It’s always good fun to get upset about something of the form “X bet against Y,” and the financial markets offer a whole range of opportunities to do so. Everything is a bet against something, and if that something is sympathetic and/or you, you can go get enjoyably pissed at whoever is doing the betting. Today ProPublica reports on a nasty-sounding Freddie Mac bet against America and freedom and the 30-year fixed-rate mortgage with no prepayment penalty:
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
Now, a “bet that pays off if homeowners stay trapped in expensive mortgages with interest rates well above current rates” is called a … what’s the word? … oh, right. A “mortgage.” A feature of our life here on earth is that banks make money when people stay in their fixed-rate mortgages when rates go down, and lose money when people refinance those mortgages.*
Okay but in fairness those aren’t Freddie’s “bets,” not exactly. Their bets against not only the housing market but also specifically a couple named the Silversteins, who “live in an unfinished development of cul-de-sacs and yellow stucco houses about 20 miles north of Philadelphia, in a house decorated with Bonnie’s orchids and their Rose Bowl parade pin collection,” look like this: Continue reading »
I try to be honest when telling you that a court complaint or SEC filing or research paper is a fun read, just in case you might go read it, though of course there’s no accounting for tastes and I may enjoy many things that you don’t.* And that’s okay. In any case I doubt anyone will find the SEC’s fraud complaints against Fannie Mae and Freddie Mac filed today all that fun to read. “Very, very boring” would be more like it. The only bits that I enjoyed were the names of some of the loan programs, including Freddie’s “Touch More Loans” and the Fannie/Countrywide joint effort “Fast and Easy” which, boy, different times.
But there are some fascinating things about the case. A small one: I was kidding when I said “complaints against Fannie Mae and Freddie Mac.” They’re complaints against former Fannie CEO Daniel Mudd, former Freddie CEO Richard Syron, and a handful of their executives. The SEC signed weird neither-admit nonprosecution agreements with Fannie and Freddie themselves, in which the GSEs agree to help the SEC make its case against their former bosses.
This all seems like very good PR. You are learning, SEC. The neither-admit-nor-deny thing might be awkies, but slapping a big fine on the taxpayer-funded GSEs wouldn’t make a whole lot of sense. And the people who are upset that the SEC are not going after big names connected to the financial crisis have to be happy about the fact that the SEC here is going after the CEOs of big entities that in most people’s minds are intimately connected to the cause of the financial crisis. Suing them is not quite as good as throwing them in jail, but the SEC can’t do that, and this is a start anyway.
The bad news is that the SEC’s case sounds just absolutely terrible. Here it is: Continue reading »
Like many people, I like to believe that I prefer the government policies that I prefer because they’re a Good Thing for the world, not because they advance my self-interest. But as a relatively new homeowner, I break down a little on mortgages. Sure the mortgage interest deduction is a crazy and inefficient boondoggle, but it’s my crazy and inefficient boondoggle, and I don’t really want my apartment to lose (more) value if the deduction goes away.
Similarly, I’m pretty psyched about the plan that’s been kicking around, and that made it in vague form into the president’s jobs proposal, to allow people to refinance mortgages even if their houses are underwater or their income wouldn’t support the new payments. When I took out my mortgage I had a bit over one turn of leverage, as it were, which had my mortgage bankers congratulating me and asking if maybe I wanted to take a little more money just in case. Whereas now I make TXU look like a strong credit. Because um blogging pays less than banking you see. So I like the idea of being able to reduce my mortgage payment without actually having to try to convince a banker that it’s a good idea for me to keep this much debt. Even though I’m not entirely convinced that it’s good for the world.
Others are also skeptical. Continue reading »
Well, someone over there is thinking. The motherland believes it has seen quite enough of agency shenanigans, thank you very much. There will be no more of that nonsense on Putin’s watch. Now let’s have no more of this so we can get back to imprisoning oligarchs and lacing reporters’ tea with lethal doses of radioactive material.
Russia banned investment of its $83.7 billion National Wealth Fund in bonds issued by foreign government agencies such as Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the Finance Ministry said on Thursday.
The ministry said earlier on Thursday it had also banned investment of its $136.3 billion Reserve Fund in foreign government agencies’ bonds.
Russia bans Nat’l Wealth Fund investment in agencies [Reuters]
Your mother told you not to bring those filthy things inside, but you snuck them in anyhow. Now, blind, helpless, cold, foul smelling and featherless, the screaming, greedy mouths of the GSEs seem to gape endlessly, never satisfied and eager to suck more capital from the mouths of strained and frantic surrogates, forced to hunt eighteen hours a day to keep the damn things from chewing off a foot in their lust for fiscal calories, or screaming so loudly that your parents may burst in to hear which cat is being brutally tortured. No sooner have they had a hard-won, slime covered bit of roadkill been dumped into their bottomless, sucking orifices than was another immediately required.
Freddie Mac posted a $25.3 billion net loss in the third quarter on surging investment and credit losses as the company announced plans to seek an initial $13.8 billion from the Treasury Department to cover the hole in its shareholder equity.
Treasury pledged up to $100 billion each for Freddie and Fannie Mae when they were put under conservatorship in September to prevent their potential bankruptcy. The government will receive preferred stock for any money given to the firm, and Freddie expects to receive its $13.8 billion request by Nov. 29.
Freddie’s Loss Balloons to $25.3 Billion [The Wall Street Journal]
At 2pm eastern, the Federal Housing Finance Agency is expected to announce a plethora of mortgage gifts to homeowners with Fannie Mae and Freddie Mac loans. This year, gifts will follow the increasingly popular “Reverse Santa” list (not to be confused with the “Double Lehman” formula) which provides relief in the form of federally mandated mortgage price fixing for those who have been caught on the Naughty Debtor list.
Don’t worry. Be happy.
Fannie, Freddie Work on Mass Loan Modification Plan [The Wall Street Journal]
Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
[...]
“For now, they’re under conservatorship and they have to be used to keep the flow of capital going to the housing market,” former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff.” “They’re important to maintaining the flow of government finance” and need to be used actively, he said.
I mean, they are kidding, right?
Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets [Bloomberg]
It’s unclear if Sarah Palin “[may not have] known what she was talking about when she made her first major statement on domestic economic policy”? Whoa. Now, obviously I’m no econ expert or political strategist for that matter. So I won’t weigh in with an answer so much as another question. Is anyone else confused as to why Palin wasn’t advised to avoid wading into tricky waters when faced with questions about the mortgage rescue, and to simply stick with the words that have gotten her this far: “This was all God’s plan.”
?
Palin’s Bailout Statement Raises Questions [DealBook]
Continue reading »
Whatever your thoughts on the matter of the this little mortgage rescue are, you cannot ignore the toll it’s taking on Warren Buffett. CNBC had him on this morning in a phone interview with Becky Quick, who called in from her vacation down the shore, and not even the thought of the Quickster frolicking out on Beach Haven could cheer the old boy up. He sounded downright sad and was clearly not himself. The reason I know this is because while the Oracle of O praised Paulson for doing “exactly the right thing,” he failed to pepper any of his prose with trademarked out of nowhere analogies that marry aberrant sex fetish with folksy business wisdom. The pro couldn’t even get it up to say something along the lines of “I am 100 percent behind this plan,” instead simply noting that he “wouldn’t change anything,” and sighing audibly. To Buffett’s credit, at one point he did tell Quick, “The government was on the hook in this position many, many decades ago when they got in this half slave/half free position where they said we don’t guarantee Fannie and Freddie obligations, wink wink,” but it was obvious to all his heart wasn’t in it.
Buffett: Treasury ‘Did Exactly the Right Thing’ [CNBC]
The common stock of Fannie Mae and Freddie Mac is almost exclusively held by large financial institutions. The top ten largest institutional holders control over half of the stock of each companies.
Details on Fannie Mae’s ownership can be found here. Details of Freddie Mac are here. (Courtesy of MSN.)
Not only did the Treasury Department avoid a direct capital injection into Fannie Mae and Freddie Mac, it has also avoided making an explicit guarantee of the senior debt of the two mortgage companies. Many people expected that the government would explicitly back the senior debt issued by the two companies.
Instead of a direct promise to support the debt with the full faith and credit of the United States, the government has pledged to maintain a positive net worth at the companies, buy mortgage backed securities from them, continue meeting their business obligations, and provide a huge line of credit. The promise to maintain a positive net worth at the companies means that they will be able to maintain debt payments, and so it amounts to a back door promise on the debt. But nowhere has the government made a direct pledge to the bondholders. It’s still an implicit, “in effect” guarantee.
“I think that the stunner of what Paulson said this morning was not about the equity haircuts, but that they didn’t explicitly guarantee the GSE debt,” one DealBreaker reader writes. “This suggest that the fear of a flight from Treasuries and a consequent dollar run is real.”
