Government says, "All your banks are belong to US." (was Freddie and Fannie thread)

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http://www.bizjournals.com/phoenix/stories/2008/09/08/daily9.html

Federal regulators on Sunday took over the failing Fannie Mae and Freddie Mac mortgage companies, quasi-government entities that got into trouble with subprime lending.

Officials with the Treasury Department, the Federal Reserve and the Federal Housing Finance Agency seized control of embattled mortgage giants in hopes of stabilizing the housing and financial markets.

Fannie Mae and Freddie Mac purchase or guarantee most of the home mortgages in the U.S. A crisis of investor confidence in the companies sent their stocks spiraling downward earlier this summer as mortgage defaults continued to plague markets across the nation, including Phoenix.

Congress passed legislation in July granting the government the authority to bail out the government-sponsored enterprises (GSEs), and Sunday it exercised that authority.

"We have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs - including the ability of the GSEs to weather a variety of market conditions going forward," said Treasury Secretary Henry Paulson "As a result of this work, we have determined that it is necessary to take action."

That action includes ousting the chief executive officers, Fannie's Daniel Mudd and Freddie's Richard Syron, and placing the companies under conservatorship -- which is similar to Chapter 11 bankruptcy reorganization.

Herbert Allison, former CEO of TIAA-CREF, has been named new CEO of Fannie. David Moffett, former vice chairman and chief financial officer at U.S. Bancorp will take Freddie's helm.

Mudd and Syron have agreed to stay on during the transition in leadership.

The government pledged to inject taxpayer dollars into the companies to prevent insolvency -- up to $100 billion total for each company. It also will also start buying mortgage-backed securities from the companies.

Under the conservatorship agreement, shareholders equity will not be eliminated, though common shareholders will be last in terms of claims on the GSEs' assets.

Preferred shareholders will be placed second, after common shareholders, in absorbing losses.

The takeover of Fannie and Freddie had been expected, with Fitch Ratings last week downgrading their preferred stock to "BBB-," one level above junk status. The ratings agency cited Fannie Mae's $307 billion in Alt-A mortgages and Freddie Mac's exposure to $190 billion in Alt-A mortgages and $6 billion in subprime mortgages as the companies' greatest risks.

Washington, D.C.-based Fannie Mae (NYSE: FNM) and McLean, Va.-based Freddie Mac (NYSE: FRE) have lost a combined $14.9 billion in the last year. Both companies stocks, which had sunk 90 percent in the past 12 months, fell to just over $1 per share Monday. The news, however, sparked a rally on Wall Street Monday among other stocks, including home building and financial companies.

Fannie Mae, the Federal National Mortgage Association, was founded in 1938 and converted to a private corporation in 1968. Freddie Mac, the Federal Home Loan Mortgage Corp., was founded in 1970. Both are among the largest lenders in the secondary mortgage market.
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So, am I the only one that worries what a housing market will do with this large of a direct government influence?
 
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I think you should have been much much much more worried if the government stood back and did nothing. As soon as this was announced stock markets all over the world jumped by on average between 2 and 4%. Time will show whether these gains will last but sadly I doubt they will.
 
GT4 genius
I think you should have been much much much more worried if the government stood back and did nothing. As soon as this was announced stock markets all over the world jumped by on average between 2 and 4%. Time will show whether these gains will last but sadly I doubt they will.
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They jumped because for decades Freddie and Fannie were considered hedge funds. Had they gone under the impact would have been worse than Enron.

My question then is: Why were people still using them as a hedge fund?


The other thing is this: The US is a free market. Government take overs of companies are the kinds of things you hear coming out of France or whatever. You almost never hear about it coming out of the US.
 
FoolKiller
They jumped because for decades Freddie and Fannie were considered hedge funds. Had they gone under the impact would have been worse than Enron.

My question then is: Why were people still using them as a hedge fund?


The other thing is this: The US is a free market. Government take overs of companies are the kinds of things you hear coming out of France or whatever. You almost never hear about it coming out of the US.
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You answered your own question there. The US do not like or do not normally take over companies, and in fairness did not take over either company fully, but this was a necessary last resort. Had both or either company gone under they would take 50% of the US mortgages with them. Had that of happened it could have destroyed the US economy and caused serve damage to the world economy.
 
Well, either way, the loans were going to be federalized directly, or the institutions that provided them would be. You've gotta pick your poison there...
 
Well the US market is not a fully free enterprise, if it was we would of see PCs lined up installed with a crappy Microsoft product if it weren't for the government's control on parts of the economy. If the economy was free we would see cars with no safety rating on the road today.
 
nick09
Well the US market is not a fully free enterprise, if it was we would of see PCs lined up installed with a crappy Microsoft product if it weren't for the government's control on parts of the economy. If the economy was free we would see cars with no safety rating on the road today.
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Don't you think people would choose a car that had it anyway, even if it wasn't mandated by the government?
 
nick09
Well the US market is not a fully free enterprise, if it was we would of see PCs lined up installed with a crappy Microsoft product if it weren't for the government's control on parts of the economy. If the economy was free we would see cars with no safety rating on the road today.
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Umm, actually we'd see more safety evaluation enterprises.
 
nick09
Well the US market is not a fully free enterprise, if it was we would of see PCs lined up installed with a crappy Microsoft product if it weren't for the government's control on parts of the economy. If the economy was free we would see cars with no safety rating on the road today.
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So, I wouldn't HAVE to pay for an added feature that I may never use, and is adding weight to my car?

I fail to see the problem.
 
Zrow
Don't you think people would choose a car that had it anyway, even if it wasn't mandated by the government?
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Off-topic, but there was a time when the presence of seat belts implied a lack of safety in the car. "I don't want that car if they have to put belts in it to make it safe!"

Having grown up in the '60s, with no seat belts, steel dashboards, glass that could shatter, fuel tanks at the rear bumper, etc., I know what of I speak. None of the current "safety" features would be present without government requirement. They universally make the car more expensive, and you can't sell a car that costs more than another one, all other things being equal.

Those who could afford it might choose the "safer" car, i.e. 70s-era Volvos and M-Bs, early air-bag Mercedes, etc, but they were choosing that car just as much for the fact that others couldn't get it.

On-topic. Bank failures are stretching FDIC, too, aren't they. Isn't a loan from taxpayers the next step there?

Can this be compared to the bail-out of Chrysler back in the K-car days? That was a loan, not a takeover, but . . . .
 
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YSSMAN
Well, its not just banks anymore, looks like we've gotten into the insurance industry as well.

Lets see what happens out of this...
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Apparently if AIG would have gone under the United States Federal Government would lose their license for operating motor vehicles without insurance. It would have caused all sorts of mayhem around the world because AIG serves customers in, what was it, 130 countries. It's even bigger than Wal-Mart. And I think some people get all upset when they hear "bailout" because they think the government just gave them the money they asked for. Actually, it's just a loan that gives them time to sell all their crap, and hopefully they'll make a profit selling all that stuff and from their normal business, cause they've got to pay back over 11% interest to the Feds.

I guess AIG really is too big to go under.
 
YSSMAN
Well, its not just banks anymore, looks like we've gotten into the insurance industry as well.

Lets see what happens out of this...
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Well duh. Insurance is bought for exactly the scenario that these various financial institutions are going through. The insurance companies never like the pay up, though. Especially if they aren't liquid. :lol:

Keef
Actually, it's just a loan that gives them time to sell all their crap, and hopefully they'll make a profit selling all that stuff and from their normal business, cause they've got to pay back over 11% interest to the Feds.

I guess AIG really is too big to go under.
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11% interest to the Fed, not to the taxpayer. We still get the inflation.
 
Got bored in photoshop.



We might be carrying these in the future. :lol:
 
We need a Visa card with McCain giving us the thumbs up (!) on the front!
 
Keef
Apparently if AIG would have gone under the United States Federal Government would lose their license for operating motor vehicles without insurance. It would have caused all sorts of mayhem around the world because AIG serves customers in, what was it, 130 countries. It's even bigger than Wal-Mart. And I think some people get all upset when they hear "bailout" because they think the government just gave them the money they asked for. Actually, it's just a loan that gives them time to sell all their crap, and hopefully they'll make a profit selling all that stuff and from their normal business, cause they've got to pay back over 11% interest to the Feds.

I guess AIG really is too big to go under.
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At least you can all now boast that you personally sponsor Manchester United

...and help pay Ronaldo's $215,500 a week wages!
 
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possibly costing taxpayers hundreds of billions of dollars.
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Surely that would be a smaller price to pay than a far worse off world economy? Though if it backfires...
 
Sureshot
Surely that would be a smaller price to pay than a far worse off world economy? Though if it backfires...
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It's not.

YSSMAN
Here is something interesting:

Congressional leaders were told "that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally," by Fed Chariman Ben Bernanke earlier this week. Perhaps we are far worse-off than we've been lead to believe?
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Well at least Ben is being honest. Greenspan's cards are falling down. No government or central bank can repeal economic law.
 
I'm watching them all yell on TV right now, and it just makes you sick. I just want to know what kind of effect this is going to have on my school loans, car loan, and any other of my credit-based activities. I'm told that I have well above average credit for someone who is 21 and in college, but that could all go out the window...
 
YSSMAN
I'm watching them all yell on TV right now, and it just makes you sick. I just want to know what kind of effect this is going to have on my school loans, car loan, and any other of my credit-based activities. I'm told that I have well above average credit for someone who is 21 and in college, but that could all go out the window...
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It depends on who your loans are through. My student loan is through a company called Collegiate Funding Associates and is so far unaffected and my auto loan is through Citizens Union.

How you individually are affected is all dependent on where your stuff is, but unless you were using some huge firm you should be fine.

If I were you I would be more concerned about whether you will be able to buy anything with a dollar after this bailout goes through.

Danoff
http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html


Explains the situation nicely.
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It explains two things to me:

1) I voted for the guy that thinks most like me.

2) Only one member of Congress is completely opposed to this bailout plan. :nervous:
 
What I don't fully understand is to what extent government regulation (or rather, the lack of it) has caused the current financial/economic crisis... what seems to be abundantly clear is that it could not have been wise to have allowed a bunch of investment bankers the complete freedom to take serious risks with almost unimaginable sums of other people's money... I agree that they shouldn't be allowed off the hook for their irresponsible behaviour (and sheer greed), but the bail-out is (to my understanding anyway) not designed to benefit the bankers, but to protect Joe Q Public whose life savings/mortgages/investments depend upon the survival/health of the financial system generally.

The very fact that these banks etc. are coming cap in hand to the government for an emergency bail-out would leave any non-socialist government with a major dilemma - stay true to the doctrine of capitalism at all costs and let everyone (from the richest city banker to the lowly saver in the street) pay the penalty, or consider intervention... Although my understanding of the whole situation is shaky to say the least, am I not right in saying that the government have always had atleast some hand in directing the path of the 'free market' in the US, and therefore should shoulder some of the responsibility now that it is going tits up? There seems to be the argument that less, not more, government intervention is what is required - and perhaps in a hypothetical scenario that should be true... but in reality, the government washing its hands of the failing financial institutions would have such a devastating impact that they simply cannot allow it to happen... it seems that calling for "less government intervention" in free market economics is just a bit late.

One commentator in the UK said that this entire crisis has been fueled by city bankers not understanding the complexity of (and therefore failing to appreciate the risks involved with) the financial products they were dealing with. That is bad enough, but factor in whose money they are gambling with, and it becomes a worrying state of affairs. And when the chickens come home to roost, who ends up paying? I'd argue that the financial institutions and bankers who took the risks without fully understanding them are to blame, but ultimately it is the folk who stump up the cash who are truly 'responsible'... but surely there comes a point at which the average saver in the street deserves to be protected from risks they were neither aware of, informed about, or properly advised about when making the initial investment? And what chance does the man in the street have of understanding what is happening to their money when the professionals they have entrusted with it don't seem to know what they are doing either?
 
in the united states of australia im watching this closely.. wonder what effect it will have on us. Apparently our major banks didnt invenst into subprime mortgage so they say that it wont effect our banks much. But in saying that if major US financial co-operations go down, surely Aussie banks will be effected...

BTW if you had a 180,000 mortgage with say Lehman brothers, and they went bust, does that now mean you have no mortgage and you own the house?
 

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