Sunday, October 12, 2008

Fannie, Freddie Turning Into Vacuum Cleaners

Notice a pattern of late? Sell a plan on one basis, and then turn around and do something different - bait and switch. Normally, I'd call them out on this "change in direction" with Fannie and Freddie, but things are so dire everything must be done to "preserve the system" - but the upshot is after trying to stabilize Fannie and Freddie we are now turning them into a large garbage pail. The costs to the American people of this are going to be enormous. But as always, we deal with the fire in front of us and kick the pail for the coming fires. Effectively that great "sucking sound" you hear is all of Wall Street's junk being sucked into the government. As I said at the time, when Paulson sold the Fannie/Freddie rescue as at maximum $100 Billion for each, the cost would end up being far far greater. On Sept 7th I wrote in 'Bailout Nation Continues - Fannie/Freddie Now Owned by You'

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)

Ah well, this is gonna cost a few trillion once we are done with it all so at some point you just lose track; is there really much different between a $3 trillion cost and a $4 trillion cost?
  • Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
  • Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.
  • Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said Oct. 5. (I bet it's a lot more than that)
Here is the key
  • Regulators initially restricted Fannie and Freddie's growth when they seized control of the government-sponsored enterprises Sept. 7. To ``promote stability'' and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two would be allowed to ``modestly increase'' their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run ``to maximize shareholder returns.''
  • Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill.
Can't trust these folks farther than you can throw 'em.

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