U.S. Considers Takeover of Fannie Mae and Freddie Mac(nytimes.com)
nytimes.com
U.S. Considers Takeover of Fannie Mae and Freddie Mac
http://www.nytimes.com/2008/07/11/business/11fannie.html
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16 comments
this will have huge riple effect on the economy, and the financial markets. The goverment will either let them go under, and risk that mortgage issuing for average joe, stops overnight and a huge flight of foreign capital from the US, or take them over and de-value the dollar even more and create more inflation.
The sad part, is both Fanie Mae, and Freddie Mac were used to stash and securize bad mortgages, basically shielding away the banks that made the poor decissions to issue these toxic mortgages in the first place. It is sad, but the rich is getting richer (and they took huge bonuses when all was rosy), and we all are paying for it now.
Either way, nuclear winter is comming. Even the SF Bay area is not feeling anything in this recession, other parts of america are reeling.
The sad part, is both Fanie Mae, and Freddie Mac were used to stash and securize bad mortgages, basically shielding away the banks that made the poor decissions to issue these toxic mortgages in the first place. It is sad, but the rich is getting richer (and they took huge bonuses when all was rosy), and we all are paying for it now.
Either way, nuclear winter is comming. Even the SF Bay area is not feeling anything in this recession, other parts of america are reeling.
The government won't allow them to go under. It would lead to a housing depression, and during an election year, is not good for the incumbent.
Also, it would set up a string of revaluations on credit default swaps, which there are about 4 trillion dollars worth floating around in an unregulated market. So the two companies will probably get nationalized, along with a government bailout of Lehman brothers.
It's funny to see everyone fight against the free market when it goes against them. Freddie and Fannie are shit. They have been shit. When they raised the loan limits to 750,000 a couple months ago, it just allowed them to pile on more shit. The bad loans coming out of California could be repackaged and sent to these companies at the taxpayer's expense.
These companies are overleveraged, poorly managed, unhedged, and are running out of cash. The only reason they're solvent is that they value their asset classes way above what they can get on the market right now.
Unfortunately, we have to bail them out. If we didn't, it would take down our financial system. But the actions of the Fed and the Treasury create a behavioral incentive for companies to take undue risk, because they know they have the government as a safety net. It's not fair to the taxpayers.
When we get over this mess, we need to find solutions to prevent this from happening again. Examples such as creating a regulated market for credit default swaps, and limiting the amount of leverage and directional risk a firm can take.
Also, it would set up a string of revaluations on credit default swaps, which there are about 4 trillion dollars worth floating around in an unregulated market. So the two companies will probably get nationalized, along with a government bailout of Lehman brothers.
It's funny to see everyone fight against the free market when it goes against them. Freddie and Fannie are shit. They have been shit. When they raised the loan limits to 750,000 a couple months ago, it just allowed them to pile on more shit. The bad loans coming out of California could be repackaged and sent to these companies at the taxpayer's expense.
These companies are overleveraged, poorly managed, unhedged, and are running out of cash. The only reason they're solvent is that they value their asset classes way above what they can get on the market right now.
Unfortunately, we have to bail them out. If we didn't, it would take down our financial system. But the actions of the Fed and the Treasury create a behavioral incentive for companies to take undue risk, because they know they have the government as a safety net. It's not fair to the taxpayers.
When we get over this mess, we need to find solutions to prevent this from happening again. Examples such as creating a regulated market for credit default swaps, and limiting the amount of leverage and directional risk a firm can take.
Well said.
But is our financial system worth saving?
Here's a way to make sure it doesn't happen again: don't let it happen this time.
Get on the phone to your congresspeople NOW, and don't stop pestering them until they pass law barring the fed from nationalize the GSEs. Fannie and Freddie do have some ability to put back fraudulent securities, so let them do so and make the banks take their medicine.
We're already in a housing depression. Prices will to go back to normal (~3x incomes) regardless of who we bail out. Nationalizing this crap is another misstep that will lead to a long and painful depression, partly because the borrowing costs for the US government have the potential to go through the roof. The government and taxpayers need to save themselves right now, or things could (will?) get much worse.
If the government protects itself and keeps it's own borrowing costs low, then there is a framework to supply new banks with credit. If not, well...
But is our financial system worth saving?
Here's a way to make sure it doesn't happen again: don't let it happen this time.
Get on the phone to your congresspeople NOW, and don't stop pestering them until they pass law barring the fed from nationalize the GSEs. Fannie and Freddie do have some ability to put back fraudulent securities, so let them do so and make the banks take their medicine.
We're already in a housing depression. Prices will to go back to normal (~3x incomes) regardless of who we bail out. Nationalizing this crap is another misstep that will lead to a long and painful depression, partly because the borrowing costs for the US government have the potential to go through the roof. The government and taxpayers need to save themselves right now, or things could (will?) get much worse.
If the government protects itself and keeps it's own borrowing costs low, then there is a framework to supply new banks with credit. If not, well...
That's the interesting thing.
The amount of desire for market reforms is inversely proportional to how well the public's portfolio is doing.
Noone wanted market reforms when their Enron stock was up 300% or when they owned a sizeable chunk of pets.com.
Hopefully this time we'll start to see some reforms that make sense.
Also of note: I don't think the legislative branch has any call on whether these shit companies get nationalized... it's up to the Treasury (exec branch) and the Fed (off on its own).
The amount of desire for market reforms is inversely proportional to how well the public's portfolio is doing.
Noone wanted market reforms when their Enron stock was up 300% or when they owned a sizeable chunk of pets.com.
Hopefully this time we'll start to see some reforms that make sense.
Also of note: I don't think the legislative branch has any call on whether these shit companies get nationalized... it's up to the Treasury (exec branch) and the Fed (off on its own).
Great line I've heard elsewhere:
Socialize the risks, privatize the profits.
Socialize the risks, privatize the profits.
[deleted]
also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.
Nice to know the kinds of things that the government is considering. I have this funny feeling that such statements are a hint to wealthy people to get an early start on the big capital flight bandwagon of 2010-2015.
Nice to know the kinds of things that the government is considering. I have this funny feeling that such statements are a hint to wealthy people to get an early start on the big capital flight bandwagon of 2010-2015.
2010-2015? Fuck, haven't you seen the chart?
http://www.retireearlyhomepage.com/hdent.html
http://www.retireearlyhomepage.com/hdent.html
The picture of Paulson and Bernanke really sum up the nation's economic situation: http://www.nytimes.com/imagepages/2008/07/11/business/11fann...
Now I'm sitting here, in my rented apartment, with a few small and responsibly managed debts, considering a startup. At this point, I don't know what to think. If these blunders go unchecked and Mae/Mac go under, and lending in general practically disappears, then there's not a snowball's chance in hell I'll be able to do some of the things I've had in mind, like buying a home and/or starting a startup (without VC). If they bail them out then the we will be looking at massive inflation and we'll be paying for it for years to come.
I just don't know which one to support. I suppose it doesn't really matter though because, as the FISA vote shows us, Congress really gives precisely fuckall about the citizens of this country.
Now I'm sitting here, in my rented apartment, with a few small and responsibly managed debts, considering a startup. At this point, I don't know what to think. If these blunders go unchecked and Mae/Mac go under, and lending in general practically disappears, then there's not a snowball's chance in hell I'll be able to do some of the things I've had in mind, like buying a home and/or starting a startup (without VC). If they bail them out then the we will be looking at massive inflation and we'll be paying for it for years to come.
I just don't know which one to support. I suppose it doesn't really matter though because, as the FISA vote shows us, Congress really gives precisely fuckall about the citizens of this country.
As a student without a job, I've had the pleasure of watching this shitstorm unfold for over a year now with no personal consecuences. Call it macroeconomic shadenfreude.
It's even more fun to watch it when you've been short the stock for the past six months.
Wow. For all these years, people assumed that the government would be stupid enough to provide an explicit guarantee for GSEs like Fannie Mae and now congress is out to validate that assumption. Talk about idiotic.
Then again, what will be even more idiotic is when the US Gov./Fed. start to inflate the currency to pay off this monstrous debt.
On an interesting related note: http://online.wsj.com/article/SB121565255349741343.html?mod=...
Then again, what will be even more idiotic is when the US Gov./Fed. start to inflate the currency to pay off this monstrous debt.
On an interesting related note: http://online.wsj.com/article/SB121565255349741343.html?mod=...
It's not stupid at all- governments with enormous, unpayable debt have two options- inflation or default. The US can't default without destroying the world economic system, so we'll just undergo obscene levels of inflation until the debt is relatively small enough, relative to other currencies, that the rest of the world can organize a bailout.
Which would be all fine and dandy until we look at past history of such maneuvers and find that no government has ever done this and survived. A good example of a government inflating currency to repay debt would be post-WW1, pre-Hitler Germany.
Furthermore, there aren't just two options for huge unpayable debt. First of, even a debt of $14 trillion is not enormous and unpayable for the US gov. (though with a few decades of medicare, medicaid, and social security benifits, it will be).
Furthermore, here the US gov. has a choice to reduce tax payer liability which is what makes the idea of explicit backing for Fannie Mae and friends particularly stupid. If done carefully, these monsters can be slowly unwound and the ticking fuse they represent, diffused. Even if they were to implode in the middle of this process, I would like to argue that the longterm benefits of removing these companies and not adding $5 trillion to the US national debt would outweigh the short term losses.
Lastly, the only description for an organization which
a) Can tax a group of 300 million people, b) can decide its own liability, and c) still ends up incurring crippling levels of debt
can only be described as terminally stupid and a drag on society.
Furthermore, there aren't just two options for huge unpayable debt. First of, even a debt of $14 trillion is not enormous and unpayable for the US gov. (though with a few decades of medicare, medicaid, and social security benifits, it will be).
Furthermore, here the US gov. has a choice to reduce tax payer liability which is what makes the idea of explicit backing for Fannie Mae and friends particularly stupid. If done carefully, these monsters can be slowly unwound and the ticking fuse they represent, diffused. Even if they were to implode in the middle of this process, I would like to argue that the longterm benefits of removing these companies and not adding $5 trillion to the US national debt would outweigh the short term losses.
Lastly, the only description for an organization which
a) Can tax a group of 300 million people, b) can decide its own liability, and c) still ends up incurring crippling levels of debt
can only be described as terminally stupid and a drag on society.
"No country in the world has ever succeeded by debasing its currency"
guess i'm going to stock up on canned food and ammo...