U.S. Treasury Attempts To Save Freddie, Fannie, Avert Apocalypse

This Sunday the Bush administration asked Congress to approve a “rescue package” that would give officials the ability to inject “billions of federal dollars” into Freddie Mac and Fannie Mae. The Federal Reserve also announced that it would make its short-term lending programs available to Freddie and Fannie, said the NYT.

From the NYT:

An official said the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

The actions, which taken together could provide an overwhelming surge of capital to the companies, were the second time in four months that the housing crisis had prompted the government to scramble over a weekend to rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and cause a shock to the financial system.

Paulson, who has spent the last week assuring everyone that Freddie and Fannie are “adequately capitalized,” had this to say:

“The president has asked me to work with Congress to act on this plan immediately,” the Treasury secretary, Henry M. Paulson Jr., said Sunday on the steps of the Treasury building. “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.”

Treasury Acts to Shore Up Fannie Mae and Freddie Mac [NYT]

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  1. Legal_Eagle_In_Training says:

    I heart that graph.

  2. jscott73 says:

    Go, go free market.

  3. thebluepill says:

    On a side note.. With the FDIC Bailout of indymac, many people will not have access to their funds for days or even weeks in the event of a failure. Might be a good idea to keep $500 of cash on-hand JIC.

  4. Bladefist says:

    @jscott73: This is hardly a free market. Freddie and Fannie don’t pay taxes like a normal company, have a 2 billion dollar line of credit through the government, and they STILL fail. Wish I could blame the liberals. But unfortunately, this cluster f is spawned from both parties.

    Anyone can see, if they are failing, it means they don’t work. Let them fail. Let the market work itself out. Believe it or not we had a healthy mortgage market before these government sponsored monstrosities ever existed.

    I’m very disappointed with our politicians on this one. This seems like a great opportunity to get rid of these institutions. I didn’t think they were good for America even back when they were “self sufficient.”

  5. @thebluepill: 500 bucks doesn’t go a long way if you’re out money for weeks and the bills are due.

    It’s like a band-aid for a bullet hole, and you know that the mortgage company doesn’t give 2 shits that your bank went under when your payment comes due. IMO you’re better off diversifying…isn’t the going standard 3 months contingency fund in a separate account in a separate bank?

  6. timmus says:

    We bought thousands in silver rounds a few years ago when we saw what the massive cost overruns in Iraq were doing to the economy. I think it’s the smartest thing we ever did.

  7. Superawesomerad says:

    Ugh, now the Ron Paul people are going to gloat.

  8. Techguy1138 says:

    @Bladefist: Normally I’d agree but quite frankly unlike Bear Stearns these are BIG companies.

    At the very best these companies should be part of a controlled failure where they are allowed several years to wind down and be absorbed into more functional companies.

    The only reason that this current economic situation hasn’t become a national depression is the intervention of the federal government. Of course the reason it has gotten that bad is that they deregulated to much to begin with.

  9. jscott73 says:

    @Bladefist: Sorry, I forgot to add the /sarcastic tag.

    I do agree that both parties are to blame for this, is was in their vested interest to get everyone spending money on housing, home improvements, furnishings and what not to help prop up the economy and make everything look a lot better then it was. In order to do this they encouraged Americans to spend while encouraging banks to lend.

    It worked for a couple of years but there was no real basis for the build up of paper wealth, the results are self-evident now. I still believe this is only the beginning, especially with all the option-arms beginning to adjust next year with a peak in 2011, a peak which is larger then the ARM reset peak we just went through.

  10. jscott73 says:

    For reference, option-arm reset information cited from: [consumerist.com]

  11. Bladefist says:

    @jscott73: After writing my comment, I remembered you and figured out you were being sarcastic. But your idea of a controlled fail makes sense. Unfortunately, an immediate failure would hurt too many good people. But it looks like they are going to try and fully revitalize these 2, which makes me wonder why history wouldn’t repeat itself.

  12. jscott73 says:

    @Bladefist: It was Techguy1138’s idea of a controlled fail, which like you say, makes more sense then an instant fail.

    Revitalizing may not be wholly bad, they did work quite well for several decades within the bounds of a well-regulated lending environment. It is my understanding that they are only supposed to be providing liquidity to the mortgage lenders by buying and reselling their loans to institutional investors. This is a classic case of garbage in, garbage out.

    If the lenders operate with rational self-interest and only provide loans to people who could reasonably afford it then there is really no issue with Freddie/Fannie buying and reselling those loans.

  13. Bladefist says:

    @jscott73: Sorry, I screwed up the comment system.

    If the lenders operate with rational self-interest and only provide loans to people who could reasonably afford it then there is really no issue with Freddie/Fannie buying and reselling those loans.

    True, even the smaller banks do that, but why do they need to be tax free, and have a LOC through the government? They need to exist in the private sector. Why are they special? Having the government bail out safety net breeds corruption.

  14. jscott73 says:

    @Bladefist: In regards to Freddie/Fannie being government vs private I think it’s six one way, half a dozen the other.

    Both private and government businesses/organizations are prone to corruption, anything controlled by a small group of people are prone to corruption. Heck anything controlled by any number of people is prone to corruption.

    I would like to see them paying taxes though since I am sure the people in charge are making a ton of money but a LOC through the government is not too bad in the grand scheme of things.

  15. ARP says:

    I don’t understand this “controlled fail.” This is complete BS from people who are all about the free market when it comes to individuals, but suddenly become socialists when it comes to helping businesses.

    So, are you willing to allow consumers a “controlled fail?” Can they live in their houses without penalty, dinged credit reports, etc. until they can move somewhere else?

    I think helping businesses only because they’re “too big to fail” is exactly the reason we’re in this place. Large banks know that they can do what they want: make risky investments, pay outrageous salaries, etc. because in the end, the Fed will bail them out and the executives will keep their parachute all in the name of “market stability.”

    So pick your economic system and stay intellectually honest about it.

  16. dangermike says:

    @thebluepill: The FDIC isn’t bailing Indymac out. They’re not trying to inject liquidity or keep Indymac afloat. Indymac no longer exists. It sunk. The FDIC took Indymac over to make sure that the consumers with deposited funds don’t lose their savings. That’s why the FDIC exists.

  17. dangermike says:

    @thebluepill: Indymac didn’t get bailed out. It sunk. Crashed. Ceased to be. The FDIC took it over to ensure that its customers would be able to access the funds they deposited. That is precisely why the FDIC exists and, quite frankly, is one of the few things with respect to the financial sector that the government has done right in the past few decades.

  18. Trai_Dep says:

    Although, neither of these institutions have any sub-prime loans in their portfolio. Indeed, the definition of subprime loans were those that couldn’t be purchased by Fannie & Freddie, which have 20% down payment and strict documentation requirements. So there’s that.

    I’d like to see them removed from being traded – it’s absurd that investors get to make profits when the losses are borne by the public. A classic of privatizing the rewards while socializing the risks.

    Krugman has a good article on this today, if anyone’s interested (reg req’d):
    [www.nytimes.com]

  19. Techguy1138 says:

    @ARP: Yes the consumer version of controlled fail is bankruptcy. I support that. You are allowed to keep the majority of your assets and work out a gradual repayment plan.

    @Bladefist: Inadequate regulation and oversight breed corruption. People tend to behave properly when they believe that they are being watched and will be punished for improper actions.

  20. ARP says:

    @Techguy1138: The difference here is that those who benefited most from the good times, leave without a scratch (and likely a parachute). On the consumer side, there is heavy fallout from a foreclosure or bankruptcy. Thats my issue. You either let regular consumers have a true “soft landing” or you let them both sink like stones. That means that consumers can refinance their debt, no negative credit reporting etc. Personally, I’m in favor of letting them sink.

    @Trai_Dep: Exactly, this is prevailent in all of our worst run industries. Megabanks, Airlines, Car companies. They KNOW they’re “too big to fail” and can act like idiots because they’ll get bailed out.

  21. papahoth says:

    @Bladefist: By law the Federal government must guarantee them. Losses handled by Feds, gains go to shareholders. That is how they were set up. These two did not make that many bad loans, but they are not required, but should its obvious now, to raise capital by selling shares, just by borrowing money. In fact most of their loans are not bad per say since they always required a decent down payment. The impact of the bubble crash is just getting more and more wide-spread. The idea that it was bottoming out a few months ago was a fantasy. At best end of year 2009. So with all money borrowed coupled with the continued drop in housing prices, these two get into trouble very easily. The idea that the government should not back what it has promised to back is so ludicrous as to require no further comment.

  22. I don’t remember the monsters in Line Rider. Maybe I just haven’t played in a while.

    Thanks for ruining my productivity for the day!

  23. @Barry White Stripes, Office LW: The monster in the chart image is from an old (sweet) game called SkiFree.

    [en.wikipedia.org]

  24. azntg says:

    @Techguy1138: On both counts, couldn’t have said it better myself.

  25. ChootinDaChit says:

    Boy, I sure wish I had a few million bucks available to sink into real estate in around six months or so. Anybody who gets in big when the market hits bottom is going to be sitting very pretty in about ten years. As the old saying goes: “Land: They aren’t making any more of it.”

  26. @LucasAnderson: THATS RIGHT!

    Duh…Ski Free guy ->Skis
    Line Rider guy ->Sleds

  27. masterthundar says:

    @Bladefist: I agree; I believe if we let the whole thing sort out, we can avert this kind of crisis in the future. Right now, we’re just delaying the inevitable by pumping more money into it. It sounds insensitive, but it could be far more helpful to make the lenders take a major hit on this instead of bailing them out for making incredibly stupid risks with their customers’n money.

  28. sirellyn says:

    @Techguy1138: If you are buying the line that the Federal government is averting a depression by bailing out these huge banking institutions then you really have another thing coming!

    The US is in for huge collapse either way, and those billions of dollars you spent on bailing them out (that you will immediately pay for via inflation thanks to all that new printed money) Will just be all that much deeper into the hole everyone will be when things do collapse.

    This isn’t pessimism. The US government has so much debt now that it CAN’T pay off even if it did raise taxes through the roof! It literally is impossible! So the only other option is to inflate the money so the trillion dollar debt becomes a billion dollar debt.

    Which of course means that that 1,000,000 dollars you have in the bank would be reduced to 10 bucks.

    Seriously these people have been lying to you for 8 years now. Why are you still buying this crap? Go research this stuff on your own.

  29. If the government is going to bail all companies that are too big to fail, no wonder they’re not going to care if they fuck up. Who’s going to bail the government out when there’s no more to take out of the taxpayer?

  30. jscott73 says:

    @ChootinDaChit: Good point but I think 6 months from now is VERY optimistic, try two years.

    Even though they aren’t making any more land we don’t live on the land, per se, we live in houses and we have more houses per capita now then ever before, and they sure as heck keep planning to build more.

  31. Optimus says:

    If you ask me this is all very fascism-leaning activity. First, Congress passes legislation which limits our Constitutional rights at the behest of the Executive Branch. Then the Executive Branch is attempting to enter into a treaty with other nations that further limits our Constitutional rights at the behest of Big Content (RIAA, Telcos, etc.). Now it’s bailing out the influencial participants in our society while leaving the individuals whom they raped to fend for themselves. And to top it all off, they promised the elderly citizenry “social security” and have no intention to fulfill that promise.

    <bitter ftw=independents>It’s a wonderful, time to be something other than a Commo-fascist (of either the Red or the Blue varieties).</bitter>

    The only branch that’s holding up the Constitution lately is the Judicial. It’s amazing that politicians can actually cherry pick people for judicial appointments and the system continue to be honest despite such activity.

  32. Techguy1138 says:

    @ARP: No only very few of the people are getting off with a parachute and a free ride. Most of the owners,stock investors, are loosing 100% of their investments, while the bank customers are getting most of their money back.

    Many many people, some of them rich, are really loosing a lot of money. The bailout is mostly securing the value of peoples bank accounts and homes.
    This is quite different from Bear Stearns.

  33. Techguy1138 says:

    @sirellyn: I agree with you. The US is in for a big collapse. It’s the rate of collapse that dictates if we call it bad times or the next great depression.

    The government has made many big and avoidable mistakes. However what they are doing now doesn’t smack me as one. We of course will have to pay this off and it will take many decades to do so. I’d rather live many years in an economic downturn then just a few with true poverty and desperation in the USA.

  34. Techguy1138 says:

    @Optimus: Yeah modern politics has become very fascist.

    The reduction down to a two party system along with the influential position of mass media in modern politics has made it so.

    Both parties seem hell bent on selling off the country to business. What really gets me is looking at the true extent of how crippled we have become in 8 years. The government may actually be incapable of performing it’s basic duties without private contractors. That gives business a lot of say.

  35. MrMold says:

    If you beleeve that this administration is doing anything other than bailing out the wealthy with your tax dollars, I have a bridge in Brooklyn to sell you.
    The gov bailed out Chrysler, not to retain the lucrative union jobs that fork over large amounts of tax but to maintain the lifestyles of Chrysler execs. Check out where the junk is made.
    S&Ls were propped up to keep the profits in the hands of the rich. If they had been allowed to fail, many investors would have sued and recovered.

  36. RodAox says:

    i second “I heart the graph” reminds me of the good old days… so the government bails out institutions…

    Cant they use that money to bail out the homeowners instead ? Or bail me out of my student debt to Fannie May ? Why the hell do they get all these icing on their cakes in the mean time I have to pay so much interest on my education and on my house ?

    Let em fail, if you operate under such favorable terms and still manage to fail then you should not be operating at all………

  37. Wormfather is Wormfather says:

    on an unrelated note, people lining up at indymac to get there money…indy mac is said to still be allowed $100K plus the rest of their balance…ouch!

  38. nequam says:

    @RodAox: Sallie Mae is the student loan organization. If you have student debt to Fannie Mae, it must have been through its loan consolidation program. In other words, you chose to have the loans sold to Fannie — I don’t see how you now get to complain about the interest you’re charged.

  39. villaged says:

    Fannie *does* pay taxes.

    Sallie Mae has your student loans. Fannie will never carry a student loan.

  40. papahoth says:

    @masterthundar: No it doesn’t sound insensitive, it sounds illegal given the guarantees and unless you want a depression, it sounds pretty stupid.

  41. stinerman says:

    @Bladefist:

    Well they either need to be completely public or completely private. This “private when we’re making money, public when we’re not” crap has to stop. Either nationalize them or cut them loose.

  42. geekfather says:

    Remember kids, governmental sponsored medical coverage… baaaad. Governmental sponsored investing in failed economic models… gooood.

  43. Bladefist says:

    @stinerman: Fully agree. It’s current setup is kind of fascist.

  44. ryaninc says:

    Seriously mad props for using the Ski Free graphics up there. You just made my day!

  45. I have a hard time objecting to this move if “doing nothing” is the other option…I work in the industry, and every broker, lawyer, etc. that I’ve talked to agrees that if these two companies went under, we’d have flown way past recession and landed smack in the middle of a nasty depression. And nobody wants that.

    On the other hand, Freddie and Fanny were some of the HEAVIEST lobbyers to prevent regulation in the banking industry that would have forestalled the “subprime” crisis before it happened…they worked hard to make sure they were allowed to write bad loans, and then wrote them with almost complete abandon…and now we’re rescuing them? With taxpayer money?? When not even half that amount, given to the taxpayers themselves, would save all the homes that are now under threat because of THEIR actions???!

    BTW, I’ll write something more comprehensive about this when I know more, but we in the foreclosure-prevention business are calling yesterday “Black Monday”. For some reason I can’t quite figure out, all of the lenders we were successfully working out deals with to modify mortgages and help people stay in their homes called us yesterday morning and said, “Nope, we changed our minds. No deals — they all go to foreclosure. Fuck you and have a nice day.” I mean, more than ten in my little nonprofit alone did this!

    Do you think it’s because they now feel “safer” because of the bailout, so they figure they don’t have to make deals with the borrowers? Any guesses?? (I’ll be researching this, obviously, but I could sure use any tips from financistas that might be hanging around here…)

  46. @Mary Marsala with Fries:

    “called us yesterday morning and said, “Nope, we changed our minds. No deals…”

    Holy crap, that’s kinda scary.