Freddie (and Fannie) Got Fingered (by Paulson)

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theacoustician

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Sep 30, 2004
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After whispers of it happening, this morning it became official.

http://money.cnn.com/2008/09/07/news/companies/fannie_freddie/index.htm?postversion=2008090711

The real meat of the article is at the end :

Some of the nation's largest financial institutions including JPMorgan Chase (JPM, Fortune 500) and Sovereign Bancorp (SOV, Fortune 500) own a big chunk of the estimated $36 billion in preferred shares of Fannie and Freddie, which are at risk of being wiped out should Fannie and Freddie do end up getting a cash infusion from the Treasury Department.
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So we're bailing out both institutions by proxy. Note this is the second time for J.P. Morgan, first being the Bears Stern "buyout". If you have money in J.P. Morgan, I'd move it now. If you have a Chase credit card, move your balance now or at least have a plan in place for a full balance transfer or pay out.
 
Like it shouldn't have been obvious from the beginning that they needed more oversight. This is bullshit, but the alternative is even worse.

And the CC biz is cutthroat, but pretty lucrative. On the remote chance that Chase would go belly up, there would certainly he buyers for their debt...
 
fly said:
Like it shouldn't have been obvious from the beginning that they needed more oversight. This is bullshit, but the alternative is even worse.

And the CC biz is cutthroat, but pretty lucrative. On the remote chance that Chase would go belly up, there would certainly he buyers for their debt...
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Um, this is the second time the government has come to bail them out. Is it not obvious by now that the JP Morgan was selected by the government to take over Bears Sterns to help prop it up? They got the good assets and the bad ones became government guaranteed securities. Bernanke and Paulson thought they could hit two birds with one stone and keep the extent of the problem veiled to the public. Now they're hoping to hit 4 birds with 2 stones.

As for someone waiting in the wings to buy up Chase assets should it become necessary, maybe. It may be ok, but they may also decide to all in as much debt as possible to boost reserves on hand or pay off creditors. I'm just saying be ready, not to run around and panic.
 
So let me get this straight... instead of a few irresponsible lenders and a few irresponsible people accepting loans way above their means getting fucked, the burden is going to be passed onto all of us so we all get fucked togethor?
 
plot said:
So let me get this straight... instead of a few irresponsible lenders and a few irresponsible people accepting loans way above their means getting fucked, the burden is going to be passed onto all of us so we all get fucked togethor?
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At this point, yes and no. The government has only said at this point its taking over the board, bringing in auditors, and guaranteeing securities. We only get charged if too many loans default, but even then, its not so much getting charged as it is the Fed will print more money and effectively devalue our currency further. All this to save other private investment houses who made stupid decisions to invest in these shaky securities in the first place. So what ends up happening? A massive wealth transfer from the general taxpayer base to a scant few. It's gaming the system on a massive scale.
 
It says they are being nationalised, not bailed out. Which makes this an incredibly socialist move o_O

Turning them into government agencies would mean a great huge portion of our secondary debt market suddenly becomes a tax issue. Turns an unfortunate situation (lack of confidence and other subjective investing things) into a government problem >.O

I wouldve expected something like this from a Democrat. *sigh*
 
FlamingGlory said:
It says they are being nationalised, not bailed out. Which makes this an incredibly socialist move o_O
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I guess that depends on what you think is going to be the long term plan. I think you'll see them go in, attempt to clean house, and spin off as much as possible to private business. The consequence of staying nationalized long term would be, in effect, that the government gets to decide who can and can not buy a house. I really don't see that being a responsibility any elected official wants to answer for.
 
fanny and freddie arn't the only ones that give out loans theac.. so even worse, they might use it as a tools to give out loans that they know will be defaulted and forgiven to those who can't afford housing and our taxes will be funneled into buying homes for them.
 
theacoustician said:
I guess that depends on what you think is going to be the long term plan. I think you'll see them go in, attempt to clean house, and spin off as much as possible to private business. The consequence of staying nationalized long term would be, in effect, that the government gets to decide who can and can not buy a house. I really don't see that being a responsibility any elected official wants to answer for.
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Well you have to admit, it plays for the democrats, it was a Fannie Mae was a government agency from it's creation until the very late 60s iirc. The government -had- a monopoly on the housing market.

Try to explain all this to most people and I get eye glaze >.> I dont think most of the public even knows how lending works, that, combined with the fact they all want something for less is what started the whole subprime thing. The people want something (albeit something stupid), the banks see no reason not to issue loans because they will have sold all the debt before it can be defulated on, the secondary debt market (of which Freddieand Fannie make up 50%) eat the losses, they get nationalized and everyone eats the losses.

>.> <.<

There really isnt a better solution though, having a complete collapse of the secondary debt market would be slightly catastrophic, but you have to wonder. They should probably be spun off into smaller corps like what happened to ATT.
 
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plot said:
fanny and freddie arn't the only ones that give out loans theac.. so even worse, they might use it as a tools to give out loans that they know will be defaulted and forgiven to those who can't afford housing and our taxes will be funneled into buying homes for them.
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There are other institutions, but Freddie and Fanny own or guarantee more than half of the entire mortgage market currently and because of the riskiness that market has right now, they have issued something like 75% of all mortgages in 2008 (Wikipedia say 80%). Who are those people? First time home owners, lower-middle class, and people with under 720 credit scores more than likely. People with better credentials are less risky and can get loans from elsewhere. So what happens? After a time someone is going to scream and yell about the disproportionate number of poor *insert ethnicity here* that can't get loans and the government is racist. You think any elected official would want to touch that with a 10 foot pole? HA! Its a high risk venture with low reward possibilities.

As to using it as a device for issuing risky loans, HA! You forget why Fannie was spun off in the first place. It was done to remove its debt load off the federal books so more money could be spend on ... WAR. Vietnam, specifically. Taking on this debt liability now means that we will have weakened our ability to borrow more money to wage war. You really think that's going to fly right now? PFFFFT! They're gonna put this thing down, flip it, and reverse it faster than Missy Elliot.
 
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