fannie and freddie are insolvent

http://news.yahoo.com/s/ap/20080713/..._giants_crisis

I do! (kidding)
Seems it's the usual people.

Posted 5 minutes ago apparently

They even included the wrong spelling, such a hurry

Good thing there wasn't just a record in treasury debt this month, else this further tappy-tap-tap would have me worried that the US isn't that worried about having a future just as long as everything looks fine the next 5 minutes
(Yea yea, too big to fail, no other option, has to be done, olla, alla, ulla, but still, isn't all this "damage first, repair later, prevention never" logic getting a bit tiring?)


See also:
http://www.bloomberg.com/apps/news?p...AAQ&refer=home
http://www.bloomberg.com/apps/news?p...T2E&refer=home
High time for bed.

http://money.cnn.com/2008/07/13/news...rss_topstories
There it is. Who didn't see this coming? Hmm? My first post is on the first page and I'm still not changing my tune.
They tell you plain as day what their plans are. GSE is GSE. I don't know where the rumor or indolence started but this was a mute issue to begin with. I told my friends to buy buy buy on Friday.

There are GSE's and then there are Fannie and Freddie.

The Fannie and Freddie assistance plan

I see much to like about this.

From the New York Times:

the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs....

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion....

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold.

The first thing I like about this plan is the fact that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress. How much risk there is to the taxpayers in the various new lending facilities introduced by the Fed is subject to some debate, but that there is some risk, and that new loans from the Fed to the GSEs would increase this risk, is indisputable. One of the clearest lessons from history is that the fiscal and monetary functions of the government must remain separate. Pretending that we can deal with these problems with money creation rather than tax increases is too tempting to allow that door to be opened any further.
The second thing I like about the plan is that such action by Congress would take the form of a dollar limit-- here's how much we're willing to stake, and no more-- with residual losses presumably laid on the GSE creditors. I've argued that's exactly the way the debate needs to be framed. Parenthetically, I can't resist repeating here my suggestion that this is also exactly the approach we should be adopting for ever-growing federal health-care expenditures-- let Congress decide how much it's willing to spend rather than generate a wish list of all the things it would like to accomplish.
Granted, action by Congress can be a cumbersome process, often painful to watch. This I presume is why the plan includes a promise by the Fed to provide immediate lending, if needed, which I'm seeing as a kind of bridge loan. I would assume that may be quite a necessary and appropriate element of the plan.
I've railed before at the way politicians sometimes treat the debt limit as a political football, and I suppose there's a danger of that here. This is a subtle issue, to be sure, requiring balancing an unknown risk of large fiscal loss against an unknown risk of spectacular financial catastrophe. Congress may get it wrong. But ultimately this is a decision to be made by elected representatives who can be held accountable for the outcome, one way or the other.
For my part, I urge Congress to say yes.



author :James D. Hamilton , Professor of Economics at the University of California, San Diego

The first thing I HATE about this plan is that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress.

Especially someone like Sen Dodd who was the beneficiary of a cheap mortgage from Countrywide at the same time he was heading the lynch mob going after the industry.

Can't have it both ways unless you are a member of that 'great' institution of government.

Sun,
I was just literally thinking the same thing. Here in Nebraska we pay a very high property tax rate for "The Good Life". My dad is a county supervisor and gets to see bids on jobs for bridges and roads etc. If I was corrupt I could form a road construction crew and work on these bridges and roads etc and in a small Nebraska county I would make millions off the local government. Thank goodness my dad is extremely honest and doesn't allow that kind of thing.

But my main problem about Congress is not just corruption but their incompetence in understanding risks the US mortgage market should or shouldn't take.

no i'm not a member of the institution that you say
this is only a article that i read,and i post it here.it doesn't belong to me

peace brohttp://qsmile.com/qsimages/76.gif

p.s:oh plz if you don't mind,describe more about that person and that institution.
tks in advance

Yes, I know I saw the author mentioned at bottom of the article.

Institution = Congress and one person is Sen. Christopher Dodd.

http://qsmile.com/qsimages/83.gif

and then in the end there are fred and barney. no disrespect, i just couldn't help it. my god... such dumb names...
so where did the money go?

The money is still in the same place. They are 20% liquid and defaults under 1% of total so they are about twice as good as the majority of banks in the USA. These prices are a bargain. They are GSE's so if they have trouble they are insured through the FED. It's not like buying a failing bank. If they were allowed to fail the world would be thrust into a recession instantly. For them to fail they would have to experience 10 times more writedowns soon before getting more funding and house prices would have to decline another 40% before securing more funding.

And Barney Fife, errr I mean Barney Frank. The Congressman not the Deputy, who is head of the House Financial Services Committee.

http://www.bloomberg.com/apps/news?p...efer=worldwide

This was found on the Drudge Report. http://www.drudgereport.com/

Why stop by prosecuting the contributors to rumor mills? Why not prosecute the large firms that know better than to sell 10million shares at the time of rumor circulation? In a healthy economy this type of activity wouldn't be an issue but in today's highly volatile economy rumors last weeks and as we saw with Bear Stearns damage can be irreversible. Thousands lost their jobs and I'm sure 10's of thousands more took a severe loss in their retirement portfolios after Buffet suggested buying the bank 6 months prior.

Whatever happened to that old saying we were all taught as children? "Do unto others as you would have them do unto you."

‘Taxpayers have not put up their money to fund the government to be a venture capitalist, particularly as they are going to be buying up the scum end of the market.’

- Lord James of Blackheath (1938-)

Awesomest most awesome quote ever in the current environment.

Since I have no clue beyond what information is supplied (naked vs normal borrow-shorting) and I am unfamiliar with the backgrounds of order types and stock trading, could someone please take a few lines to tell/explain to me why something like this isn't a rather extravagant variation of market intervention and manipulation by those acutally intended to prevent it, but seemingly perfectly "fine":

http://www.bloomberg.com/apps/news?p...m2E&refer=home

In my not-knowing words: if it gets so bad you have to forbid people to actually sell something in some way or other, isn't something very wrong?

If the government steps in and "snaps up shares", I wonder if it'll ultimately turn out like AmTrak where share holders consider the shares worthless but are shareholders are more or less forced to hold on to them? IE, Fannie and Freddie's common stock would be picked up by the players like Citi or BofA and the government controls the preferred stock end, and ultimately ruins the whole enterprise?

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).

Did Fannie and Freddie cause the mortgage crisis?

Some thoughts about the role played by the GSEs in the run-up in mortgage debt and house prices.
Paul Krugman ably lays out the case for why it's conceivable that Fannie and Freddie could have made a contribution:

Here's the background: Fannie Mae-- the Federal National Mortgage Association-- was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.
The case against Fannie and Freddie begins with their peculiar status: although they're private companies with stockholders and profits, they're "government-sponsored enterprises" established by federal law, which means that they receive special privileges.
The most important of these privileges is implicit: it's the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.
This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.
Such one-way bets can encourage the taking of bad risks, because the downside is someone else's problem.

Fannie and Freddie had purchased $4.9 trillion of the mortgages outstanding as of the end of 2007, 70% of which the GSEs had packaged and sold to investors with a guarantee of payment, and the remainder of which Fannie and Freddie kept for their own portfolios. The fraction of outstanding home mortgage debt that was either held or guaranteed by the GSEs (known as their "total book of business") rose from 6% in 1971 to 51% in 2003. Book of business relative to annual GDP went from 1.6% to 33%.


Sum of retained mortgage portfolio and mortgage backed securities outstanding for Fannie and Freddie (from OFHEO 2008 Report to Congress) divided by (1) total 1- to 4-family home mortgage debt outstanding (from Census for 1971-2003 and FRB for 2004-2007) and (2) annual nominal GDP.

http://www.econbrowser.com/archives/...gdp_jul_08.gif The fact that the volume of mortgages held outright or guaranteed by Fannie or Freddie grew so much faster than either total mortgages or GDP over this period would seem to establish a prima facie case that the enterprises contributed to the phenomenal growth of mortgage debt over this period. Krugman nevertheless concludes that the GSEs aren't responsible for our current mess:

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.
Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

These developments appear clearly in the graph above after 2003, which is marked with a vertical line. And certainly much of the dramatic appreciation in house prices came in the two years after the GSEs began to contract.


S&P/Case-Shiller Composite 10 home price index (data source).

http://www.econbrowser.com/archives/...ler_jul_08.gif Even more striking is the explosion of home mortgages held in the form of privately-issued asset-backed securities that did not go through either Fannie or Freddie. By 2006, these represented 20% of all outstanding home mortgages.


Dollar value of home mortgages held by private asset-backed securities (from Census for 1971-2003 and FRB for 2004-2007) divided by (1) total 1- to 4-family home mortgage debt outstanding and (2) annual nominal GDP.


http://www.econbrowser.com/archives/...gdp_jul_08.gif On the other hand, Tanta contributes this:

Fannie and Freddie .... didn't like losing their market share, and they pushed the envelope on credit quality as far as they could inside the constraints of their charter: they got into "near prime" programs (Fannie's "Expanded Approval," Freddie's "A Minus") that, at the bottom tier, were hard to distinguish from regular old "subprime" except-- again-- that they were overwhelmingly fixed-rate "non-toxic" loan structures. They got into "documentation relief" in a big way through their automated underwriting systems, offering "low doc" loans that had a few key differences from the really wretched "stated" and "NINA" crap of the last several years, but occasionally the line between the two was rather thin. Again, though, whatever they bought in the low-doc world was overwhelmingly fixed rate (or at least longer-term hybrid amortizing ARMs), lower-LTV, and, of course, back in the day, of "conforming" loan balance, which kept the worst of the outright fraudulent loans out of the pile. Lots of people lied about their income (with or without collusion by their lender) in order to borrow $500,000 to buy an overpriced house in a bubble market. They weren't borrowing $500,000 from the GSEs.

Michael Carliner (hat tip: Economist's View) adds:

Fannie and Freddie are ... subject to regulation by HUD under mandates to serve low- and moderate income households and neighborhoods. As originators and investors with more energy than brains expanded their (subprime) lending to those borrowers and neighborhoods, it was difficult for Fannie and Freddie to increase their shares. They didn't want to buy or guarantee subprime loans, correctly perceiving them to be insanely risky. Instead they purchased securities created by subprime lenders, taking only the supposedly-safe tranches. Those portfolio purchases were counted toward their obligations to lend to lower-income home buyers, but are now part of the write-downs.

For my part, I have two questions for those who take the position that the GSEs played no significant role in causing our current mortgage problems. First, what economic justification is there for the dramatic increase in the share of loans guaranteed or held by the GSEs between 1980 and 2003 that is seen in the first graph presented above? What sense did it make to increase the ratio of such loans to GDP by a factor of 12 over this period?
Second, what forces caused the explosion of private participation in a much more reckless replication of the GSE game? A year ago, I suggested one possible answer-- private institutions reasoned that, because the GSEs had developed such a huge stake in real estate prices, and because they were surely too big to fail, the Federal Reserve would be forced to adopt a sufficiently inflationary policy so as to keep the GSEs solvent, which would ensure that the historical assumptions about real estate prices and default rates on which the models used to price these instruments were based would not prove to be too far off.
Is that the answer to the second question? I'm not sure. But if anybody has a better answer, I'd still like to hear it.
In the mean time, I very much agree with Krugman that the most egregious problems were not caused by anything Fannie or Freddie themselves did. But I disagree that their actions played no role in causing the underlying problem we face today.


author: James Hamilton

http://qsmile.com/qsimages/83.gif

also:

"Please find me a one-armed economist so we will not always hear “On the other

hand ..."

Herbert Hoover, US president