. Still, the fact that the funds are in this trouble partially because they are having problems cashing out of failed banks like Lehman shows how delicate all bank-related finance still remains, and more turmoil in hedge fund land will only exacerbate these tensions. Finally, US industrial production statistics show a decline the likes of which hasn't been seen in decades, and September housing figures just came in and are poor. So the economic gloom element may be the dominant factor as US trading starts today, even as the extraordinary measures taken by Central Banks and finance ministries worldwide starts to show signs of having an effect (though, as was the case with US mortgage costs, as we saw above, these effects are far form straightforward and completely serendipitous). Also: watch the situation in South Korea: the currency there fell some 9% yesterday, and its financial situation is dire, characterized by a large current account deficit, falling exports, stubborn inflation, and a banking sector heavily reliant on short-term debt (interbank and commercial paper problems again). And though they accumulated huge reserves in response to the Asian crisis ten years ago (and the subsequent, masochistic IMF structural adjustment program imposed on it), its position is very fragile, especially given the rapidity with which the crisis is now infecting emerging markets, even ones considered only weeks ago to have "decoupled" from the western world's messes. Also watch Eastern Europe: Ukraine and Hungary now, but possibly Baltic countries which borrowed heavily in euros from Scandinavian and Eurozone banks now feeling the pressure. Labels: Fannie Mae, financial crisis, Financial Times, Freddie Mac, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Is the Bailout Justified?This is a Q&A session with Mason Gaffney, professor of economics at the University of California at Riverside. (Visit his website.) Gaffney points out that banks are in their very nature highly leveraged. Bernanke and Paulson must intervene, not to save the bad guys, but to keep the whole banking system from shutting down as it did in 1932. Of course the devil is in the details. And their intervention won't work in the long run without tax and regulatory reform.QUESTION: We hear that the feds had to bail out Fannie and Freddie because of the terrible consequences of letting them fail. How much of that is real and how much is bunk? I'd have thought that if the companies go bankrupt, their stock sells for pennies on the dollar and the new owners can re-negotiate loans down to lower interest rates for people who can afford to pay something, while foreclosing and selling (cheap) those homes that had been bought on false pretenses and weren't going to be paid off at any positive interest rate. Where's the catastrophe? Am I missing something important? ANSWER: Yes, you are missing something important. Banking is a confidence game because banks borrow short to lend long, making their income on the spread of interest rates. That means they are at all times technically insolvent, so when confidence hangs by a thread the whole system can crash, even though for years it has operated smoothly. They insure all this with a cushion of capital and surplus that is a small fraction of their liabilities, well under 10%. So if a small fraction of their borrowers default it wipes out their capital and surplus, and they stop lending. When they move too much of their funds into long-term investments like buildings, plus land purchases which are even slower to pay out, their loan turnover slows down so every year they have fewer funds to finance current production. This is the case today, and it chokes off lots of productive businesses. Superficially the lower (commercial) banks avoid this slowdown by selling their assets to higher (investment) banks, but that just blows dust over what is really happening. The higher banks end up holding the bag, as now, and they collapse, as now. Since FDR, strict banking regulations held the system in check. The Glass-Steagall Act of 1933 separated commercial banks from investment banks precisely to protect consumers and commercial borrowers from the risky behavior of higher banks. Since Newt Gingrich and Rush Limbaugh and Tom DeLay took over, these regs have been repealed, including Glass-Steagall in 1999. The ensuing crash, set up by doctrinaire neocons blinded by Chicago-school economic theology and Bush imperialism, is likely to match 1929. In previous busts the U.S. Treasury could hold the final bag. Now, however, the U.S. Treasury itself is vulnerable, depending on loans from foreign nations. So we inflate the currency and devalue the dollar in a vain effort to prevent further collapse of real estate values and further seizing up of the commercial banking system. Bernanke and Paulson, no fools, are making lemonade as best one could hope. I would nonetheless fault them for cooperating with an administration that refuses to raise taxes or cut military spending and related puppet-propping subventions. We need to do what Clinton did: "reverse crowding out"--paying off government bonds to put money back into the hands of consumers and, especially, investors. Of course this leads right into income tax reform, which is more Paulson's business than Bernanke's. We need steeply progressive income and corporate taxes and an end to special treatment of real estate, oil and other natural resources. Bernanke's business should be to promote selective credit controls, especially to restrict bank lending on real estate collateral. Labels: bailout, banking regulation, Ben Bernanke, credit crisis, Fannie Mae, Freddie Mac, Henry Paulson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). News Alert from the WSJNEWS ALERTfrom The Wall Street Journal Sept. 19, 2008 U.S. Treasury Secretary Hank Paulson, in public remarks, called for "further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," adding that hundreds of billions of dollars may be needed to fix the problems. He said the federal government must implement a program to remove illiquid mortgage assets that are weighing down financial institutions and threatening the economy. More immediately, he said, Fannie Mae and Freddie Mac—which were taken over by the government this month—will increase their purchases of mortgage-backed debt. To facilitate that effort, Treasury will also expand the MBS purchase program it announced earlier this month. Labels: credit crisis, Fannie Mae, Fredddie Mac, Henry Paulson, mortgage meltdown, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Take a Load off FannieThe history of the Fannie Mae bailout, as narrated by The Band. (Produced by Omid Malekan.)Labels: Fannie Mae, Freddie Mac, Henry Paulson, Omid Malekan Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lehman Next?This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Across the Curve is an excellent site, which I look forward to visiting every day, but today's postings were extremely alarming. After all the agony of the Fannie Mae/Freddie Mac bailout, the euphoria on the markets lasted less than 24 hours, and ATC points out a number of reasons why this is so. First and foremost, there seems to be a gloomy sentiment forming that the Treasury has employed all the most powerful weapons it has in combating the credit crisis, and will now be consigned to the sidelines to watch and wait for whatever else may come along. And candidates are already queueing at the door. Lehman, of course, is potential casualty number one: much-exposed to subprime-related writedowns, it announced huge losses not long ago, and recently has been under fire because it is experiencing difficulties raising the capital it requires to reconstruct its tattered balance sheet. It had been in discussions with a South Korean concern, but those negotiations broke off, and, according to ATC, the Fed and Treasury, having just assumed responsibility for Fannie and Freddie, barely caught their breath before being forced to recruit potential investors on Wall Street to prevent Lehman from suffering a Bear Stearns-style meltdown (Lehman shares fell some 40% today); ATC speculates that the tipping point may be reached when a counterparty refuses to do business with Lehamn. But ATC says nobody on Wall Street is in a position to save Lehman except J.P Morgan Chase and Goldman Sachs, and JPM already got hooked into the Bear Stearns deal. Meanwhile, shares tanked across the board today, and, as ATC notes, bond yields, which reacted favorably to the Fannie/Freddie bailout, are on their way back up. If the Fed and Treasury have to bail out Lehman, they'll go even higher (investors are already concerned about the sums the government is shelling out to salvage the financial system), and the dollar may again be exposed, despite its impressive performance of late. And, as we noted yesterday, the situation with regional and commercial banks is becoming scary. Labels: bailout, credit crisis, Fannie Mae, Freddie Mac, Larry Peterson, Lehman Brothers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fannie and Freddie: The Mother of All BailoutsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Treasury Secretary Henry Paulson finally called time on the financial world's two biggest deadbeats this weekend, effectively putting the two mortgage behemoths under government control. Although some details remain to be worked out (not least of which is the unprecedented $1.4 trillion of credit default swaps that, technically speaking, amount to defaulted payments in the case of the GSEs (Government Sponsored Entities) being taken into "conservatorship" by the government), the main effects of the takeover are as follows: (1) the government will provide up to $100 billion to both companies to beef up their capital, and the Treasury may ultimately buy the companies at little cost if it chooses to do so; (2) dividend payments (which they were very liberal with, at the expense of capital provisioning) will be eliminated, while payments on debt will be honored; (3) the government, in yet another unprecedented move, will buy significant amounts of mortgage-backed securities on the open market, beginning with a $5 billion spending spree later this month; (4) the CEOs of both companies will be replaced; (5) the companies will be barred from lobbying on Capitol Hill, a skill it learned to master over the years, (6) both companies will gradually reduce their participation in the mortgage markets (a stunning reversal, given the fact that the government was relying on them to increase their presence in the moribund market only a few months ago); and (7) the Treasury will create a "Secured Lending Credit Facility," or emergency fund in case they companies cannot secure the loans they need to purchase mortgages or mortgage-backed securities on the open market. In exchange for its largesse, the Treasury will receive warrants (giving them the right of purchase) on 80% of the GSEs' shares, and $1 billion in cash from each. What, exactly, tipped the two companies over the abyss? During the past week the shares of both companies rose a bit, as investors came to believe that drastic government action might not be necessary. But then doubts about the GSEs' accounting methods, an issue that has plagued them historically and during the current crisis, began to come to the fore again. Also, foreign investors, who hold vast amounts of GSE securities, began to pressure the US government to guarantee their debt, even at the expense of equity--and hence the ability to continue business as independent companies. But, according to The New York Times http://www.nytimes.com/2008/09/08/business/08takeover.html?_r=1&oref=slogin, the single most important factor behind the Treasury's move had to do with Freddie Mac: even more careless about capital provisioning than its sister GSE, Freddie aroused so much uncertainty amongst investors, who feared that if they bought Freddie's debt now, and the Treasury eventually had to be called in anyway and seized, their investments would be lost. And since Fannie and Freddie's debt is so important to the operation of the so-called repo- and interbank markets, which lubricate all financial markets, this was something the Treasury simply could not allow. So what will happen now? Holders of Fannie and Freddie's shares will suffer. And though many are happy at the thought of wealthy investors being punished, there is an underside of this for the rest of us. As The Financial Times http://www.ft.com/cms/s/0/68a608be-7d3c-11dd-8d59-000077b07658.html points out, US regional banks are some of the biggest holders of Fannie and Freddie stock, and their losses will compound difficulties in the US banking sector, just as worries about the health of commercial banks--themselves increasingly exposed to the commercial property downturn--are coming to the fore. And it is by no means clear that the takeover will unclog the the interbank market. Though Fannie and Freddie may be dead as independent concerns, they may well continue, like vampires, to suck the blood out of the living for some time yet. Who was the guy who used that metaphor again? Labels: Fannie Mae, Freddie Mac, Henry Paulson, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). What free markets?Our July/August issue is (finally) going to press; here is the Editors' Note for the issue:The government's response to the ongoing banking and credit crises is beginning to look like a massive redistribution of wealth from taxpayers and ordinary borrowers to the financial companies that got us into these crises in the first place—and to their executives, who profited handsomely along the way. It seems that policymakers and regulators are happy to take a hands-off approach to markets as long as stocks and other financial assets are appreciating—even if that appreciation walks, talks, and quacks like a bubble—but not when the stock market starts to go sour. The bailout of Fannie Mae and Freddie Mac is a case in point. On the one hand, the government has to back the mortgage giants' bonds, given the enormous number of mortgages they hold or guarantee (over $5 trillion), and given that investors in those bonds—including foreign central banks—have assumed that the government would guarantee them. Failure to honor the bonds would throw the U.S. housing finance system into chaos, hurting millions of families. But as Dean Baker of the Center for Economic and Policy Research has pointed out, the Treasury Department has also effectively promised a potentially huge bailout of holders of Fannie and Freddie's stock. That would be a bailout on an even larger scale than Bear-Stearns's earlier this year. Unlike the guarantee of the companies' bonds, this piece of the bailout is nothing more than a redistribution of wealth from taxpayers to shareholders who made risky investments. While the government—the public—is bailing these companies out, how about some conditions? Maybe the public should get to own Fannie and Freddie, following the lead of the British government, which nationalized failing bank Northern Rock earlier this year. At the very least, caps on executive pay would be nice. David Mudd and Richard Syron, CEOs of Fannie and Freddie, made a combined $30 million in salary and other compensation last year. The bailout of is part of the larger housing bill that also includes steps to address the foreclosure crisis. As Fred Moseley discusses in this issue, the bill's foreclosure provisions in fact amount to a partial taxpayer bailout of mortgage lenders, since refinancing is initiated by lenders rather than borrowers, and the federal government will guarantee the new mortgages. This, when lending companies were the ones who lured people into risky mortgages in the first place. Moseley reviews policies to cope with foreclosures and sorts out which ones will truly help homeowners at risk. Other issues in the headlines—food, oil—also expose the myth of the "free market." The "fundamentals" of supply and demand have clearly played a central role in the precipitous rise in global food prices, but so has the rush of so-called index investors into new, unregulated "over-the-counter" markets for commodity futures. In the case of the oil industry, supply and demand have never been a free-market affair. In this issue we also examine two of the biggest winners in an economy rigged to redistribute wealth upwards: the managers of private equity firms and hedge funds. The regulatory and tax advantages lavished on our wealthiest citizens make clear that the government is active in the rigging. Meanwhile, to read the editorial page of the Wall Street Journal, you'd think the big flow of money is from corporations into the public purse, as John Miller reveals in his critique of the Journal editors' stance on auctioning, rather than giving away, carbon credits. Our question is: what planet are they on? Labels: Dean Baker, Fannie Mae, food crisis, Freddie Mac, hedge funds, Northern Rock, oil, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Statement on the Bailout of Fannie Mae and Freddie MacA statement from Dean Baker of the Center for Economics and Policy Research:The collapse of the housing bubble has put the survival of Fannie Mae and Freddie Mac in jeopardy, as those of us who warned of the bubble have long predicted. While there can be no question of supporting these mortgage giants at such a critical moment for the housing market, the public should place serious conditions on this support. These companies face bankruptcy because of the incompetence of their management. They should not be given unlimited access to taxpayer dollars without any strings attached. Read the full statement. Labels: affordable housing, Center for Economic and Policy Research, Dean Baker, Fannie Mae, Fredddie Mac, housing bubble Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fannie Mae/Freddie Mac, RevisitedThe bailout of Fannie Mae and Freddie Mac that was announced yesterday was predictable. In fact, D&S collective member and frequent blog contributor Larry Peterson was on this story back in early May:The New York Times reported today that the two mega government-sponsored mortgage lenders, who have single-handedly kept the US mortgage market from sinking through the quicksand altogether since private mortgage finance dried up in the wake of the subprime crisis (they account for no less than 80% of mortgages bought by investors in the first quarter of 2008), may themselves require enormous taxpayer-financed bailouts if properties they hold continue to decline in value. Fannie and Freddie, who use their unspoken government guarantee to clinch cheap financing (which they do, to a degree, pass on to consumers), buy mortgages from banks and keep some of them on their books, while securitizing and selling the rest off (retaining the liability for repayment if consumers default). For example, Fannie Mae sits on an enormous pile of debt and outstanding loans (nearly $3 trillion), while investments, retained earnings and equity (or "core capital") chalks up at only about %800 billion, while Freddie has about $2 trillion in liabilities and $750 billion in assets. If these some of these loans follow the prevailing trend and continue dropping in value, it is clear that Fannie and Freddie could find themselves facing a serious shortage of capital, especially since they've been doing all in their power to avoid ramping up capital, in order to concentrate on paying off shareholders. Shareholders, remember, were put off by a series of scandals at the agencies, and Fannie and Freddie have been using Congress' desperation to keep the mortgage markets open to extract better terms from Congress (for one thing, Congress increased the cap on mortgages they can buy to $730,000 from $417,000); and now, Fannie and Freddie want Congress to repeal the very laws Congress made in the wake of the scandals. Labels: Fannie Mae, Fredddie Mac, housing bubble Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
