The reason the Bush administration is leaning toward bringing Fannie Mae and Freddie Mac into conservatorship rather than backstopping the two home mortgage companies is that concern about moral hazard problem. Bailing out Fannie and Freddie would reward years of aggressive use of financial mismanagement, according to some members of the administration.
In the Old Executive building and the White House, Fannie Mae is viewed by many as a hotbed of waste, fraud, abuse and Democratic featherbedding. What's worse, the administration believes that both companies failed their public mission of making housing affordable. But these criticisms are not driving policy right now. Instead it is the concern that bailing out financial companies may lead shareholders and counter-parties to become lax about risky behavior.
Conservatorship, which could wipe out existing shareholders and humiliate past and present executives, is appealing because of the signal it would send to the market. Some key members of the Bush administration's economic team believe putting Fannie into conservatorship would create stability in the housing market without sapping discipline from financial markets.
U.S. Weighs Takeover of Two Mortgage Giants [New York Times]
Posted by guest , Jul 11, 2008 9:51AM
hmm
Posted by brianvan , Jul 11, 2008 10:03AM
Right, humiliation is the way to go. It's not like they've already escaped with the money from their overinflated salaries... hit em where it hurts, their pride.
Fucking retarded. Thank God this administration is on their way out.
Posted by guest , Jul 11, 2008 10:04AM
ummm.... like they have any choice in this matter?
what did you expect them to say? "we prefer to explicitly guarantee the debt, adding $5 Trillion to our balance sheet..."
Posted by guest , Jul 11, 2008 10:05AM
@10:04 - the GSEs have $5 trillion in debt, but they also have somewhat offsetting assets. The net effect on the Fed's balance sheet wouldn't be anywhere to $5 trillion.
Posted by guest , Jul 11, 2008 10:09AM
@10:05 - if the gov't only guarantees the debt, then it only adds the debt to its balance sheet, not the assets.
Posted by guest , Jul 11, 2008 10:15AM
@1005. yes, sure there wouldn't be a $5tril hit but have u heard what david faber has just said? $5trillion is such a huge number such that even a fraction of that is material. are you saying the Fed would be happy with a fraction of $5trillion(which, i thought was total issuance and not gross exposure of like $1.5trill).
Posted by guest , Jul 11, 2008 10:15AM
The GSEs have credit exposure of 5T, but only 1.5T of that is on balance sheet and funded* (or funded at all). The balance is in the form of a guarantee (think insurance) and basically unfunded, but subject to a miniscule capital charge**.
*debt and 250bps of equity
**45bps
Posted by guest , Jul 11, 2008 10:16AM
The GSEs have credit exposure of 5T, but only 1.5T of that is on balance sheet and funded*. The balance is in the form of a guarantee (think insurance) and basically unfunded, but subject to a miniscule capital charge**.
*debt and 250bps of equity
**45bps
Posted by guest , Jul 11, 2008 10:18AM
This is completely insane. Given that foreign central banks have been huge buyers of both Agency debt and MBS, you can be damn sure that the implicit is about to become explicit. It's not like the Fed is going to have to starting P&I on $4.5 trillion of guaranteed MBS tomorrow. Just take over the GSEs, operate normally, and infuse capital as required. Last I checked Fannie's loss rate was somewhere in mid teens basis points. The "check" were are talking about here is in the $100 billion range, not the $4.5 trillion range.
Posted by guest , Jul 11, 2008 10:20AM
Apologize for the grammatical trainwreck above. Also on further examination I think the guaranteed MBS held by third parties is around $3.8 T.
Posted by guest , Jul 11, 2008 12:44PM
How come no one ever blames Chuckie Shumer for the excess losses. He's the one that kept giving them extra ability to absorb losses. I can't wait until he "blames" the watchdog for this one. He's such a hypocrite.
Posted by guest , Jul 11, 2008 1:04PM
@10:09 - If the govt. takes on the debt, you bet your ass they will nationalize the assets too.
Posted by guest , Jul 11, 2008 1:26PM
Man, this is such an unwholesome mess. I've learned a little by reading this thread about how we got into this boondoggle, but I still don't understand why or how two gigantic corporations organized by the government got listed on the stock exchange and then were allowed to disintegrate to the point that they need to be put into receiverships. Anyone got an good informative link that can give me some background?
Posted by guest , Jul 11, 2008 2:09PM
You know how the banks had Visa and Mastercard and now we have the real things floating well Savings and Loans had mortgages and QED. sorta.
Posted by guest , Jul 11, 2008 7:46PM
OK. I read up on Fannie Mae and Freddie Mac and GSEs and internal accounting scandals involving huge amounts of money resulting in hand-slaps from the comparatively small and poorly connected regulatory agency, and the Franklin Raines/Angelo Mozilo connection, wherein Franklin Raines got a cheap housing loan from Angelo Mozilo in addition to the millions he was being paid annually to head up Fannie Mae.
How can the Federal Reserve system be run so well over the years, and these two GSEs become such cesspools? $5 trillion at stake? All I can say is that I have been battling a respiratory virus for the last week, finally went to the doctor because I was so miserable, who of course could do nothing much to help me because the problem was viral. After the doctor, I returned to work and then went to lunch, thinking a routine of normalcy would help straighten me out, and back in the office, suddenly tossed up the entire lunch in the hallway. Now I feel better. But the tossing up the lunch part is how I've been feeling about the developments of the last 48 hours.
Tell me the U.S. economic system isn't on its way to a complete blowout.
Posted by guest , Jul 11, 2008 7:50PM
Incidentally, I also read Maureen Dowd's New York Times op-ed piece (which I always try to avoid) which consisted of tips from a dear old celibate priest about the kind of person to select as a husband or wife. I dedicate the mess in the hall to Maureen Dowd.
I'm not kidding. Why is this person published?
Posted by StMarc , Jul 11, 2008 8:28PM
What on Earth makes you say the Fed has been "run so well" over the years?
Give me the authority to decrease the purchasing power of the dollar by 98% and I will show you a good time, too... until I can't. Or as our CFO says, "A positive cash flow covers a multitude of sins."
M
Posted by guest , Jul 11, 2008 9:47PM
Maybe you don't agree with the policies of the Federal Reserve. That's fair.
The Fed charges its fees and usually pours in money to the U.S. Treasury.
As an agency, I don't recall anyone in charge dipping into the merchandise or fiddling with the accounting rules to justify huge management bonuses. Just saying.
Posted by guest , Jul 11, 2008 9:53PM
so you morons want the federal government to basically own almost all private property???
lol
wall street rulezzzz~!!111
Posted by guest , Jul 11, 2008 9:57PM
so wait, wall street capitalists want the federal government to take over the entire capital markets systems, save for "hedge" funds of course, and hold the title to almost all private property?
Posted by StMarc , Jul 11, 2008 10:13PM
9:47 - Also fair. If you mean in relation to personal peccadilloes and pecuniary improprieties, I'll grant you that the Fed looks pure as the driven snow compared to, well, pretty much any other government agency ever.
If I were a conspiracy type, I'd say that of course the organization that wields more financial power than any other single entity on the planet does a good job of keeping the bodies buried. :) But I'm not. We've by and large had good people at the Fed, moral-wise. They've just been put in charge of a policy that isn't sustainable. I'm sure there were good and moral Communists, too.
M