Fannie & Freddie Blank Check

[ray23]

Why is Paulson involved in this?

Although he may not be a teenager, blank check to trillions, I don't think so. These kind of things establish policies, it may not be Paulson using that check next time.

Banks are failing in the US OK that's happened before, what does that really mean unless you have more the a 100K in an account your safe. When they fail the Feds take them over they don't stop existing.

Yes Freddie and Fannie are important but they are also businesses, when I had business that failed I took the loss, not my next door nieghbor through his taxes.

Give them access to better borrowing OK, blank check for a bail out no way.

There are things that these businesses can do to reduce thier loses, if they are really in that bad of shape. They ceated it they should fix it.

Values of housing down nothing new about that, they were over valued in the first place. Really a normal correction in the market.

What can they do, reduce the interest amount and recover as much as they can. Who hasn't had a buiness and nogoiated on a bill in troubled times.

If you owe more on the house then it's worth you ride it out till the market comes back, it will. What's messing that up variable rate loans, instead of seeing a break in bad times the interest rates are increased leaving people without enough to make the house payment. Can someone explain to me why when loan rates on the commercial levels are down why are individual rates being raised. Personally I think we are trying to get money to investors. Well the last I Time I looked the Stock Market doesn't go up all the time it has down turns. You want to play you might pay, you might make a bunch of money.

I have never been in the market simply because I don't understand it. So that means I have never made a dime from that. So why should I be paying for thier screw ups. Were they going to give me part of thier profits I doubt that.

In any business I have been in if thing went bad you get innovative and work through it, for those good times again. Thats just business. If profits were guaranteed every time why would anyone have a job and listen to a grouchy boss.

I'm sorry these busnesses need to get innovative and work thier way through this. Uncle has enough problems of his own deal with. Don't increase the rates and if you have to go interest free for awhile till this works it's way through, well that is just life Will the investors take a hit Yep. But they choose to play the game and knew going in they could suffer a loss.

Banks really don't want the properties they lose big time on that, the values go down and the properties are subject to damage, that need to be repaired not a good deal. Investors still don't get money. This mentality gets you the same thing we have seen in Thailand for years, Bank takes the property back carries it and try to sale it at the loan value which was inflated in the first place. Result builder gets his money out of the loan. The property is over priced for the market, doesnt move. Carried as a NPL forever here. Just doesn't work

Lawmakers Balk at Paulson's Fannie, Freddie Plan (Update1)

By Dawn Kopecki and Craig Torres

July 15 (Bloomberg) -- Lawmakers balked at giving Treasury Secretary Henry Paulson unprecedented power to use government funds to rescue Fannie Mae and Freddie Mac, the U.S. mortgage- finance companies grappling with a collapse of confidence.

``I'm uneasy about giving this blanket authority without having any kind of checks,'' Senate Banking Committee Chairman Christopher Dodd said in a Bloomberg Television interview after a hearing his panel held today. Senator Richard Shelby, the committee's top Republican, told reporters ``I've never known Congress'' to give ``an open-ended blank check for somebody to fill in.''

The skepticism forced Paulson to stress he would protect taxpayer funds and assert his authority over Fannie and Freddie, the biggest sources of U.S. home financing, in case of a government intervention. Federal Reserve Chairman Ben S. Bernanke said Paulson would have the right to overhaul the companies' management under the Bush administration's proposals.

Today's hearing indicates Congress may not approve a plan to provide a backstop for the companies this week, as Paulson had counted on when he announced his rescue package July 13. Shares of the companies dropped and bondholders demanded higher premiums on their debt.

Drop in Stocks

Fannie Mae slid 27 percent, its biggest drop since at least 1980, to $7.07 in New York Stock Exchange composite trading, bringing its slump in the past week to 60 percent. Freddie Mac fell 26 percent to $5.26, and is down 61 percent from a week ago.

Paulson repeatedly said he had no intention of using the authority to buy unlimited equity in Fannie Mae and Freddie Mac, and the proposal was aimed instead at bolstering confidence in the firms so such emergency action wouldn't be needed.

``When you're dealing with the taxpayer's money I don't think ambiguity has a place,'' Shelby, of Alabama, told reporters after the hearing, which featured Paulson, Bernanke and Securities and Exchange Commission Chairman Christopher Cox. ``We are potentially layering taxpayer resources on top of massive systemic risk,'' Shelby said at the hearing.

Dodd's reaction was a sharp contrast with that of his counterpart in the House, who yesterday said he was comfortable with giving Paulson power to use unlimited funds.

Not a `Teenager'

``I trust him,'' Democratic Representative Barney Frank of Massachusetts, the chairman of the House Financial Services Committee, said in an interview with Bloomberg Television yesterday. ``This is not some irresponsible teenager.''

Republicans in the House today said they want to postpone consideration of the proposals because they haven't had enough time to vet them.

House Minority Leader John Boehner, along with No. 2 Republican Roy Blunt, said in a joint statement today that Democrats ought to hold hearings on the plan so lawmakers can get a better understanding of how it would work and how much it would cost.

``There is little question that action is necessary, but there are also important questions that must be answered,'' they said. ``It would be irresponsible for Congress to provide the proposed new authority without due diligence on the mechanics of the Treasury proposal and its potential implications for taxpayers.''

Bipartisan Reaction

In the Senate today, Paulson found skepticism on both sides of the aisle.

Democratic Senator Jon Tester of Montana demanded that Paulson detail in writing the consequences for the economy if Congress doesn't act to help Fannie Mae and Freddie Mac.

``It could be a trillion bucks'' that Paulson could appropriate under his proposed authority, Tester said.

Paulson, appointed by Republican President George W. Bush, received the most hostile reception from other Republicans.

``The taxpayers have reacted and the market has reacted to your plan by driving down Fannie Mae shares 26 percent today, right now,'' said Senator Jim Bunning, a Kentucky Republican. ``Freddie Mac's are down 29 percent at this moment, just in case you are interested in how the markets are reacting to your wonderful plan.''

Bunning pledged to oppose the measure, indicating the Senate may need 60 votes to enact it, rather than a simple majority. A single senator can block legislation unless 60 other members vote to stop his so-called filibuster.

`Essential' Role

Bernanke told lawmakers it's ``important'' for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market. Paulson said the two companies are ``essential'' because they represent the only ``functioning'' part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages.

The extra yield investors demand to buy Fannie Mae's five- year debt over U.S. Treasuries with a similar maturity rose 5.2 basis points to 85.2 basis points today, compared with 64 basis points two months ago, according to Bloomberg data. Spreads on five-year Freddie Mac notes widened to 85.3 basis points, from 66 basis points in mid-May.

The Treasury chief's proposals also included unlimited lines of credit for the companies and bringing the Fed into a ``consultative'' role over the firms' capital.

Dodd, a Connecticut Democrat, said he was ``uneasy about what we're trying to achieve here'' by bringing the Fed into some supervisory role.

Dodd said he planned to work with other lawmakers on the committee in coming days on some sort of measure, because ``inaction is not an option.'' He said some plan would probably be attached to an existing bill that's aimed at stemming foreclosures and setting up a stronger regulator for Fannie Mae and Freddie Mac.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki[at]bloomberg.net; Craig Torres in Washington at ctorres3[at]bloomberg.net

Last Updated: July 15, 2008 16:54 EDT

[sabang]

^ Can you provide a Link for that article ray- Issues rules.

Fannie and freddie are quite integral to the US credit markets in general, mortgages in particular. Speaking as an ex-stockbroker who dealt in US securities, they are a sacred cow- literally too big and important to fail.

I was opposed to the Fed bailing out Bear Sterns- an Investment Bank. I think there is no choice but to bail out these two. From Wiki-

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government sponsored enterprise (GSE) of the United States federal government. It is a shareholder-owned corporation authorized to make loans and loan guarantees.

Although Fannie Mae is not explicitly backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection, there are many people in the investment community who believe that Fannie Mae is a company that is too big to fail. This belief was ultimately validated by the US government when Fannie Mae seemed in danger of financial collapse. Because of this, financial markets have often priced in an implicit government guarantee with respect to Fannie's share price....

Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal to provide liquidity to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to remove the activity of Fannie Mae from the annual balance sheet of the federal budget, it was converted into a private corporation.Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae).

Federal National Mortgage Association - Wikipedia, the free encyclopedia


The US government formed it, sponsored it, then privatised it but with an implicit (but unwritten, i.e 'unnoficial') guaranty. It will not- Can not- let it go under. If necessary, it will buy it back rather than let it fail- I am quite confident of that.

[attaboy]

The two institutions have long been run not by bankers but by retired political figures, predominantly Democrats. From 1991 to 1998, Fannie Mae was headed by James Johnson, a longtime aide to former Democratic vice president Walter Mondale. Johnson’s successor, Franklin Raines, had served as budget director to Bill Clinton. Jamie Gorelick, vice chair of Fannie Mae from 1998 to 2003, served as deputy attorney general in the Clinton administration.

These figures have paid themselves impressive private-sector salaries. Johnson earned US$21-million in just his last year at Fannie Mae. Raines earned US$90-million for five years’ work at Fannie Mae. Gorelick got US$26-million.

Yet the companies never had to meet the discipline of the private marketplace. They paid no taxes, and they had access to a line of credit at the Treasury department. More ominously for today’s crisis: They were not required to provide anything like the level of information about their internal operations expected of a privately owned company.

This non-transparency allowed Fannie Mae to engage in serious accounting fraud, overstating its earnings by more than US$6-billion over the Raines years — overstatements that incidentally justified the company’s lavish compensation packages. (Both Johnson and Raines incidentally also received below-market mortgages from the large mortgage company — and major Fannie Mae beneficiary — Countrywide Mortgage.)

David Frum on the demise of Fannie Mae and Freddie Mac - Full Comment


Fannie Mae has been getting abused for years now. It seems the top guy's salary was based on company earnings. The institution's income statements were determined using creative accounting procedures.

Bailing them out encourages more bad behavior elsewhere. But the trend is to get so deep in trouble while being so integrated in the system that letting Fannie Mae fail means the patient dies.

The first step would to cease using the top slot for patronage. Put a banker in charge of each institution. Put Raines on trial. See how he likes that.

[Mid]

literally too big and important to fail.

Crap ...................

all animals are equal .............

[ray23]

Sorry about that article is not showing on Bloomberg any longer.

Sorry Sabang I will remember that in the future, didn't realize ther was rule about that. But then again I didn't read the rules in the first place. Hey I don't read the instructions before assembly either. Could be why I have three legged table HMMM!!!!!!!!

[sabang]

This non-transparency allowed Fannie Mae to engage in serious accounting fraud, overstating its earnings by more than US$6-billion over the Raines years

This is a very serious scandal. I find it hard to believe that, once privatised, FNMA had less stringent accounting and transparency laws than a normal private company!

Something badly amiss there. Otoh, The Federal Reserve has even less transparency and accountability still. Something very badly amiss there too.

It's way over time that the accountability of the institutions that issue money, bonds, commercial debt (i.e Investment Banks) and underwrite mortgages was increased.

The US Financial system is going to need a major overhaul to bring back confidence in it, from the Federal Reserve- now accepting junk bonds as collateral, not priced to market- downwards. It's all increasingly looking like smoke and mirrors now that the House of Cards is tumbling.

[Spin]

I sat and watched the Senate Banking Committee meeting on tv yesterday for about 4 hours. By far the most interesting comments were made by Kentucky Senator Jim Bunning.
He was clealry furious at the actions of the Fed and had this to say:

"I'm deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan's easy money in the late 90s and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke's easy money in the last year has undermined the dollar and sent oil to a new high every day and an almost doubling since the rate cuts started.
...
The Fed is asking for more power but the Fed has proven that they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it farther than it was supposed to go in the first place. As I said a moment ago, their monetary policy is the leading cause of the mess we are in. As regulators, it took until yesterday to use the power we gave them in 1994 to regulate all mortgage lenders and then they stretched their authority by buying $29 billion worth of Bear Stearns assets so J.P. Morgan could buy Bear Stearns at a deep discount.

Now the Fed wants to be a systemic risk regulator, but the Fed is a systemic risk. Giving the Fed more power is like giving a neighborhood kid who broke a window playing baseball on the street a bigger bat and thinking that will fix the problem"

Chairman Dodd followed this (not the exact words but close enough) by asking Ben Bernanke "Can you answer that?, I do wish that Senator Bunning would tell us whats really on his mind instead of being so vague"

It was pure entertaniment!

Link to the Jim Bunning transcript. Here

[ray23]

Does kind of kinda call a spade a shovel doesn't it. Valid points kind of makes you wonder what the Treasury and Fed are really protecting.


Kind of hard to stretch it all the way to the citizens of America

[sabang]

I should've put my money where my mouth was. The US Gov't has guaranteed it will bail out fannie & ginnie- US Treasury mostly, but the Fed will stand behind that also. Fannies shares uo 35% overnight.

The US Federal Reserve is looking rather like Drexel Burnham & Lambert these days.

[Butterfly]

I think they really have no choice. And it does make sense. Do we want to see the entire collapse of the system, and then take actions later ? certainly not

nationalization and government intervention is back in force,

[Norton]

Sorry about that article is not showing on Bloomberg any longer.

Can you provide a Link for that article ray- Issues rules

Is this it RC?:

Bloomberg.com: Worldwide

[barbaro]

I am hearing two views on Freddie Mac and Fannie May. One view is optimistic, stating 1% of the mortgages are in trouble and that this problem will pass. The pessimistic view is that this reveals a "cancer" within the entire lending system, especially as it relates to housing.

Perhaps both arguments are nuanced. Perhaps, we'll just have to wait and see.

In many cases in the US, lenders want to see 20% down is down areas. A $200,000 house requires $40,000 down, in addition to other fees. Others areas will take 10 or 15%. I think this is getting back to common sense, and is more realistic.

[attaboy]

Another reason the housing market is in the doldrums is lenders are waiting to see what new regulations are coming forth. They don't want to be in violation so only the tip top applicants are getting loans.