Sunday, September 7, 2008

Bailout Nation Continues - Fannie/Freddie now Owned by You

Well it's official. We saw this day coming a long while back - starting last fall, and throughout the winter/spring as the government in its "brilliant" short sighted mode loosened regulations even further [Feb 27: OFHEO Increases Allowance for Fannie Mae] [Mar 19: Fannie, Freddie Layered with MORE Risk] to heap more and more of the mortgage market onto Fannie (FNM) and Freddie (FRE) we said this is only adding to the stress. Here are a series of posts where we predicted this day. [Aug 18: The Heat is On: Fannie Mae (FNM) and Freddie Mac (FRE)] But who are we - just a lonely voice in the blogging wilderness. We did nail this one, but it happened far quicker than even we, being quite negative on the situation, ever forecast. I thought this would happen sometime in 2009. Personally, I feel a lot of disgust and shame in a way of the way our country conducts itself, allowing these things to go on despite warnings, so people along the line can line their pockets ....but Wall Street will most likely celebrate as they have once again offloaded risk from them to you. I also feel perturbed because 90%+ of Americans probably have no idea this is happening or it's "too complicated" to understand since you cannot explain it in under 20 seconds... so their ignorance of the issue is being taken advantage of. Just my take. If they understood, perhaps more would actually be outraged at this. We continue to go through what can only be described as historic times, and many of those counted as "doomsdayers" by the pundits a year ago, are looking very smart - while said pundits never say "we were dead wrong in our Kool Aid we sold you in spring/summer 2007". Instead they are trotted out today again to say "the bottom is in" (for the 28th time)

Now, like Countrywide Financial (CFC) and Bear Stearns (BSC) we can cheer that this is "behind us" and run the market up since it "can't get worse than that". Somehow the spin meisters will spin this is good for the US dollar. [Apr 15: Could the US Lost its AAA Rating?]
  • The Bush administration seized control Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, aiming to stabilize the housing market turmoil that is threatening financial markets and the overall economy. Treasury Secretary Henry Paulson is betting that providing fresh capital to the two firms will eventually lead to lower mortgage rates, spur homebuying demand and slow the plunge in home prices that has ravaged many areas of the country.
  • The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
  • At both Fannie and Freddie, so-called Alt-A loans, a category between prime and subprime, accounted for roughly 50% of credit losses in the second quarter, even though such loans accounted for only about 10% of the companies' business. Alt-A mortgages include loans made with less than full documentation of borrowers' income or assets.
  • Countrywide Financial Corp., now part of Bank of America Corp., was the largest provider of loans purchased by Fannie Mae, accounting for 29.1% of its business in 2007, according to Inside Mortgage Finance, and was the second largest source of loans for Freddie Mac, with a 16.2% share.
  • Both companies have resorted to questionable accounting changes that delay the need to recognize losses on some delinquent loans.
  • In another step aimed at slowing the flood of foreclosures, Fannie earlier this year began offering to finance unsecured loans of as much as $15,000 to people who have fallen behind on their mortgage payments. These loans are designed to allow the borrowers to pay the past-due amounts on their mortgages. (can you believe this stuff? unsecured loans on top of mortgages, many of which have been 0-3% down the past half decade? How do you solve a problem of debt? Layer on more debt!! You will be paying for these loans when they eventually default - it's just more kick the can down the road policy) Some critics say the loans may be just a stopgap that saddles people with additional debt they can't afford.
  • Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie. The executives and board of directors of both institutions are being replaced.
  • The Treasury Department said it will immediately be issued $1 billion in senior preferred stock, paying 10 percent interest, from each company, but eventually could be required to put up as much as $100 billion for each over time if the funds are needed to keep the companies afloat as losses mount. The government also will receive warrants representing ownership stakes of 79.9 percent in each. (and you know when a government institution estimates one cost, that by the time we get there it is usually 2-3x higher. So figure $200 billion x 2-3 times = $400 billion to $600 billion cost to you)
  • The impact on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson's assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year.
  • After the Treasury Department's announcement, credit rating agency Standard & Poor's downgraded Fannie and Freddie's preserved stock to junk-bond status, but reaffirmed the U.S. government's triple-A rating. (yes, I bet a gun is not to their head to never drop that AAA ratings, just like a gun was to their head not to drop the AAA rating on MBIA or Ambak despite total junk status in "reality")
  • The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans." (translation - there is about $36 BILLION on banks balance sheet of PREFERRED shares - since the banks are in so much trouble we cannot let that fall or it will cause even more pain in our financial system = more of your tax dollars to make sure banks making private party investments are made whole. Repeat, your tax dollars will be used to make sure banks investments in Fannie and Freddie preferred is whole - enjoy)
  • In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed issued by the two companies later this month.
These Frankstein creations should of been split into 10-12 private companies and set off to fend for themselves. Then if 3 fail the whole system does not implode. Just a disgusting era all around.

This piece of data has not been made public on CNBC as they cheer the "bottom is in" but...
  • Some 9.2% of mortgages on one-to-four family homes were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey of the Mortgage Bankers Association. That is the highest percentage in the 39 years that the trade group has been doing the surveys.
I assume Bill Miller is praying tonight that enough people find this news to be "good" and drive up the common stock of the 2 Frankensteins [Aug 13: Bill Miller Continues to Boggle Me - Increasing Stake in Freddie Mac (FRE)]

On a side note bank #11 fell this Friday night - remember folks, every Friday night for the next 2 years I think we have a >50% chance of losing a bank in the still of the night.

Lest you worry about the CEOs, remember this is Wall Street aka "No CEO is Left Behind program" (keep in mind, this is now your risk/money on the line) I know some readers always feel sadness and despair knowing a CEO may lose a 4th or 5th house so I want to reassure my readers this will NOT happen. I need to know my readers can sleep at night so let me offer you this good news.
  • Mr. Syron (CEO Fannie) may walk away with an exit package that could total as much as $15 million, says David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay, and a possible payment of $8.8 million to compensate for forfeiting certain equity grants.
  • Mr. Mudd's (CEO Freddie) exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price.
The great transfer of wealth from the many to the few continues in America - a trend accelerated each year over the past 3 decades. I recommend getting your child into Harvard/Yale - making the right connections with the kids of the "right people", get them employed at the "right" level at public companies or in government, and make sure they get into the "few" slots and not live like the slovenly masses of the current & future. Because this is what our Banana Republic full of nanny state bailouts for the upper 0.5% and corporations has come to, along with keeping the sheep blind with government reports that are useless representations of reality, along with bubbles that come along every 6-7 years to keep the masses "content" that there is a way for them to get rich fast too. Before they lose big time and transfer more wealth to the "right people". If I'm not making myself clear, I'm disgusted with everything I've seen the past year.

Now hand me your wallet, you wretched middle class - it's time to pay up. In return we'll move your Ameritrade or Etrade account up 2% in the next few days as compensation. Now we're equal.

Big Brother

Once more let me reiterate the free market will regulate itself, so I highly encourage us to get rid of all regulation, regulation is evil and what those high taxing evil doers want - I mean that's been the mantra the past decade - it's working great!

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