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Author Fannie (FNM) and Freddie (FRE)
HenryTo
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PostPosted: Wed Aug 08, 2007 2:50 am    Post subject: Fannie (FNM) and Freddie (FRE) Reply with quote

Both stocks bounced substantially since Friday afternoon and will most probably lead the next housing bull cycle, however muted it is (actually, the more muted the better, as long as the pipeline is growing). Now that the jumbo loan market is starting to freeze up as well, senators and regulators alike are entertaining the though of easing the caps of both quasi-government companies.

Following is courtesy of the WSJ:
------------------------------------------------------------------------
Big Fans for Fannie, Freddie Some Lawmakers See
One-Time Pariah Firms As Subprime Salvation
By JAMES R. HAGERTY
August 8, 2007; Page C1

The mortgage-market meltdown isn't over, but it already has produced two clear winners: Fannie Mae and Freddie Mac, the nation's biggest investors in home loans.

Until recently, politicians in Washington were arguing about how best to rein in the two giant government-sponsored companies, both recovering from accounting scandals and lapses in financial controls. Now, as worry about the housing market trumps accounting scruples, the political debate has shifted to whether Fannie and Freddie need to grow even bigger to buy more loans and calm mortgage investors.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

Fannie's shares gained 3.1% to close at $64.43 on the New York Stock Exchange yesterday, while Freddie was up 2.7% to $61.64.

The two stocks have held steady over the past month amid anxiety over mortgage defaults, while shares of Countrywide Financial Corp., the nation's largest home-mortgage lender, have fallen 27%.

Fannie and Freddie are benefiting because investors are still happy to buy the mortgage securities they create, backed by loans purchased from lenders scattered across the country. The two companies collect fees for guaranteeing the interest and principal payments on the loans backing those securities. Although Fannie and Freddie are private-sector companies, they were created by Congress to funnel money into housing, and investors assume that Congress would bail them out in a crisis.

Sticking With Uncle Sam

With loan defaults rising and house prices falling, investors now are shunning, at least temporarily, mortgage securities packaged by Wall Street firms and others that don't have any implied backing from Uncle Sam. That makes it hard for lenders to find buyers for loans that can't be sold to Fannie and Freddie. Regulations prevent them from buying loans of more than $417,000 on single-family homes, and they have stricter standards on down payments and verification of income than were imposed by Wall Street during the housing boom.


The result is a spike in rates on some types of loans that can't be sold to Fannie or Freddie, such as prime, 30-year, fixed-rate jumbo loans, those above $417,000. Yesterday, the average rate on such loans was 7.44%, according to a survey by financial publishers HSH Associates. That's 0.84 percentage point higher than the average rate on "conforming" loans, those that meet Fannie and Freddie's standards. Typically over the past decade, the premium paid for jumbo loans has been around 0.20 to 0.30 point.

Even middle-class people often pay $500,000 to $700,000 for a humdrum home in high-cost areas. So the higher rates on jumbo loans could be "devastating" for the housing market in some areas, says Michael Menatian, president of Sanborn Mortgage Corp., a mortgage bank in West Hartford, Conn.

As lenders recoil from riskier types of mortgages, "we're turning a lot of people away now," says Jeff Lazerson, chief executive of Mortgage Grader, a mortgage broker in Laguna Niguel, Calif.

Many investors hope that alarm over the housing market will induce Ofheo to ease restraints on Fannie and Freddie.

But Joshua Rosner, an analyst at the New York research boutique Graham Fisher & Co., describes as "mass delusion" the idea that they can save the day for investors exposed to billions of dollars of ill-advised home loans now heading toward foreclosure. For one thing, he says, Ofheo has required Fannie and Freddie to follow stricter standards, recently imposed by banking regulators, in assessing borrowers' ability to repay. So they can't buy up loads of reckless loans to speculators or people failing to pay bills.


Richard Syron, chief executive of Freddie, agrees that there are limits to what his company can do. "Neither we nor anyone else can buy at par loans that probably shouldn't have been made in the first place," he says.

Freddie's Limited Help

Mr. Syron says Freddie can provide funding to refinance many subprime borrowers stuck with loans due to reset to sharply higher monthly payments, but not most of them. In addition, he says, Freddie could help the market by buying and holding more mortgage securities packaged by Wall Street if the cap on its holdings rises.

Fannie and Freddie may be able to buy subprime mortgage securities at discounts that more than make up for the credit risk, Kenneth Posner, an analyst at Morgan Stanley, said in a research note. They also may be able to charge more for providing guarantees on securities sold to others, he said: "We can't imagine anyone complaining -- right now there's no other game in town."

The flight of other investors from the mortgage market "does show the role and the need" for Freddie and Fannie to act as steady providers of mortgage funding, Mr. Syron says. Still, he says, Freddie isn't gloating: "You don't want to take a lot of joy in other people's suffering."

Write to James R. Hagerty at bob.hagerty@wsj.com
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Author Fannie (FNM) and Freddie (FRE) Replies
Rubedo
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PostPosted: Sun Sep 07, 2008 11:11 am    Post subject: Reply with quote

From Cramer yesterday.

Cramer: Fannie, Freddie Takeover Changes the Game
Jim Cramer
09/06/08 - 09:47 AM EDT

Right now, at this moment, many people know that something good is going to come from this government takeover of Fannie (FNM - Cramer's Take - Stockpickr) and Freddie (FRE - Cramer's Take - Stockpickr), but they don't know how it relates to the market.

So, let me tell you how I see things unfolding. We know that our economy started rolling over because so much money -- trillions -- has been bet on house-price appreciation.

The wagering on American house-price appreciation has taken place in every venue and, in many cases, with gigantic leverage, magnifying a problem of historic proportions with a financial Armageddon quality we have not seen EVEN IN THE GREAT DEPRESSION. In other words, not since the Great Depression, but including the Great Depression. That's how important it was for houses to appreciate.

We are now in a double-digit decline of housing that has made most houses bought since 2005 worth less than their mortgages. House-price depreciation has been so relentless, particularly in Florida and California, believe it or not, two states that could bring the whole financial edifice down, that if it isn't stemmed then it's difficult to stop a severe recession, if not depression, given the abrupt slowdown of the rest of the world and our own skyrocketing unemployment.

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

So far we have failed so badly in doing so that borrowers of even the highest quality are now defaulting. That's wrecking the bonds and derivatives and the insurers of the bonds and derivatives and anyone that is holding mortgage paper.

The Treasury's takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.

The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.

Put simply, there will be no reason to foreclose, and no reason to walk away. That will DRAMATICALLY reduce the amount of foreclosed homes coming to the market. It will dramatically reduce the amount of money people owe on their mortgages.

Therefore, given the incredible 60% decline in homebuilding from two years ago, the incentives put in the recent housing legislation to buy a home and what should be a radical revision going forward in the amount of foreclosed homes, you can expect that house-price depreciation will be stopped within a year's time.

We have more homes for sale than any time since 1991, BUT we have 40 million more people than we had in this country in 1991, so that figure is virtually meaningless.

Given the low rates of interest in this country and what will now be mortgage rates that track those low rates, and given the freefall in home prices nationwide to where they were in many cases before the bubble, and in some cases well below, there is, for the first time, an INCENTIVE to buy a home.

That's how significant this takeover could be.

You need to forget its expense right now and the inflationary problems stemming from this. Those were the same reasons given when I suggested that we cut rates by 300 basis points last year and let everyone refinance when it was still worth it to do so.

I am tired of the moralizing based on a total lack of rigor and homework. We are at this extreme because our policymakers have simply been lazy, wrong, intransigent and foolish. If this were the private sector, all of these people would be candidates to be fired. If this were the NFL they would have been gone long ago. But because they are in high positions and considered somehow blessed with a ken far beyond reality, we are in this mess.

But the mess must be stemmed, and this will help stem it. Radically. It will not turn around the fortunes of the companies that need Europe or Asia to turn. Those economies just started slumping. It won't mean much to many industrial companies. At least not yet.

But it will revive credit and it will cordon the problems to where they are manageable, and we will no longer worry about the viability of a Wachovia (WB - Cramer's Take - Stockpickr) or a Bank of America (BAC - Cramer's Take - Stockpickr) or a Wells Fargo (WFC - Cramer's Take - Stockpickr) or even a Washington Mutual (WM - Cramer's Take - Stockpickr) because now any deposit is worth its weight in gold. That's because the spreads between what a bank can lend out and what it pays you are gigantic.

With bountiful credit and bank balance sheets cleaned up, we will get out of this moment, and we will be prepped to advance, just as the BKX, HGX and the retail index have been signaling. With mortgage paper turned into federal paper, the holders worldwide, from Russia to China to Europe, will be made whole. The world will rally and something good, at last, will occur. With the concomitant decline in energy, we have the start of a turn that could get us out of this bear market once and for all.

Considering that "the world' is not set up for this change, you can bet that those who are short or in cash have to say that all of this is much ado about nothing or that it won't matter a hill of beans. In fact, you will hear many things in the next 72 hours that contradict this bullish view.

That will be wrong. Do you hear me? Wrong.

I am tired of being laughed at for my July 15th call that the financials bottomed and my call for housing to bottom next year. I am weary of the catcalls and the attacks.

And, oh yeah, I am going to be right as of this weekend.

Maybe I just got lucky with this bailout, but it is better to be lucky than good.

As for the common stocks of Fannie and Freddie, owners, it serves your right. There has been another guy on this site, Doug Kass, who has told you again and again that their common stock is worthless.

If you owned that, you simply never read the guy, who paid for your subscription 10 times over. Congrats to my friend Doug for a job well done. (Want more insight on the stock market? Follow the link to subscribe to RealMoney Silver.)
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Rubedo
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PostPosted: Sun Sep 07, 2008 11:10 am    Post subject: Reply with quote

From Ritholtz and Doug Kass

http://bigpicture.typepad.com/comments/2008/09/gse-takeover-ov.html

Treasury Takeover of GSEs: 10 Key Points
Sunday, September 07, 2008 | 12:04 PM
in Bailouts | Credit | Real Estate | Taxes and Policy

I am still working my way through the details of the GSE takeover by Treasury, but here is my initial read of the details:

• FHFA will act as conservator of the two firms -- meaning the US government has day-to-day control of Fannie and Freddie;

• The conservator's goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company's business and preserve and conserve the assets and property of the company.

• There is an immediate moratorium of the firms' lobbying activities.

• New lending facility: "Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks;"

• Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS).

• Treasury purchases the mortgage-backed securities from the firms; no word about any derivatives or swaps owned by the two;

• Starting in 2010, the portfolios must be reduced at the rate of 10% per year.

• Both CEOs (Daniel Mudd and Richard Syron) dpart after a transition period. TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie; U.S. Bancorp Chief Executive David Moffett at Freddie.

• Senior preferred stock purchase agreement includes an upfront $2 billion issuance of senior preferred stock with a 10% coupon ($1B per GSE); Dividends are quarterly starting in 2010, and warrants represent an ownership stake of 79.9% in each firm.

• 3 Goals of the takeover: market stability, mortgage availability and taxpayer protection.

• The takeover is the result of a "detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve;"

This looks like a 80% haircut for the common holders, I am trying to figure out if this is a haircut for the preferred holders . . .

Regarding common and preferred losses: "With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."

On Moral Hazard: "Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."

==

The treasury to get preferred senior to existing preferreds, a 10% coupon and 80% of the common. Exisitng preferred dividends are eliminated.

Whether prefs get protected or not has been one of the detail uncertainties with this bailout. The banking industry’s lobbying to protect itself from losses on the preferred fell on deaf ears as well it should have. If taxpayers lose a penny, the common and preferred should and will get wiped out. Having to pay a 10% coupon on whatever the government gives them will assure there is nothing left over. Banks are going to have to take other than temporary impairment on their preferred holdings creating a new capital hole to fill in addition to that from credit losses. Banks will/may rally but this isn’t really good news. Not going to help credit or do anything to balance the negative effects of rising unemployment.

Posted by: Doug Kass | Sep 7, 2008 12:12:33 PM
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PostPosted: Sun Sep 07, 2008 10:51 am    Post subject: Reply with quote

I was thinking of launching a "Value" tracking portfolio this week, but I'm running behind on the backtests.

It's really hacking me off, because if I launched on Monday, it would be a great time to "deploy fresh capital," but I may miss it due to being unready ...

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PostPosted: Sun Sep 07, 2008 9:47 am    Post subject: Reply with quote

Text of Bernanke's statement on the GSE bailout:

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a2ovipUvC2pw
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PostPosted: Sun Sep 07, 2008 9:23 am    Post subject: Reply with quote

Key take-away points:

1) Treasury to directly invest in GSE MBS
2) Treasury's position would be senior to both the preferred and the common shares - although it is not clear how the latter will perform once trading starts on Monday
3) The GSEs will moderately increase their portfolios next year. Starting in 2010, the GSEs will reduce their portfolios by about 10% a year, largely through run-off
4) Establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks in order to ensure these entities can continue to fund their operations.

As I mentioned in our commentaries, the US stock market made a significant bottom in mid July. The bear market has just ended.
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PostPosted: Sun Sep 07, 2008 9:13 am    Post subject: Reply with quote

Full text of Paulson's statement:
----------------------------------------------------------------------------------
September 7, 2008
hp-1129

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC-- Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.

We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.


Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

***

I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and xxx Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today's action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs' business outlook.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

And let me make clear what today's actions mean for Americans and their families. 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. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.
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PostPosted: Sun Sep 07, 2008 9:09 am    Post subject: Reply with quote

Treasury's conference starting as we speak.

rffrydr: To your point on covered bonds: I don't see a problem in having a covered bond rated AAA but with an underlying mortgage and bank that are "only" rated AA as long as the latter's portfolio has geographical and asset class diversity. This housing cycle was a once-in-a-lifetime cycle where both geographical and asset class diversification did not matter. Again, each deal will need to be evaluated on a separate basis and with more rigor - and above all, the methodology will need to be transparent.
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PostPosted: Sun Sep 07, 2008 6:53 am    Post subject: Reply with quote

....But it misses the key (German) point. Covered Bonds control the LEVERAGE. And it puts the issuer's hand to the fire. This has to come first. Perhaps the Agencies should spare us the fiction altogether.

This news would not be complete without some wise words from a Madman:

Quote:
Right now, at this moment, many people know that something good is going to come from this government takeover of Fannie (FNM - Cramer's Take - Stockpickr) and Freddie (FRE - Cramer's Take - Stockpickr), but they don't know how it relates to the market.

So, let me tell you how I see things unfolding. We know that our economy started rolling over because so much money -- trillions -- has been bet on house-price appreciation.

The wagering on American house-price appreciation has taken place in every venue and, in many cases, with gigantic leverage, magnifying a problem of historic proportions with a financial Armageddon quality we have not seen EVEN IN THE GREAT DEPRESSION. In other words, not since the Great Depression, but including the Great Depression. That's how important it was for houses to appreciate.

We are now in a double-digit decline of housing that has made most houses bought since 2005 worth less than their mortgages. House-price depreciation has been so relentless, particularly in Florida and California, believe it or not, two states that could bring the whole financial edifice down, that if it isn't stemmed then it's difficult to stop a severe recession, if not depression, given the abrupt slowdown of the rest of the world and our own skyrocketing unemployment.

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

So far we have failed so badly in doing so that borrowers of even the highest quality are now defaulting. That's wrecking the bonds and derivatives and the insurers of the bonds and derivatives and anyone that is holding mortgage paper.

The Treasury's takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.

The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.

Put simply, there will be no reason to foreclose, and no reason to walk away. That will DRAMATICALLY reduce the amount of foreclosed homes coming to the market. It will dramatically reduce the amount of money people owe on their mortgages.

Therefore, given the incredible 60% decline in homebuilding from two years ago, the incentives put in the recent housing legislation to buy a home and what should be a radical revision going forward in the amount of foreclosed homes, you can expect that house-price depreciation will be stopped within a year's time.

We have more homes for sale than any time since 1991, BUT we have 40 million more people than we had in this country in 1991, so that figure is virtually meaningless.

Given the low rates of interest in this country and what will now be mortgage rates that track those low rates, and given the freefall in home prices nationwide to where they were in many cases before the bubble, and in some cases well below, there is, for the first time, an INCENTIVE to buy a home.

That's how significant this takeover could be.

You need to forget its expense right now and the inflationary problems stemming from this. Those were the same reasons given when I suggested that we cut rates by 300 basis points last year and let everyone refinance when it was still worth it to do so.

I am tired of the moralizing based on a total lack of rigor and homework. We are at this extreme because our policymakers have simply been lazy, wrong, intransigent and foolish. If this were the private sector, all of these people would be candidates to be fired. If this were the NFL they would have been gone long ago. But because they are in high positions and considered somehow blessed with a ken far beyond reality, we are in this mess.

But the mess must be stemmed, and this will help stem it. Radically. It will not turn around the fortunes of the companies that need Europe or Asia to turn. Those economies just started slumping. It won't mean much to many industrial companies. At least not yet.

But it will revive credit and it will cordon the problems to where they are manageable, and we will no longer worry about the viability of a Wachovia (WB - Cramer's Take - Stockpickr) or a Bank of America (BAC - Cramer's Take - Stockpickr) or a Wells Fargo (WFC - Cramer's Take - Stockpickr) or even a Washington Mutual (WM - Cramer's Take - Stockpickr) because now any deposit is worth its weight in gold. That's because the spreads between what a bank can lend out and what it pays you are gigantic.

With bountiful credit and bank balance sheets cleaned up, we will get out of this moment, and we will be prepped to advance, just as the BKX, HGX and the retail index have been signaling. With mortgage paper turned into federal paper, the holders worldwide, from Russia to China to Europe, will be made whole. The world will rally and something good, at last, will occur. With the concomitant decline in energy, we have the start of a turn that could get us out of this bear market once and for all.

Considering that "the world' is not set up for this change, you can bet that those who are short or in cash have to say that all of this is much ado about nothing or that it won't matter a hill of beans. In fact, you will hear many things in the next 72 hours that contradict this bullish view.

That will be wrong. Do you hear me? Wrong.

I am tired of being laughed at for my July 15th call that the financials bottomed and my call for housing to bottom next year. I am weary of the catcalls and the attacks.

And, oh yeah, I am going to be right as of this weekend.

Maybe I just got lucky with this bailout, but it is better to be lucky than good.

As for the common stocks of Fannie and Freddie, owners, it serves your right. There has been another guy on this site, Doug Kass, who has told you again and again that their common stock is worthless.

If you owned that, you simply never read the guy, who paid for your subscription 10 times over. Congrats to my friend Doug for a job well done.


Give yourself more credit Mad One: the stuff that needed to bottom in July...did. And your critique of the knee-jerk hardmoney guys is spoton (Volker's endorsement of Obama must have been the last straw for the Administration). And another credit out to that old woodchuck, Don Wolanchuk who's been calling for a 1000pt dow up day this last week or so. Very possible. But one thing's for sure, you can't talk like that if you're not willing to stand alone in this business. Money is supposed to be truth. Funny.

But blaming the govt., please! Dodd/Frank had this plan out there six months ago and were swallowed up in a tangle of "legal" interests and securitization (biggest arguement against). The power to change these contracts, Cramer correctly sees, is crucial. How little it would have cost "The Industry" to do this back when subprime crashed...just wiping away the ARMS. And the FED did all you wanted and more, jimmyboy. So lay off the bashing and give credit where credit is due--to yourself. For Better and for Worse.
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HenryTo
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PostPosted: Sat Sep 06, 2008 11:39 pm    Post subject: Reply with quote

The article raises an interesting issue. To a large extent, what drives the ratings of a covered bond and the bank that is backing the bond are essentially the same factors, such as GDP growth, credit defaults, a bear market in housing, etc. One way to alleviate this is to set aside a pool of cash strictly dedicated to backing these bonds within the bank or spun off as a separate entity. Another way to do this is to purchase reinsurance from companies such as Berkshire Hathaway and GE, where the correlations are not as high.

My sense is that this should be evaluated on a deal-by-deal basis. e.g. In a "normal" market housing cycle - where we may only have a regional housing bubble (e.g. California in the early 1990s), the national banks that are guaranteeing the covered bonds issued for California may have a mortgage portfolio that is diversified enough so any change in the default rate in the bonds may not significantly alter the banks' capital position. At the same time, the economic environment (credit defaults, etc.) may just be unique to California. Obviously, the current cycle is a little bit different (to put it mildly). Correlations across asset classes have turned to one. In such a scenario, the underlying backing/rating will not matter unless there is a dedicated pool of cash assigned to the specific covered bond portfolio, or unless one has purchased reinsurance from Berkshire Hathaway or is able to get financing from the Federal Government. I agree that transparency is the key.
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PostPosted: Sat Sep 06, 2008 11:44 am    Post subject: Reply with quote

Too bad we'll never know what monday "would have" brought.

I'm reading shares and preferreds getting the shaft. Shares, okay...but preferreds? That's core bank holdings around the world.

Paulson's Covered Bonds, what do you think of the math here, Master H?:

http://ftalphaville.ft.com/blog/2008/09/05/15657/us-covered-bonds-frederick-ii-would-be-turning-in-his-grave/

Of course, like all ratings, there's more to the buy than the rating.
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PostPosted: Fri Sep 05, 2008 9:21 pm    Post subject: Reply with quote

Latest update: Common to be diluted and preferred shares will be made whole. If this plan is final come Monday morning, then the market should see a 90% upside day on Monday.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBY8f3smq5k0&refer=home
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PostPosted: Fri Sep 05, 2008 5:17 pm    Post subject: Reply with quote

Excerpt from the WSJ:

Quote:
U.S. Near Deal on Fannie, Freddie
Options Include Injecting
Capital in Mortgage Giants;
Management Shakeup Coming
By DEBORAH SOLOMON and DAMIAN PALETTA
September 6, 2008

WASHINGTON -- The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter.

Precise details of Treasury's plan couldn't be learned. The plan is expected to involve a creative use of Treasury's authority to intervene in the two companies, which it won earlier this year, and could involve a capital injection into the beleaguered giants.

The plan also includes a management shakeup at both companies, according to one person familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts.

An announcement could come as early as this weekend. Some details are still being worked out, which means terms of the arrangement could change.

Treasury's move would represent perhaps the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a year ago. From the $168 billion economic-stimulus package in February through the bailout of investment bank Bear Stearns Cos., the Bush administration and the Federal Reserve have taken an increasingly aggressive stance in responding to what has become one of the worst financial crises in decades.

Fannie and Freddie are vital cogs in the U.S. housing market, and their woes have threatened to worsen the bursting of the housing bubble. A Treasury intervention could help Main Street borrowers by keeping interest rates on mortgages lower than they would be in the event of continued instability.

Treasury's emergency powers to backstop Fannie and Freddie, which it won as the result of legislation passed by Congress in July, extend until the end of 2009. A decision about their future role could be handed off to the next administration and the next Congress.

The likely move would mark a remarkable comedown for two of Washington's most powerful and feared institutions, known for their financial clout and no-holds-barred lobbying prowess. Fannie and Freddie shares, which were up during the regular session Friday, dropped 25% and nearly 20% respectively in the after-hours session.

Treasury's likely plan is supported by Federal Reserve Chairman Ben Bernanke and James Lockhart, chief of the two companies' regulator, the Federal Housing Finance Agency, according to people familiar with the matter. On Friday afternoon, Messrs. Syron and Mudd were summoned to a meeting at the offices of the agency. Also attending were Mr. Bernanke and Treasury Secretary Henry Paulson.

The meetings Friday were in part aimed at getting Messrs. Mudd and Syron to agree to the plan, though their approval was not necessary, these people said.

Mr. Mudd arrived for the meeting at 2:50 p.m., flanked by the company's general counsel, Beth Wilkinson, and Rodgin Cohen of Sullivan & Cromwell, one of the country's top banking lawyers. A few minutes later, Mr. Bernanke followed with security escorts.

"We are making progress on our work," said Treasury spokeswoman Jennifer Zuccarelli, who declined to comment further. Spokesmen for Fannie and Freddie declined to comment on the expected Treasury moves.
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PostPosted: Fri Sep 05, 2008 5:08 pm    Post subject: Reply with quote

GSEs plunge in AH trading. WSJ reports that the government is close to providing liquidity to the GSEs' balance sheets:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9L5St2a4GdU&refer=home
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PostPosted: Thu Sep 04, 2008 2:23 pm    Post subject: Reply with quote

There no solving HEADLINES like these:

http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression?tickers=%5Egspc,fre,fnm
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PostPosted: Thu Sep 04, 2008 9:40 am    Post subject: Reply with quote

Not a bad idea.. I would say nationalization,cash injection firing the management, waiting a couple of years and splitting the company and selling in a couple of years seems appealing ...

And regulating the derivative market for spreads swaps to prevent disaster..

however if not solved quickly .. we can head for new lows ...
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