Sunday, January 25, 2009

Freddie Mac Saddles Up for Another $35 Billion

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In a typical government move, at 5:30 PM Friday night it was announced Freddie Mac was requesting another $35 Billion from the US Treasury. That's Billion. I am watching this like a hawk because of multiple reasons to be disgusted. First, the takeover of FanFredBomb was sold to us as a bill of goods costing "at most $200 Billion" and second, no matter what you think of the auto guys - the fact these folks were paraded as fools and lambasted for a "measly" $15 Billion (and it will be much more when all is said and done) for weeks upon weeks in public - while we hand out multiple iterations of that amount in the dead of the night with no questions asked to financials... is pathetic.

On Sept 7th when the takeover was announced [Sep 7: Bailout Nation Continues - Fannie/Freddie Now Owned by You] I wrote

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)]

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.


I said nonsense to that "as much as $200 billion total"

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


We were sold a bag of goods - within 2 months Freddie was already asking for handouts [Nov 14: Freddie Mac First to the Trough]

Freddie is the first to go to the government, and already is asking for the first $13.8 Billion. $13.8 Billion down, $86.2 Billion to go before they hit their (cough) ceiling of $100 Billion.


Now Friday night - just 2 months later... the next $35 Billion.... uh oh - just 4 months after the rescue and Freddie almost is at the halfway point of their "up to" $100 Billion....
  • Freddie Mac, the mortgage-finance company under federal control, said it will ask the U.S. Treasury Department for as much as $35 billion more in aid.
  • Freddie, which took $13.8 billion from Treasury in November, said in a securities filing today that its fourth- quarter operating losses will again drive its net worth below zero.
  • Their losses are going to be much higher than anyone anticipated,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.”
  • Fannie also said at that time that $100 billion may not be enough to keep it afloat.
This is of course brought to you by the same folks who say it would be a great bargain for us to buy bad assets from banks (TARP 1.0 selling point!) because they are such a great value and the marketplace is not properly valuing them. If we just hold them for a long enough time we will all be rich from the proceeds once the market returns to normal. It's a bunch of baloney. But that's how they will sell "the national bad bank" solution that soon arrives.

I am telling you the end game now - losses will be taken in huge batches by the United States; whether Treasury or Federal Reserve or FDIC. Whatever shell they hide it in - you can't make these bad loans with rapidly defaulting consumers behind them, turn good. They will sell the plans one way ("think of it as an investment!") and then quietly over the years absorb seismic losses when your attention is turned to the next thing. We're just getting started - Fannie and Freddie own or guarantee $6 TRILLION of mortgages. And we are supposed to believe, in the biggest housing bubble of our lifetime a mere $200 Billion will "save us"? One bank, Citigroup, has $300 Billion of federal backstops and Fannie/Freddie dwarf Citi. And that's just Freddie/Fannie - next comes the United States of "Bad Bank" which will be created to house all these "undervalued" loans now sitting on our banks balance sheets. You will get the same sales job... "heck we should be happy to own this stuff! If we hold it long enough we'll make a profit!" Watch for it. Same lines they used before.

Even worse we are exaggerating the problems with FanFredBomb so that we can "fix" housing from going to its natural place... one example of countless
  • 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.
So do you get that? Give unsecure loans of up to $15,000 for people who are already behind on their payment. Yes - solve debt by giving more debt. Unsecured... no problems there. That's just one of many bright ideas done behind the scenes.

Then within weeks of the original Sept bailout Paulson & Co backtracked on promises and turned Fannie/Freddie into great vacuum cleaners.... which is the same thing we are doing with the Federal Reserve balance sheet. [Oct 12: Fannie, Freddie Turning into Vacuum Cleaners]
  • 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.
So on top of the junk these two already held, we directed them to buy more once they came under our taxpayer roof. Laughable. Talk about socializing losses.

But that's not how it was sold to us when it originally happened - here was the initial promise
  • 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.
And that's what's going on as your attention is turned to the more recent fires. Fannie/Freddie are upwards of about 90% of all mortgage originations in our now frozen financial system. And already had about $6 Trillion owned or guaranteed. $200 Billion on $6 Trillion = 3.3%. So "up to 3.3%" of losses will cover it all.... yep. We'll be taking hits on these loans for half a decade at least. If it's even at a 10% rate we are talking $600 Billion. $49 billion down (to Freddie alone - in 4 months).... much, much, much more to go.

Just make sure to watch out for those sneaky press releases on Friday nights after the market closes and very few are paying attention. Thankfully this is all just too complicated for the average sheeple to comprehend so it can go on, with little fanfare.

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