Bush Administration Considering A Takeover Of Freddie And Fanny

Freddie and Fanny lost about half of their value overnight as investors became more certain that the government was going to have to bail out the two GSEs (Government Sponsored Enterprises.) The New York Times says that senior members of the Bush administration are considering a takeover of Freddie and Fannie that would leave their shares “worth little or nothing,” and where taxpayers would pay “any losses on mortgages they own or guarantee.”

Together, Freddie and Fanny own or guarantee more than half of the nation’s mortgages — about $12 trillion, according to the NYT.

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

Treasury Secretary Paulson maintains that he is in favor of supporting the GSEs in their current form.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said in a statement today in Washington. “We are maintaining a dialogue with regulators and with the companies.”

As of this post, Freddie is trading at 5.85. Fannie is trading at 9.83. Both are down about 25%.

U.S. Weighs Takeover of Two Mortgage Giants [NYT]
(Photo: Jonathan Ernst/Reuters)

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  1. incognit000 says:

    So a group of people who’ve done nothing but trumpet private enterprise, deregulation and small government is about to turn Freddie and Fanny into government-owned organizations?

    And my father wonders why I have so little hope for the future.

  2. dinoman1989 says:

    I think “too big to fail” is correct. As you said, “Together, Freddie and Fanny own or guarantee more than half of the nation’s mortgages – about $12 trillion.” If the two companies did collapse, it would wreak untold havoc on the credit markets — it is the government’s responsibility to protect the American economy against nationwide-collapse, and in this case I feel that is just what they are doing.

    Sucks for Freddie Mac and Fannie Mae investors though : /. Although I don’t understand why the government supporting the two companies has lowered the stocks’ values so much. I guess the President really does have the touch of death. :P.

  3. Skipweasel says:

    @dinoman1989: “it is the government’s responsibility to protect the American economy against nationwide-collapse, and in this case I feel that is just what they are doing.”

    That’s pretty much what happened in the UK with Northern Rock which got bailed out with nearly £50billion.

  4. darkryd says:

    All the eggs, meet one basket. One basket, meet all the eggs.

  5. battra92 says:

    Please … don’t do this. The market will turn around on its own.

  6. Murph1908 says:

    Greaaat. More bailouts because people bought houses they couldn’t afford.

    I bought my house in 2003, and haven’t missed a payment. Now, I get to pay for someone else’s mortgage too.

  7. Orv says:

    @dinoman1989: The stock is low because there are really only two scenarios here:

    - Freddie and Fannie issue lots of new stock to bring in fresh capital, severely diluting the existing stock. This is what smaller mortgage lenders in the same situation have had to do.

    - The government takes over by putting the companies into conservatorship. The stock becomes worthless, and taxpayers are on the hook for the bad mortgages.

    This is a very, very bad situation. These companies hold $5 *trillion* in debt. A bailout would be hideously expensive; it’d make the S&L bailout look like pocket change.

  8. consumersaur says:

    @Murph1908: Half the nation didn’t.

  9. Anonymous says:

    The biggest enemy in this is the ratings agencies, who gave AAA ratings to securities backed by these crap mortgages. If they had been rated appropriately, investors would not have swallowed them up like candy and then got burned when the inevitable happened.

  10. TecmoTech says:

    So what exactly does this do? Now the gov’t owns all of the debt… So when people foreclose, taxpayers pick up the tab?

    Is that correct? What are the effects? Would we going into more debt and start borrowing more money causing even more devaluation of our currency?

    We need to cut some spending ASAP.

  11. ekthesy says:

    @TecmoTech:

    We need to cut some spending ASAP.

    I know a great place to start.

  12. TecmoTech says:

    @ekthesy:

    That is always the first target in spending discussion. But really, what do you do with all of the personnel? Do they just come home and sit in the unemployment line? How much do you really save by bringing troops home? I’m sure a bulk of the war spending is salary.

  13. Tmoney02 says:

    Well on this subject just got two “Breaking News” alerts from ABC News

    U.S. TREASURY SECRETARY PAULSON SAYS NO BAILOUT FOR MORTGAGE GIANTS FANNIE MAE AND FREDDIE MAC PLANNED AT THIS TIME

    and

    DOW FALLS BELOW 11,000 FOR THE FIRST TIME IN TWO YEARS

    Call me crazy but I bet those two headlines are related somehow…yep must be crazy.

    In all seriousness there is a number of ways to help these two giants without the government coming in full force. The WSJ article that was the lead article yesterday writes about a number of options that would almost certainly be undertaken before the government comes in.

    Also I read somewhere that if the government does bailout these giants containing debt from anywhere of 1.5 trillion to 12 trillion (depending on where you draw the lines) that the government assumes this debt and it becomes a part of the national debt. The current national debt is about 5 trillion dollars. Does this mean that in a worst case scenario the US national debt could double overnight?

  14. Orv says:

    @TecmoTech: It’s a lot more expensive to support people who are fighting a war halfway around the world than it is to support them when they’re training at home. The military wasn’t needing emergency spending supplementals to support these troops at home, but they’ve needed over $500 billion of them since the war started.

    This is, incidentally, one of the flaws in McCain’s argument that he can balance the budget by winning the war and bringing the troops home. Even if you ignore that no one seems to know what “winning” would mean, Iraq War spending has all been by emergency spending; it isn’t even counted in the budget.

  15. Orv says:

    @Tmoney02: The NYT article says that if the government decided to respond to the crisis by backing all of Freddie’s outstanding debt that it would, in fact, double the budget deficit — at least on paper. So yes, that’s the worst-case scenario.

    What this would do to the value of our currency is kind of scary to think about.

  16. Eldritch says:

    Oh man. This is so incredibly bad. Maybe the Aztec’s are right, maybe it is all over in 2012. I haven’t heard any good news concerning the economy our housing market in a very, very long time…

  17. moore850 says:

    Bush just can’t put off his failitude any longer: the “bankruptcy” of the USA is practically assured since they have estimated 5 trillion dollars of govt guarantees would be required to back all those mortgages, which would approx. double our national debt.

  18. Tmoney02 says:

    @Orv: What this would do to the value of our currency is kind of scary to think about.

    Exactly, Also one has to think about the bond market. Wouldn’t the US have to have a huge government bond sale to cover this enormous load of debt? Talk about flooding the market.

  19. ekthesy says:

    @TecmoTech:

    A lot of the personnel already HAVE jobs. They’re not “regular” Army/Navy/etc, they’re National Guard and Reserve troops with careers back home. A co-worker of mine shipped out last month (3 months at Ft. Bliss in the summer first!) and will have his job waiting for him when he returns–that’s mandatory for employers.

    Not only will that cohort be taken care of, but when the soldiers return home, they’ll just be soldiers at home, getting paid what they usually would have been paid. In fact, the US will save money by not having to shell out combat pay, which is above and beyond the usual salary for troops. Nobody’s losing their jobs here.

    (In the long run it really isn’t going to matter. The coming oil catastrophe, either via price shock or supply shortage, is going to be the death of American society as we know it.)

  20. Matt says:

    Can I has a free house too?

  21. chrisjames says:

    Simple system dynamics: an undercapitalized giant will collapse under its own weight. One way or another, this is going to be a financial black hole. If you put the GSEs, taxpayer-backed I assume, underneath all that, then its just going to be draining taxpayer money, shriveling the economy like a deflating pool toy. If the government backs them or there’s a bailout, same effect. There’s no way out of the fact that the government stepping in is going to cost us a shitload of money.

    But, what would happen if the companies default, though? Are we talking about a lot of investors that will be out, I guess, up to $12 trillion total? Who are the investors and why should we care? What about the mortgages themselves, what happens to those? No one is outlining the consequences, except for ambiguous doom and gloom talk.

  22. Cap'n Jack says:

    Great. I guess I won’t be planning any overseas travel in the next few years, since the US Dollar won’t be worth crap.

  23. pal003 says:

    @ekthesy: Agree. I suspect that the considerable overbilling from Halliburton, KBR, Bechtel, etc – would more than bail out some of this.

    Fannie Mae problems – shocking. “Fannie Mae engaged in “extensive financial fraud” over six years by doctoring earnings so executives could collect hundreds of millions of dollars in bonuses, federal officials said yesterday in a report that portrayed a company determined to play by its own rules.” – washingtonpost.com

  24. Trai_Dep says:

    So they took a gov’t run system meant to lubricate the home-buying system, then turned it into a quasi-public entity so that, in good times, investors could profit. Then when times are bad, they want the public to pick up the tab. To the tune of trillions of dollars.

    Also, about ten years ago, they shrank the deposit requirements, allowing these two entities to borrow against vastly less backing capital. Without any corresponding scrutiny.

    “Deregulation” yet again privatizing the profits, publicizing the losses.

    > Investors better lose every thin dime, regardless of the outcome.
    > “Deregulation” is almost always Washington-ese for “We’ll Screw Taxpayers in Ten Years So Make Your Money Fast”.

  25. This is one of those issues that conjures images of an itemized tax expenditure insert along with my 1040:

    How would you like us to spend the income we’ve appropriated?
    - Infrastructure improvements (roads, bridges)? Check.
    - Military capability investments (personnel, equipment)? Check.
    - Bailouts for hopelessly irresponsible nitwits who overextended themselves on dubious mortgages instead of following a sane financial plan? No f’ing way!

    A man can dream, right?

  26. ARP says:

    People were rabid about not bailing out people who got in over their head in mortgages. Yet, they seem to be silent when it comes to bailing out the entire system.

    @Trai_Dep: This is what pisses me off about republican capitalists (as compared to libertarian or pure capitalists). They have no problem bailing out companies or entire industries with government money, but go nuts when they feel like individuals are getting a “handout.” The problem is that companies know this are are merging their way into being “fail-proof.” They can act as irresponsibly as they want, and pay crazy salaries because they know they’re too big to be allowed to fail. That’s what happened with Countrywide, and it will likely happen with others.

  27. mac-phisto says:

    @AtomicPlayboy:

    - Bailouts for hopelessly irresponsible nitwits who overextended themselves on dubious mortgages instead of following a sane financial plan? No f’ing way!

    i’m assuming that by “nitwits”, you’re speak of the investors that loaded their portfolios with stock from these 2 GSEs & other financial institutions (a la bear sterns & countrywide). am i right?

  28. Jaysyn was banned for: http://consumerist.com/5032912/the-subprime-meltdown-will-be-nothing-compared-to-the-prime-meltdown#c7042646 says:

    @TecmoTech:

    They are in the military, why the hell do you think they’d be unemployed?

  29. thebluepill says:

    Hmm..

    If the .gov takes over the debt, making it part of the national debt, and someone pays their mortgage to the .gov.. would that make the entire mortgage tax deductible.

  30. @mac-phisto: Obviously I’m referring to the nitwits who took on these mortgages, and to the nitwits who offered them. And by extension I’m also referring those who proffered the unsound financial vehicles that enabled the sub-prime feeding frenzy. Bailouts like this and that of Bear Stearns remove accountability for bad choices, and as such enable and encourage further foolishness and opportunism. Diffusing responsibility by employing tax dollars to (maybe) mitigate the situation is not a solution. If the alternative is to do massive, temporary financial harm to the participants in this terrifically irresponsible behavior, that is absolutely fine by me. Preferable, in fact.

    I’m constantly amazed at the capacity for anyone to argue against the importance of personal responsibility and for policies that enable the lack thereof.

  31. TecmoTech says:

    @Jaysyn:

    I really don’t know how the military works, but why would we keep a bunch of people employed if we weren’t at war?

  32. @TecmoTech:

    I really don’t know how the military works, but why would we keep a bunch of people employed if we weren’t at war?

    You’re not serious, right? You do know that countries retain a military capability even when they are not in shooting wars?

  33. ARP says:

    @AtomicPlayboy: I’m of the same mind, either we help everyone (both the idiot borrowers and the idiot mortgage companies, investment banks, etc. who supported and encouraged this lack of responsibility), or we help nobody and let them all fail. They’re euqally at fault for the mess they’ve created. Unfortunately, we’ve already begun helping just the companies (Bear Sterns) and not borrowers.

  34. Breach says:

    Such total bullshit. I dont even have a mortgage, but I get to inadvertently pay to bail out these shithole companies and the people that allowed them to give mortgages to people who couldnt possibly afford them in the first place.

    I swear I lose my faith in this country a bit by the day…

  35. Comms says:

    Corporate Welfare Queens are awesome

  36. mac-phisto says:

    @AtomicPlayboy: hey man, this is corporate america! we eliminated personal responsibility the day that scotus declared corporate entities people about 150 years ago. & it’s been downhill ever since. the biggest mistake (most recently) was the repeal of glass-steagall by gramm-leach-bliley.

    i understand your sentiment, but by sitting on our tuffet, the only people we are going to cause massive financial harm to is ourselves. we’re going to lose our homes, our livelihoods, our retirements, our investments & our parity. meanwhile, those chiefly responsible will keep the booty they harvested from these unsound practices. they will lord over us in an age where private ownership of real property will cease to exist & corporate entities will rule supreme.

    & only this man will be able to save us (but not until the 3rd, über-cheesy installment where he has to battle a clan of japanese ninja androids):

  37. myasir says:

    Where are the free marketers denouncing this? Why aren’t they screaming about how the “invisible hand” of the market will take care of Mae and Mac?

  38. @mac-phisto:

    i understand your sentiment, but by sitting on our tuffet, the only people we are going to cause massive financial harm to is ourselves. we’re going to lose our homes, our livelihoods, our retirements, our investments & our parity.

    No, I’m not going to lose any of these things, as I didn’t get involved in this nonsense, and I don’t have any investments which will be significantly harmed. I am going to lose something else, though, in that part of my tax contribution will now go toward helping these buggers instead of being used for something that would be better for the country.

    meanwhile, those chiefly responsible will keep the booty they harvested from these unsound practices. they will lord over us in an age where private ownership of real property will cease to exist & corporate entities will rule supreme.

    The bastards who created this situation will be rewarded with future employment only if they are not held sufficiently accountable for their actions. As long as one can get away with this crap and still create value for shareholders, then one will be a valuable asset to a corporation. If, instead, these shenanigans end up greatly damaging the companies involved, their perpetrators will be professionally ostracized as they should be.

    It is a false choice to decide whether the lenders or the borrowers should pay for this. They both should pay, and those of us who practice some level of sound financial management shouldn’t have to give one cent to fix this problem.

    Lastly, unless you can prove to me that Murphy put OCP out of business and that OCP executives were held accountable for their misdeeds, then I don’t think he’s the man for the job.

  39. Tmoney02 says:

    @myasir: I don’t think anyone, at least around here, argues for a 100% lasiez fair economy. Especially when a problem of has snowballed to the point of taking the entire globe into at long recession/depression.

  40. @Murph1908: @Matt:

    Sigh, such oversimplification. I suppose indignation is cheap though.

    From Irwin Stelzer, Center for Economic Policy Studies at the Hudson Institute (From today’s WaPo):

    “You have to have the person who’s writing the risk bearing the risk. That means a whole host of regulations. There’s no way around that.”

    Can we please stop blaming people who took deals that did indeed turn out to be too good to be true?

  41. Hmmm… let’s see. Is this all the fault of 20 or so major financial institutions that have billions of dollars, hundreds of thousands of employees, decades of experience in finance, massive amounts of statistical data and computer models on loans and defaults, market experts and lavishly rewarded CEOs…

    Or a guy named Bud who never had a mortgage and had crappy credit?

    Hmm…. gee, who should we blame???

    These banks knew exactly what they were doing. And if they got rich doing it, you think they’d be giving some of the money back?

    You want to bail out these banks then fine, but don’t look in the mirror and think you believe in deregulation. You can’t have it both ways. I don’t give a crap what is going to happen if the banks fail – that’s how a free market WORKS. You guys supported a government that lets corporations do whatever they please and now you want to bail them out because you’re gonna cry? Boo hoo, we might actually have to pay for our belief that “don’t tell me what to do” is a sound financial policy for individuals and corporations?

    It isn’t. But if you believe that, then you should be howling mad at even the slightest hint of another bailout from Big Daddy government. I think, really, all of the free market people like to talk the talk, but when their money is on the line… well, suddenly, big government doesn’t sound so bad…

  42. christoj879 says:

    Time to short!

  43. Stephen Colon says:

    @TecmoTech: Military employees generally have contracts with the government requiring them to stay in the military for four years or more, typically more for reserve than active duty. The vast majority would still be employed by the military when they got home, but they would not be receiving combat pay, which is a much higher pay than they earn at home. After speaking to men and women of the military, I am definitely pro-Iraq rebuilding, but the fact is that we would be spending less right now if they were home. Supplies factor in as well.

  44. differcult says:

    What I don’t get is why doesn’t the govt start by buying out the high risk loans…since those are the ones that will kill these guys, $500 billion at most, which 250 should be recovered.

  45. sirellyn says:

    @Tmoney02: 100% lasiez fair economy? No, but any sort of regulations are going in the WRONG WAY. For instance the federal reserve, who has admittedly botched things up pretty terribly is asking for MORE power. So it (the incompetent institution) can regulate things more!

    All it’s safeguards for it’s abuse of power have been slowly stripped away from it since 1913, and have we become better for it? Any prosperity we’ve gotten has been a simple bubble of low interest credit!

    Now that the dollar is going to tank. The only recourse will be to institute another currency (which will also be Fiat and be doomed) but hey! They’ll say look! We’re doing something about it!

    God, if people accept a new currency that ISN’T backed by anything. They’ll REALLY be suckers.

  46. Matt says:

    @Excited_Utterance: I was just kidding mate. Over simplified on purpose there…