While the Congress ponders whether to cough up $300 billion to backstop Fannie Mae and Freddie Mac, the Fed has opened the discount window to these two crippled companies.
In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”
If you take just the mortgages they own you come to a total of $1.7 trillion supported by core capital of about $70 billion. That is a leverage ratio of 24 to 1. Throw in the guaranteed stuff and you balloon to 68 to 1. You can have a very good book of mortgages with a very low default rate and still be out of business quickly with that leverage. This is crazy.
So let me get this clear. You and I (the taxpayers) are going to loan these two companies $300 billion and the existing shareholders and bondholders are not going to have to take a haircut? If Henry Paulson was still running Goldman Sachs and a private company came to him for a rescue to stay out of bankruptcy, you can bet your bottom dollar that he would have “crammed down” the existing shareholders and bondholders. Fannie and Freddie have been run on the edge of criminal negligence by their executives who took millions out during the boom. In any sense of fairness, the equity holders should have been wided out and the bond holders asked to take a serious haircut.
But it looks like Uncle Sucker will step in with no such conditions. WTF. It sounds like Phil Gramm is already running the Treasury and corporate socialism is in the saddle.
26 responses so far ↓
Dan // July 14, 2008 at 6:27 am |
It’s getting harder and harder to sing the Ode to Free Markets these days.
I heard Cokie Roberts on NPR this morning say that this is an issue “above politics,” showing that she continues to cement her relationship as an enthusiastic spokesperson for the Billionaire Bandit Club.
Ken Ballweg // July 14, 2008 at 6:29 am |
I believe that the current admin will do anything to try to hold the potential crash off until after the elections. Since it looks likely that the Dems will steamroll in on a major punish the Repubs sentiment, it’s critical to their future to be able to say that the “recession/depression” happened during a Dem administration.
Now, whether people will be dumb enough to believe that BushCo wasn’t the actual cause, and McCain would have inherited it as well…. I don’t know.
The evidence of ‘04, and balloon mortgages, and middle class gambling through e-trading would support a very large percent of probable takers for such a Rovian meme.
The pity is that when the dam breaks, the flood is going to be significant, and this just adds more metaphorical water.
Ken Ballweg // July 14, 2008 at 6:31 am |
Oh, and it’s “Free Markets” Jon, nothing but pure and simple “Free Market” philosophy at it’s finest. In your heart you know that.
Dan // July 14, 2008 at 6:44 am |
“Since it looks likely that the Dems will steamroll in on a major punish the Repubs sentiment”
Not if Greg Palast’s anlysis is correct in “Armed Madhouse.” He makes a pretty compelling case that the close elections of both 2000 and 2004 were stolen, and has some damning evidence to back up both charges.
I won’t be surprised if CNN’s exit polls at 7 PM on election day indicate that Obama is a winner, but the story somehow changes by 7 AM the next day.
Dan // July 14, 2008 at 7:51 am |
I just love seeing headlines like “Fed adopts plan to curb shady lending practices” with a picture of Paulson and Bernanke sitting side by side.
It was the Fed that *created* the shady lending practices. It was Greenspan who *pushed* the shady lending practices.
Horse Thieves Adopt Plan to Curb Horse Theft.
“Some dang fool left the barn door wide open!” said a grinning Shady McShade, chairman of the Federal Reserve of Horse Thieves. “All we, I mean, all they had to do was give a little whistle and all them ponies came running out. Gosh dang it, it makes me spittin’ mad just to think about it! What’s that, you say? What’s in my back pocket? What, this old busted barn door latch? I wonder where that came from.”
MS // July 14, 2008 at 8:24 am |
Any hope that an Obama administration will put the brakes on some of these practices?
Or is the Congress so far gone that, even with a new administration, the siren song of “the joys of the Free Marketplace” will replace common sense (once again) — rescuing billionaires and letting the rest of us drown.
BobbyG // July 14, 2008 at 8:53 am |
As I’ve said before, we simply must return the financial system to normal., And, “normal” is succinctly characterized by the words of Michael Lewis:
“The firm made money, and the broker made money. Two outa three ain’t bad.”
Look! Up in the sky! Is it a bird? A plane? … it’s, it’s…
It’s a Black Swan heading our way.
Lewis Haidt // July 14, 2008 at 9:26 am |
Great explanation.
Your post raises the question of why the general public is so aware and reacting?
If the LA Times and other MSM would take the time to explain our complicated, flows of finance through f-ed up Networked like ones exploited to F Mae, F Mac, Paulson, et al, in the same way that this post does, then finally we might start getting traction.
If any MSM journalists are reading this, hello, get your Flash, graphics teams on this so then your readers will begin to understand our over-networked world and care more about your brand.
Nice one here Prof.
Brian // July 14, 2008 at 9:42 am |
Dear Jon,
At long last we agree on an issue.
Rush Limbaugh
Rick Turner // July 14, 2008 at 12:11 pm |
You mean we can’t have guns and butter?
Zhirem // July 14, 2008 at 12:32 pm |
*pokes* Morgan.
Your queue sir…
We need guidance on interpretation of these troublesome events.
- Zhirem
Rick Turner // July 14, 2008 at 3:02 pm |
I’d say that nobody in a company being bailed out should make more than 100 K a year, and to enforce that nicely, they should be at that rate retroactive for three years. “But it wasn’t my fault!” is what you’d hear, but hey, who do these assholes think they work for? If it’s my tax bucks bailing them out, they work for me and you and all the rest of us suckers.
P. Cross // July 14, 2008 at 3:39 pm |
Free markets, see”The CRA” Community Reinvestment Act modified in 95′ . This act enabled the mortgage industry to tap a whole new market. Individuals that never would or could repay their loans. Mortgage lenders became seed money for speculators. ETC, ETC
Bankers are want to loan money where their is no collateral. So why would they loan money on zero or low collateral. I believe the CRA changed
the rules just enough to facilitate underwriting to fit the borrower.
The CRA didn’t create the cheats it just opened the door just wide enough.
Lenders could be fined if they didn’t abide by the act. In the name of “fairness”
The investors in this garbage paper, well the dumb ass ate em up. They forgot their own rules.
Just a thought
Melissa Goldstein // July 14, 2008 at 4:56 pm |
Rick>
I was mighty pissed a few years ago when the Canadian government bailed out a flailing Air Canada, and at the same time the CEO of the company was awarded a few million dollars in contractually-protected bonuses (while forcing all other employees to take a pay cut, I should add). That kind of practice is nauseating, and REALLY needs to stop.
michaelmeme // July 14, 2008 at 5:12 pm |
and the existing shareholders and bondholders are not going to have to take a haircut?
What makes you think they haven’t? In the past year the stocks have fallen 85% and 88%.
http://finance.google.com/finance?q=fnm+fre
Ken Ballweg // July 14, 2008 at 7:37 pm |
Cross, I don’t think you can lay this on the law to end redlining. This is a ponzie scheme by the lenders that is the more a consequence of the lack of regulation, then some liberal law to end discrimination in loans.
The CRA says you can’t deny a person a loan because of their race. It doesn’t say you have to make loans without having the ability to repay.
bigring55t // July 14, 2008 at 8:46 pm |
michaelmeme- yes and if you go back to the limit of that chart you would still be up 68% w/Freddie and 613% w/Fannie, although it is very clear that something happened in the early 90’s that just didn’t fit w/ the previous pattern, maybe the laws changed? Anyway haircuts are relative, but Jon is absolutely right on this one, all those shouting free market all the time deserve to have their ass handed to them, and I would like to start with all the performance bonuses the top execs have been raking in while they fly this thing into the ground.
Rick Turner // July 14, 2008 at 9:43 pm |
Top execs at many, many poorly performing companies are raking in the dough because the boards of directors are stuffed with all their pals. It’s quite a club of good old boys ripping new ones in the stockholders’ behinds while handing each other carte blanche on board after board. It would be amazing to chart the boards of directors of a whole pile of these companies to see how many hands are washing how many others. I suspect it’s a big circle jerk of interconnected low performing multi-millionaires who look good with those blue suits and red power ties. How do these guys fail so spectacularly and make so much money? Where’s the instruction manual for that lifestyle? Oh, there it is, but it’s missing some pages. In fact, it’s missing the chapters on ethics and caring about other people. Wonder why?
Dan // July 15, 2008 at 4:51 am |
The stocks are way down now, but if the government rides to the rescue with mountains of our taxpayer dollars, those stocks will go right back up…otherwise why are they talking about riding to the rescue?
The deal should be that every dollar they get has to be paid back, and it is paid back FIRST, before there are any dividends or other payoffs to shareholders. In fact, they could just issue a bunch more shares that the government can hold, and then sell off over time to get the money back. That dilutes the shareholder value but keeps it from collapsing.
Dan // July 15, 2008 at 4:59 am |
And claiming that this crisis was created by a law against redlining is ludicrous. I’m guessing that came from Rush Limbaugh.
There was a long piece on NPR a while ago about this, and they interviewed a bunch of insiders from mortgage companies. There was not a single comment about the crisis being caused because lenders were “forced” loan to minorities due to CRA.
Instead, there was a rush not to get left behind. Everybody was making a lot of money, there was a ton of money in the market, mostly coming from China, and all these foreign investors wanted to get in on the “safe” and “guaranteed” American real estate market. But there was too much money chasing too few opportunities.
The solution was to create more opportunities. Thus began the race downward, where, at the bottom, frontline lenders were told to lend money to people with *zero* collateral and let them have their homes with *zero* down payments. And at subprime variable rates. The lenders knew it was crazy, but everybody was doing it. And the investment dollars were still lined up waiting.
The herd all rushed straight off the edge of the cliff together.
Not one word about how liberal fascists put a gun to the mortgage industry’s head and said, “Now start handing out free money to minorities or I’ll blow your head off.”
Dan // July 15, 2008 at 5:04 am |
Pardon me; my rhetoric was a bit overblown and snide in the previous post. I stand by the point I made, but P. Cross said nothing about liberal fascists holding guns, only that CRA had opened the door. I still completely disagree with the point, however.
P. Cross // July 15, 2008 at 5:12 am |
Ken, Redlining wasn’t just a racial issue, it was also a socio-economic issue. Below a line it was very difficult to get a mortgage. Subprime mortgages have existed for a long time, sort of the middle ground but the CRA especially after 95′ changed the attitudes of lenders especially brokers. Underwriting rules adjusted, no doc qualifying, 100% mortgages very liberal appraisals, more qualifiers raising demand, rising prices.
With the number of variables in the market this was bound to have happened at some level of rising interest rates.
Reminds me of the 20’s when it was so easy to pyramid stocks.
Government meddling distorts markets whether its price freezes or subsidizing industries or paying people to remain poor.
Dan // July 15, 2008 at 8:43 am |
“Government meddling distorts markets whether its price freezes or subsidizing industries or paying people to remain poor.”
Again: These bad loans were *not* a result of government meddling. They were a result of a badly underregulated market in which too much money chased after too little investment. The distortion was to increase tolerance for risk to an unacceptable and dangerous (insane) level, which happened precisely because the government did not impose enough regulatory power.
If it’s meddling to say that you can’t exceed certain risk thresholds when making mortgage loans, then the government should not even consider bailing out the mortgage companies. Cokie Roberts should keep her mouth shut instead of saying that the risk of Fannie Mae collapsing is “above politics.” The hell it is.
If the government is going to bail these industries out (with my money) when they crash, then it’s downright stupid–criminal, even–not to regulate those industries.
MS // July 15, 2008 at 1:27 pm |
The stocks are way down now, but if the government rides to the rescue with mountains of our taxpayer dollars, those stocks will go right back up…otherwise why are they talking about riding to the rescue?
The deal should be that every dollar they get has to be paid back, and it is paid back FIRST, before there are any dividends or other payoffs to shareholders. In fact, they could just issue a bunch more shares that the government can hold, and then sell off over time to get the money back. That dilutes the shareholder value but keeps it from collapsing.
How sensible that the government (and taxpayers) should get a position in a company if they lend money to the enterprise.
May it be so.
Jon Taplin // July 15, 2008 at 5:49 pm |
P.Cross-The trouble with free market idealogues is that they can’t imagine that pure greed could deliver less than optimal market outcomes. The commission based mortgage salesman for Countrywide just wanted to get one more sale. He was willing to help anyone lie about their income in order to book another commission. This has less than nothing to do about redlining. Its just about the human capacity to lie for money.
P. Cross // July 16, 2008 at 12:34 pm |
Jon, I submit that government interference opened that door for the greedy by in essence deregulating sound loan underwriting that prevented unsound mortgages to be made.
It was an unintended consequence I hope. The CRA exists, the mandates of the bill exist, the opportunities for greed created by the bill manifested themselves in a lot bad paper.
That’s all I’m saying.
I’ve been in business for 40 years and I don’t see in the capitalist handbook anywhere that capitalism & free markets will free us of human proclivities.