 |
|
| View previous topic :: View next topic |
| Author |
Message |
rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 6707
Location: Sunny California
|
 Posted: Sat Jul 12, 2008 10:41 pm Post subject: |
 |
|
Mauldin on GSEs (note last line misses the changing nature of these financials, the writedowns are being submerged in rights-down. This Treas. move just puts a point on it):
| Quote: | Take Freddie Mac. Please.
(Cue Henny Youngman) Take Freddie Mac. Please. Its shares are down almost 90%. "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae [down 78%] assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said." (Bloomberg) Poole asserted that these institutions are essentially on a short path to insolvency.
But in the same story, Senators Schumer and McCain both said Freddie and Fannie would not be allowed to fail. Even curmudgeonly former Fed Vice-Chairman Wayne Angell (someone whom I sincerely respect), said on CNBC yesterday that the government regulator of the GSEs (Government Sponsored Enterprises) ought to get some money from Congress to buy preferred stock and then get even larger amounts from the public through an offering of preferred stock. He said that Congress ought to learn about its responsibilities with regard to a GSE; and the public ought to realize that we are in for a long, tough fight. (He also expects the second half of 2008 to be no better than the first half, and he sees 1% growth in 2009.)
I wrote the above paragraph, and a few I deleted below, on Thursday, as I am on a plane to Las Vegas and need to finish the letter in order to attend a conference. I wrote with suggestions about how a collapse of the two Government Sponsored Enterprises might be handled. Last night, the New York Times broke a story that government officials are looking at how to go about taking over operations at Freddie and Fannie, should worse come to worst. Then this morning, the Wall Street Journal in its lead story elaborated on this theme.
The basic problem is that both Fannie and Freddie need more capital, and perhaps far more than their current market capitalization. Where to find it? What investor wants to try and catch this falling safe, without government guarantees? The Journal article quotes numerous people with various ideas about what to do. Most of their ideas will potentially cost US taxpayers.
And make no mistake. The problems with Fannie and Freddie have to be solved. They are now doing 80% of the mortgages in the US. Without them the housing market would grind to a halt quickly and housing prices would drop even beyond Gary Shilling's pessimistic views.
Not to mention that the world has assumed the implicit backing of the government in buying the paper of Freddie and Fannie. How easy would it be to finance US debt if this paper was allowed to default? The implications are serious. I understand the arguments for allowing them to fail, and I think shareholders should bear the risk they take on when buying equity.
A very reasonable idea was broached by Steve Forbes on a BizRadio program this afternoon, which Dan Frishberg graciously allowed me to co-host. He suggests breaking Fannie and Freddie into eight smaller companies, giving them whatever backing they need in the form of public financing to start business, and then cut them off to sink or swim on their own, with much tighter capitalization controls. Remember, this is one of the more free-market conservative thinkers.
The authorities are slowly losing control. All they can do is crisis manage. There are no good solutions, only expedient ones. And we must all hope they choose the best among a handful of not particularly pleasing options. Allowing the system to devolve into chaos is not an option. The Fed and whatever administration comes in will do the same as the current group, which is to buy time so that the wounds can heal, and hopefully put in place rules to prevent another such occurrence.
(Sidebar: I will go into greater detail in a later letter, but regulators need to move NOW to create a Credit Default Swaps Exchange. A problem/crisis in that unregulated market is actually a far bigger problem than the current subprime crisis. Why do you think Bear Stearns was not allowed to go into bankruptcy? There are banks that are too big to fail, despite what Paulson says for public consumption.)
There are a lot of conflicting opinions, which you can read at www.bloomberg.com if you care. Some say Fannie and Freddie will have to lose $70 billion before the regulators step in. Poole says they are insolvent now, using fair market accounting methods. I don't know, and neither do 99.9 % of the shareholders. At this point Fannie and Freddie are not an investment, they are a gamble. Sitting here at Caesar's in Vegas, and reading the opinions, makes me think I have better odds at the tables below me.
I hope that when (not if!) taxpayer money is used, it is at market rates and means that shareholders are last in line, if at all, to recoup any money. For those of us who for years have called for tighter regulation and increased capitalization of the GSEs, as well as a clear removal of any government backing, implicit or explicit, being able to say "I told you so" does not feel all that good. Freddie and Fannie cannot be allowed to go out of existence. They are too tightly wound into the core and fiber of the US economy.
What can and should happen is that shareholders bear their losses, taxpayers pick up the bill, and when they are healthy again, as they will be at some point, another public offering should be done to hopefully recoup the losses to taxpayers. Or perhaps an auction with some guarantees to a potential buyer, but a complete removal of implicit government guarantees on future loans, and higher capitalization requirements. There are any numbers of ways to lessen the ultimate cost to the taxpayer.
What I fear is that politicians will use the opportunity to prop up the mortgage markets with taxpayer guarantees and create much larger losses, which could quickly mount into the hundreds of billions if not properly dealt with. A new populist-oriented administration could find this problem on their desk as they take office.
I would not want to own any stock in the financial sector. There is going to be a continual stream of write-offs over the coming year, at a minimum. Yes, some banks are better managed and will avoid the real life-threatening problems. Some will be like JP Morgan and end up with solid assets backed by government guarantees.
But which ones? Do you want to trust the analysts that have been telling you there is value in the financials at each step, all the way down? The management who insists they are in good shape, then raises capital at dilutive prices? The very people who did not see the problems to begin with, telling you that they are now solved?
The "value" that analysts optimistically see in various financial stocks is evaporating with each quarter, as they slowly write down ever more losses. With another potential $1 trillion to be written off or absorbed through earnings from profitable parts of the business, there is more pain to come. Investing in financials today is like trying to catch a falling safe. |
_________________
Today is the Tomorrow you worried about Yesterday!
Last edited by rffrydr on Tue Jul 15, 2008 9:03 pm; edited 1 time in total |
|
| Back to top |
|
 |
rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 6707
Location: Sunny California
|
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
| Posted: Sun Jul 13, 2008 12:30 pm Post subject: |
|
|
Latest developments as of Sunday morning:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ablYQ7pPEw9g&refer=home
| Quote: | | The U.S. government during the next few days will be ``exercising a lot of different options that it has available to ensure that they don't get into a financial situation where they can't cover their obligations,'' Senator Jon Kyl, a Republican from Arizona who is a member of the Senate Finance Committee, said on the CNN program. |
|
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
| Posted: Sun Jul 13, 2008 4:41 pm Post subject: |
|
|
Full text of Paulson's speech today on the GSEs:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNHPA3k7pAAQ&refer=home
| Quote: | Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.
GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.
I look forward to working closely with the Congressional leaders. |
|
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
|
| Back to top |
|
|
rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 6707
Location: Sunny California
|
|
| Back to top |
|
|
rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 6707
Location: Sunny California
|
| Posted: Mon Jul 14, 2008 11:26 am Post subject: |
|
|
| Quote: | Who Owns GSE and Agency Debt?
By Tony Crescenzi
RealMoney.com Contributor
7/14/2008 11:32 AM EDT
Click here for more stories by Tony Crescenzi
Data from the Federal Reserve's quarterly flow of funds report indicate that at the end of the first quarter of this year, foreign investors were the largest holders of debt securities issued by U.S. agencies and government-sponsored enterprises.
The data highlight the immense international political and economic pressures that exist for the U.S. government to back Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take). The banking and personal sectors were also major holders.
At the end of the first quarter of 2008, foreign investors held $1.54 trillion of debt issued by agencies and GSEs, which was about $500 billion more than the next largest holder, commercial banks, although the household sector's exposure was also vast when combining direct holdings of $844 billion with $900 billion of mutual fund holdings, as well as pension fund holdings of $269 billion, $324 billion of holdings by state and local retirement fund holdings and $391 billion of holdings by life insurance companies.
Highlighting the risk to municipalities, state and local governments held $431 billion. Securities brokers and dealers held $268 billion, and savings and loan institutions held $324 billion. |
_________________
Today is the Tomorrow you worried about Yesterday! |
|
| Back to top |
|
|
diesel
Moderator
Joined: 05 Oct 2006
Posts: 311
Location: Australia & New Zealand
|
| Posted: Mon Jul 14, 2008 4:03 pm Post subject: |
|
|
Barton Biggs disagrees with Rogers.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a5GYUti82O0s&refer=home
| Quote: | Anyone who says the mortgage-finance companies should be left to fail is ``silly,'' hedge fund manager Barton Biggs said in an interview on Bloomberg Television from New York.
``Fannie and Freddie are way too big and way too big a part of the mortgage system and really the American way of life to say `Just let them go bankrupt,''' said Biggs, a former Morgan Stanley strategist who now runs the hedge fund Traxis Partners LLC. ``The Treasury, in my view, is doing the right thing.'' |
_________________
Out of clutter, find simplicity. From discord, find harmony. In the middle of difficulty, lies opportunity. - Albert Einstein |
|
| Back to top |
|
|
Suomodo
Veteran Poster
Joined: 21 Mar 2008
Posts: 165
Location: Bratislava, Slovakia
|
| Posted: Mon Jul 14, 2008 10:32 pm Post subject: |
|
|
Rogers is short FNM, FRE, would you expect any other statements ...
| Quote: | ROGERS: Carol, since I have been coming on your program, I have been short all the investment banks. I have been short Citibank, I have been short Fannie Mae, I am still short every one of them. I will cover them all some day, but some day is a long way from now.
MASSAR: Jim, a viewer e-mailed me last night, actually e-mailed Bloomberg, happens to be a mortgage banker and his question was for you. He is wondering if you covered your shorts Friday, especially in Fannie Mae and Freddie Mac?
ROGERS: No, I have not covered my shorts. Obviously I should have, because you know they already are up 50 percent or something since then. If they go up a whole lot more, I will short more. They are basically insolvent. There is no question about that. |
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apEivHJhf1vE |
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
|
| Back to top |
|
|
rffrydr
Moderator
Joined: 30 Oct 2005
Posts: 6707
Location: Sunny California
|
| Posted: Tue Jul 15, 2008 3:40 pm Post subject: |
|
|
That's exactly the tact the Russians have been taking (sold 22billion treas bought 34 billion agencies)...do they deserve to be so lucky?
_________________
Today is the Tomorrow you worried about Yesterday! |
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
|
| Back to top |
|
|
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 7244
Location: Houston, Texas & Los Angeles, California
|
|
| Back to top |
|
|
Odysseus
Experienced Poster
Joined: 14 Feb 2008
Posts: 57
Location: Dallas/Moscow
|
| Posted: Fri Jul 18, 2008 10:00 am Post subject: |
|
|
There is a truely wierd situation going on with F&F. It looks like a classic manipulative twist to get the stock prices up.
As I understand it, no naked shorts will be allowed come monday morning. When I have shorted stocks in the past, I assumed that FIDO would lend them to me or arrange to borrow the stock on my behalf.
Just for kicks, I called them and awh gee, there is no stock to borrow. I'm assuming that come monday morning, a lot of shorts are going to be bought in without permission.
Interesting that Treasury didn't have to buy an equity stake to support the stocks. All they had to do was arm twist others not to lend them.
Bill Siedman, an old hero of mine said it best. Paraphrased "Paulson is running Treasury like he used to run Goldman. He's trying to make his numbers for next year." He also offered the observation that the bailout of F&F may work in the short term but it will be a disaster down the road. This is the guy that did the work outs and ran the RTC.
_________________
Psychic with Alzheimers. I can predict what I will forget. |
|
| Back to top |
|
|
Please log in to view without the ad banners |
|
|
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
|
|
FAQ
Search
Memberlist
Usergroups
Statistics
Register
Profile
Log in to check your private messages
Log in
