Fannie/Freddie to be put in Conservatorship

This is probably the only, and most expected, outcome. It actually sounds essentially the same as Ackman's suggestion - let the common and preferred die.

In my view, better than the bailout of the preferreds that I feared would happen. At least the capital structure bailout appears not to go as low as preferred equity. And we had already been told that the Govt would stand behind the debt - no avoiding that - so here we are.

There's no doubt that the taxpayers already are in the hole on this even without the common and preferred, but this at least allows the pain to be taken over time (probably years), without any transparency as to how much or how little these mortgages are really worth. The same way that we aren't finding out the market value of the Bear Stearns debt that the Fed holds, we won't see how bad of an investment this Freddie/Fannie bailout is. And the murkier/more spread out the detail, the less of a threat to financial markets.

Sounds great. No worries about the $5 trillion of paper between FRE and FNM which are now going to be unconditionally guaranteed by the US taxpayer. What could possibly go wrong???

I may have spoken too soon. Washington Post saying that the preferred will be spared and the common equity "diluted but not wiped out".

This is extremely disturbing if true.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html?hpid%3Dtopnews&sub=AR

look at the list of holders of preferred and you'll see why...

Good to know the government will go out of its way to make sure Bill Gross doesn't take a hit on his preferred stock.

WaPo is reporting that even common wont be totally wiped out. I wonder if they are structuring this to not punish anyone, and if they did, the moral hazard argument that will ensue.

I researched the Bear rescue, and it was Paulson that made sure the deal was $2/share. Originally it was going to be $5 or $6, and it was Paulson that said it must be way lower to ease moral hazard concerns. It was only later on that the deal was moved to $10/share to prevent a shareholder rejection of the deal.

I would think in this bailout, especially a conservatorship, that common gets wiped out and preferred sees some pain. Saving some more write downs for the holders of preferred will certainly give the impression that no big institution will ever be allowed to fail. Either way, financials will rally big on this probably for a while as the street assumes all systemic risk is removed again and govt will bail out everyone. Talk about free markets.

mbz - true, true. PIMCO's higher returns are on the backs of taxpayers. Bill Gross should be shot. Or PIMCO nationalized.

The govt essentially promised to bail these firms out without destroying them when the stock was trading around current levels. So there's no moral hazard.

My crystal ball is cloudy but I think I see common stock being turned into savings bonds equivalent and preferred stock having its dividends canceled for a few years in such a way that will make current price levels fair.

So? Should homeowners now mail their mortgage payments to the Treasury?

What a world we live in.

"Wiped out" may be a relative term. Even if shareholders "only" lose 95%, you can be sure that they will be appropriately licking their wounds and will be on guard to be sure that future management doesn't do some of the things that the well-paid erstwhile management did.

Looks like I was close:

"...As part of the takeover, Lockhart said the dividends on Fannie and Freddie's common and preferred stock will be eliminated, but that the common and preferred shares will remain outstanding. Additionally, subordinated debt interest and principal payments will continue to be made..."

My general feeling is that government takeovers of private industries fail to increase efficiency and promote better performance. The takeover allows the gov't to pay back large shareholders which includes many U.S. pension funds as well as foreign investors. And of course a ton of new high paying jobs for political appointees. It seems that the gov't is saying, "we can't fix the problem but it's better to have us running a broken ship than to let the ship sink altogether".

It was an artificial market and the best the government can do is, to keep up the charade. Don't expect anything to change. When you have an artificial market, it doesn't matter how many bandaids you put on the wound, eventually the infection will spread. You know when your in trouble when you can't even put a dollar amount on the cost. How much will it actually cost the Tax payers? They provided no answer other then telling the public that we will back them at any cost.

I have always been a republican minded individual, however the way in which I have seen this administration, handle this mess is making me re-consider. If this were two companies owned by "little" people they would be out of luck. This whole mess, is one big bailout, for the people who actually put us in this mess in the first place.

Does this mean that the US is now a big public housing project?

Will either candidate speak out against this? No chance. Maybe it's not too late for Ron Paul.

sonic_youth "Does this mean that the US is now a big public housing project?"

WOW. That's a new way to look at it. That's hilarious and perhaps one of the most insightful and original explanation. What makes it so appealing is, it actually has some validity.

Fannie and Feddie is now the new keeper of affordable housing. HAHAHA. Maybe they should get Charlie Rangel to be the CEO. Classic.

This is straight out of a Franz Kafka story. Or George Orwell.

I've heard the govt will extend all mortgages to 50 years in exchange for your first born son

No, you won't send your mortgage payment to the Treasury. You will send it to the company that services your mortgage.

No, it is not "public housing." It is merely that the government will inject capital into the companies as needed, and will buy MBS's at market prices. What could be better than finally getting a market price for MBS's?

And, what else could the government do but seize them? No one would invest any capital in them, and were they to collapse, declare bankruptcy, it would have caused unprecedented turmoil in the financial market. Imagine what would have happen to the "full faith and credit" of the US Treasury had subordinated debt holders not been guaranteed in this transaction? Interest rates would have shot up, exacerbating an already bad situation.

I was joking

This is basically the epitome of the success of the Republican policies over the last 8 years. Now the tax payers are being soaked in bailing out to the toon of Trillions of dollars.

This is the latest and most egregious example of the Republican "Privatize the profits; socialize the losses."

When will the sheep wake up?

petrfitz, I think it's obvious that Americans did not have the money to pay the high prices for homes that we have been seeing over the past 7-8 years. Where did we get the money? It was lent to us. Much of it through fannie/freddie Now we have to pay back the money we shouldn't have borrowed in the first place.

So, from the government's point of view we taxpayers are "the greedy fools who bought the properties" and now we are "the poor schmucks who have to pay for for them". It doesn't matter to them that the person who bought the house and the person who ends up paying for it are different. We're all the same in the eyes of the government. King John will send his men to collect his taxes. Get ready.

80sMan - so the Republican deregulation of lending practices and the ensuing predatory lending had nothing to do with getting us into this situation? It was only stupid people borrowing more than they could afford?

It wasnt the banks advertising the loans, creating documents that no one could understand, issuing loans to people they knew couldnt afford them, etc etc?

This credit crisis is the result of the failure of deregulation, and the blind eye our government used in letting this happen.

petrfiz, this all started with the loosening of Glass-Steagal which was one of Sandy Weill's contributions to betterment mankind. One of the functions of government is to keep us from fleecing each other because if they don't in the end not one of us will have anything. Good work government. Let the commercial banks and the investment banks merge. Why not? We haven't had a depression in 70 years. Why do we need those silly old laws anyway?

Yes petrfitz, the government knew that it was opening up a pandora's box of problems when congress made the changes but hey, we needed the money. This is America. We've got wars to fight.

I really enjoy that petrfitz often doesn't realize when someone is on his side.

oh those banks and their damn docs, it was so confusing I forgot I made 50k a year and probably couldn't afford the $2500 a month.

ccdevi - how many havard traiined lawyers worked for the banks and wrote the lending terms vs how many harvard trained lawyers did the guy making $50K year have on his side?

oh please, like it takes such brainpower to read a home loan doc. loans were made that people couldn't afford, the banks were dumb for offering the money and the people were dumb for taking it

petrfitz, you have been telling people to "buy, buy, buy or be priced our forever peasant" for how long now? Under how many different aliases? Would you say you're on the side of the bank or the little guy?

the little guy. I have said buy and are not prices at historic highs?

petrfitz: "the little guy."

Is this the same petrfitz who gloats that he's fleecing his tenants out of 50% of their incomes in rent?

Steve or am I trying to tell these morons that think renting is a financial strategy that they are wrong?

How else better to get the point through than letting them know that they are wasting over 50% of their take home, and what us landlords do with it?

I think that they are morons for sending me all their money.

petr - "send me your rent check" - fitz. Always on the side of the little guy.

petrfitz, when have you ever been a proponent of exercising sensible control, discretion, financial or risk management with regards to real estate purchase or investment? You are more on the banks' side than the banks themselves.

as opposed to the "give tax breaks and my tax money to the uber wealthly so they can trickle down on me" posters who are for the little guy?

> the little guy. I have said buy and are not prices at historic highs?

Apparently you said buy WHEN we were at historic highs. We are no longer there.
That was *not* good advice for the little guys.

> am I trying to tell these morons that think renting is a financial
> strategy that they are wrong?

As opposed to the "financial strategy" of buying at the top with carrying costs higher than equivalent rents?

Why is always the folks who make the most mistakes do most of the name calling?

"give tax breaks and my tax money to the uber wealthly"

But Sneak, don't you yourself claim to be the uber-wealthy?

no I do not qualify as rich when it comes to the "rich" whom the republican policies benefit. I am only worth $11 million. I am middle class.

One very large PYRAMID scheme. Nothing more, nothing less. Those at the top got out and those at the bottom got taken.

dco - i agree with you it was the epitome of the Republican:

"Privatize the profits; socialize the losses."

Just like what they are also doing in Iraq! It is a proven model.

This has little to do with Glass-Steagal. Fannie & Freddie were chartered decades ago with good intentions but ended up getting involved with activities not intended. The problem was their governance - public companies run with no accounability, whose executives were in bed w Congress, and an ineffective regulator.

The Bush administration has been pushing for more stringent oversight after their problems first surfaced a couple of years ago. It was key Democrates in Congress who kept resisting change, wanted to keep Fannie & Freddie afloat and even expand their portfolios.

Now we have to pay the price.

ah typical republican excuse - blame it on some one else even though the Republicans were in charge of every aspect of the govt!

But Mr. Greenspan wasn’t the only top official who put ideology above public protection. Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

Also in attendance were representatives of financial industry trade associations, which had been lobbying for deregulation. As far as I can tell from press reports, there were no representatives of consumer interests on the scene.

Two months after that event the Office of the Comptroller of the Currency, one of the tree-shears-wielding agencies, moved to exempt national banks from state regulations that protect consumers against predatory lending. If, say, New York State wanted to protect its own residents — well, sorry, that wasn’t allowed.

Of course, now that it has all gone bad, people with ties to the financial industry are rethinking their belief in the perfection of free markets. Mr. Greenspan has come out in favor of, yes, a government bailout. “Cash is available,” he says — meaning taxpayer money — “and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this.”

If we're handing out blame, I think a *huge* chunk has to go with the folks who said over and over again "its the best investment ever, you can't lose" and "buy now or be priced out forever".

We could not have had such problems without them. Fannie & Freddie are decades old... this crisis took special help from self-serving brokers and other shills.