Insolvency of the Fannie and Freddie Predicted Here Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”

Author: Nouriel Roubini · July 11th, 2008 · 2529742008-07-11+18%3A34%3A46Nouriel+Roubini › Share This Print

Two years ago in July and August of 2006 this author first presented here his analysis of why the U.S. would experience its worst housing recession of the last 50 years, why home prices would fall at least 20%, why the collapse of mortgages would start with the “subprime” ones (a term that at that time was unknown to 99.9% of the public including most investors) and how this housing bust would lead to a severe banking crisis and a credit crunch that would tip the U.S. economy in a recession by 2007. My timing of the recession call was off by six months – as the recession started at the end of 2007 rather than mid-2007 as then predicted – but all the other predictions turned out to be correct.

At that time this author also predicted that this housing bust and mortgage bust would lead to a bust of the two government sponsored enterprises (GSEs) in the mortgage market, Fannie Mae and Freddie Mac. Predicting the insolvency of Fannie & Freddie was the obvious logical implication of the prediction of the worst housing recession in decades. So no wonder that this week headlines are all about Fannie and Freddie being insolvent and the systemic consequences of such insolvency.

Let me now elaborate on those insolvency predictions, discuss what happens next when Fannie and Freddie go belly up and discuss why they should not be fiscally bailed out; rather – on top of wiping out their shareholders – their creditors/bondholders should also take a haircut to avoid the “mother of all moral hazard bailouts” …

As a starting point of the analysis note that the insolvency of Fannie and Freddie is no news to regular readers of this forum. In August of 2006 I wrote the following:

“the gambling-for-redemption behavior…are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom.

If this kind of behavior is – as likely – the norm, the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s. The recent increased financial problems of H&R Block and other sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg – and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs being unable to service their mortgages and defaulting on them; mortgage delinquencies and foreclosures sharply rising; the beginning of a credit crunch as lending standards are suddenly and sharply tightened with the increased probability of defaults; and finally mortgage lending institutions – with increased losses and saddled with foreclosed properties whose value is falling and that are worth much less than the initial mortgages – that increasingly experience financial distress and risk going bust.

One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs – that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit. Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to.

The main, still unexplored issue, is where the risk from mortgages is concentrated: among the sub-prime lenders (as I worried about…) or among commercial banks or among hedge funds and other financial intermediaries that purchased mortgage backed securities(MBSs) or among the GSEs (Fannie and Freddie)? Commercial banks claim that they have transferred a lot of their mortgage risk to other financial intermediaries – such as asset managers, hedge funds or insurance companies – who purchased large amounts of MBSs. But banks have still lots of mortgages on their books and, on top of it they have tons of consumer debt exposure (credit cards, auto loans, consumer credit) that may go really bad in a recession. If part of the housing risk has been off-loaded to hedge funds, the risk is not just of some of these hedge funds going bust but also their prime brokers (i.e. large investment banks) getting into trouble; counterparty risk will become serious once the hot potato of mortgage risk is pushed from one counterparty to the other. And finally, a large part of the housing risk is also in the hands of Fannie and Freddie. How much are the GSEs at risk is a complex issue…”

So, what was written two years ago has by now unfolded as predicted, including the now evident coming bust and insolvency of the two GSEs. The issue now is: what happens next to Fannie and Freddie given that they are effectively insolvent?

The conventional answer is that their shareholders get fully wiped out but that their creditors (those holding the $5 trillion of these agencies’ debt and their other liabilities) are made whole as the U.S. government cannot afford reneging on the implicit guarantee of the liabilities of Fannie and Freddie and it cannot risk a collapse of the mortgage and housing market that defaulting on part of the liabilities of Fannie and Freddie would imply. Unfortunately, the conventional wisdom may turn out to be right; but it could also turn out to be wrong.

First notice that, as discussed previously in this column, the farce that Fannie and Freddie were “private sector” firms was obviously a farce as investors always expected that the liabilities of the two GSEs would be eventually backed by the U.S. government. And in spite of the decade long rhetoric by Fed, Treasury, the Bush administration, conservative government-bashing hawks and a slew of other regulators that Fannie and Freddie were private firms, that investors should not assume that they would be bailed out if these firms turn out to be insolvent and that the moral hazard deriving from perceptions of an implicit guarantee should be stomped as hard as possible, the reality was different: these were effectively public institutions – not private ones – used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started
. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.

To minimize the financial cost of this farce the administration should stop pretending that these are private institutions and go ahead and take them over and nationalize them since they are going to bail them out anyhow. The financial costs of this farce include the $50 billion of subsidy that the GSEs bondholders/creditors are receiving every year as the spread of the agency debt over Treasury is now close to 100bps (100bps on $5 trillion of liabilities is equal to $50 billion). Today the market prices the debt of the GSEs as if there is a meaningful probability that – once bankrupt – these firms will be treated as private firms and their bondholders will take a loss. But if the government is going to bail them out – because the consequences of a capital levy on their bondholder will destroy the mortgage and housing markets – the government should at least make this implicit liability (the guarantee of the $5 trillion debt of the GSEs) explicit and thus save the U.S. taxpayer that $50 billion subsidy that is given every year to the creditors/bondholder of Fannie and Freddie. An implicit liability that is not made explicit is the worst of all worlds as fat cats on Wall Street and around the world get a 100bps spread relative to safe Treasuries ($50 billion subsidy) on their holdings of agency debt and they know they will be anyhow bailed out if Fannie and Freddie go bust. Saving those $50 billion will not make Fannie and Freddie solvent as their insolvency hole is too big to be filled but it would at least reduce the fiscal bailout bill – that could be as high as $200-300 billion – that their insolvency and government takeover will imply.

Leaving aside now the “positive” issue of how the government will deal with the insolvency of Fannie and Freddie, let us consider the “normative” question of not what it is most likely to be done (an issue that involves more politics than sound economics) but rather what should be done in an ideal world? The simple answer is that we need to limit as much as possible the moral hazard of a bailout of Fannie and Freddie. Such a bailout of the creditors/bondholders of the two GSEs would result in the “mother of all maoral hazard-laden bailouts” in terms of its size and consequences. And such a bailout is neither necessary, appropriate nor desirable.

Of course most of Wall Street, domestic and foreign investors and Congress are already screaming and begging “Bail us out, bail us out!” as their $5 trillion holdings of agency debt will take a significant hit if the insolvency hole of the GSEs – after the shareholders are wiped out – is filled not with public bailout money but rather with an haircut on the bonds held by Fannie and Freddie creditors. On top of bondholders not wanting to take a hit almost every politician – including McCain that in a former life was one of the shamed and corrupt members of the Keating Five club when he facilitated the S&L scam – is now clamoring for a bailout of Fannie and Freddie under the argument that not rescuing them would lead to a collapse of the mortgage and housing markets. But these screams of “the sky will fall” if we don’t rescue Fannie and Freddie are vastly exaggerated and incorrect for a number of reasons.

First, notice that the hit that bondholders will take will be limited in the absence of their bailout. With a debt/liabilities of about $5 trillion and expected insolvency – as of now and in the worst scenario of $200 to $300 billion – the necessary haircut is relatively modest: either a reduction in the face value of the claims of the order of 5% (if the mid-point hole is $250 billion) or – for unchanged face value – a very modest reduction in the interest rate on their debt after it has been forcibly restructured.

Second, a 5% haircut is much smaller than the 75% haircut that the holders of Argentine sovereign bonds suffered in 2001-2005, much smaller than the haircuts that holders or Russian and Ecuadorean debt suffered after those sovereign defaults, and much smaller than the 30% haircut that holders of corporate bonds suffer on average when a corporation goes into Chapter 11 and its debt is restructured. So why should Uncle Sam – i.e. eventually the U.S. taxpayer – pay that $250 billion bill when investors in the U.S. and around the world can afford it? The same investors are getting a fat subsidy of $50 billion a year (whose NPV is much bigger than $250 billion) for holding claims that now provide a 100bps spread above Treasuries and are under the implicit guarantee of a full bailout.

Third, of the two options we need to pick one: either we formally guarantee those claims and start paying the Treasury yield on that debt saving the tax payer that $50 billion subsidy; or if we maintain the subsidy a credit event in the form of a small haircut because of insolvency would be the fair cost that such investors pay for earning the extra spread over Treasuries.

Fourth, while the haircut would reduce the market value of such agency debt and inflict mark to market losses to investors such losses are already priced by the fact that the widening of the agency debt spread relative to Treasuries – from 10bps to about 100bps – has reduced the mark to market value of such agency debt. So, in the current legal limbo of insolvent GSEs whose debt is however not formally guaranteed the persistence of the spread would lead to those $250 billion mark-to-market losses regardless of a formal default, restructuring and haircut on that debt. We may as well resolve that insolvency and restore the positive net worth of the GSEs by doing the haircut.

Fifth, a haircut on the debt of the GSEs does not need to destroy their business, the mortgage market or the housing market. The best debtor is a solvent debtor that has restructured and reduced its unsustainable debt burden: that is why firms coming out of a Chapter 11 process that reduces their debt burdens are viable businesses ready again to produce goods and services in a viable and profitable way. The worst thing that can happen to the GSEs is to remain as zombie comatose insolvent institutions whose debt burden is not restructured and who are barely propped by an implicit government lifeline. Do we really believe that GSEs with unrestructured debt kept alive in a zombie government “conservatorship” (the solution now most likely preferred by the U.S. administration) could function properly and continue their service of supporting the mortgage and housing market? Lets instead clean them up first and make them financially viable – after an out-of-court Chapter 11 style debt reduction – so as to ensure that they keep on providing the public goods that they are alleged to give.

Sixth, the existence of GSEs and the implicit subsidy that they provide to the housing sector and mortgage market is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy. For the last 70 years investment in housing – the most unproductive form of accumulation of capital – has been heavily subsidized in 100 different ways in the U.S.: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative an
d regulatory measures.

The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.

And these MacMansions and the broader sprawl of suburbian/exurban housing are now worth much less – in NPV terms – not only because of the housing bust and the fall in home prices but also because: a) the high oil and energy prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production that are not served by public transportation are burdened with transportation costs that are becoming unsustainable given the high price of gasoline. So on top of the housing bust that will reduce home values by an average of 30% relative to peak high oil/energy prices make the same large homes in the far boonies of suburbia/exurbia worth even less – probably another 10% down – because of the cost of heating palatial MacMansions and because of the cost of traveling dozens of miles to get to work in gas guzzling SUVs. Thus, it is time to stop this destruction of national income and wealth that a cockamamie decades long policy of subsidizing the accumulation of wasteful and unproductive housing capital has caused.

So, all the above economic arguments and the need to control the moral hazard from the activities of the GSEs suggest that the creditors/bondholders of Fannie and Freddie should not be made whole, i.e. bailed out, once the insolvency hole of these institutions emerges. The optimal policy response would be to have such creditor take a haircut that is financially affordable and substantially desirable from a social point of view. The cost of borrowing for the GSEs after such haircut will be certainly higher but that is an outcome that is economically desirable: it will induce less unproductive and subsidized accumulation of wasteful housing capital. Will this optimal policy solution – an haircut for bondholders – be undertaken? Most likely not as the political economy of housing, mortgages and of “privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs. But the financial costs of this financial crisis – the worst since the Great Depression – are mounting so fast that any bailout will become fiscally extremely expensive.

Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this financial crisis did not include the bailout of Bear Stearns’ creditors, the bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the fiscal costs a severe U.S. recession that is mushrooming an already large fiscal deficit, the fiscal cost of bailing out – a’ la Bear Stearns – the last four remaining major independent broker dealers (as the time for such independent broker dealers is now gone as – given their wholesale overnite funding – they are subject to bank-like runs much more severe than for banks), the cost of bailing out the Federal Home Loan Bank system (another GSE system that pretends to be private and that has been happily propping up or bailing out – to the tune of hundreds of billions of liquidity support – illiquid and insolvent mortgage lenders). Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.

Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic. It is thus time to put a stop to the coming “mother of all bailouts” starting with a firm stop to the fiscal rescue of Fannie and Freddie, institutions that have behaved for the last few years like the “mother of all leveraged hedge funds” with their reckless leverage and reckless financial activities.

Sunday evening update:

The Sunday statement and plan by Secretary Paulson to rescue Fannie and Freddie is the ultimate implementation of socialism for the rich and the well connected. Under the plan the U.S. government would become a major shareholder in the two GSEs (the unofficial figure being rumored is $15 billion for each institution); it would massively extend the Treasury line of credit to the two institutions that is now only $ 2.25 billion for each of them (the unofficial number being rumored is one of a line of credit as large as $300 billion per each institution); finally while marxist comrade Paulson (to borrow the term used by Willem Buiter) waits until Congress passes this legislation comrade Bernanke is providing the two GSEs with access to the discount window on same terms as commercial banks. So the lender of last resort support of the Fed – that was already extended via the PDCF to the non-banking primary dealers – is now officially extended also to the two GSEs: this is “quasi-fiscal recapitalization of two insolvent institutions” as Willem Buiter has correctly argued and imposing a potentially large burden on the U.S. taxpayer without a formal act of Congress.

So not only the creditors/bondholders of the GSEs are made whole and continue to enjoy the subsidy of whatever spread the agency debt will remain relative to US Treasuries (a subsidy that is already worth $50 billion a year); but in this plan the current shareholders of the two GSEs are also bailed out as the resolution of even a bailout of the GSEs’ creditors should have at least included fully wiping out the current shareholders of Fannie and Freddie. The official excuse that the government will inject capital and significantly dilute such shareholders is big baloney: the bailout plan itself will raise the market value of the two GSEs and provide – even before passage – an immediate capital gain to the current shareholders of Fannie and Freddie; so whatever the actual dilution of such shareholders may eventually be – given the public capital injection – the current shareholders will be suffering a much smaller loss than in the absence of such a plan that provides massive subsidized liquidity, credit and bailout funding to these insolvent institutions and their shareholders.

Also, unlike any corporate restructuring plan where current management is replaced – we usually kick the bums out – this plan also bails out the corrupt management of Fannie and Freddie that has spent the last few decades creating a corruption and graft machine that is unri
valed in U.S. history. These sleazebacks who fattened their incomes by the hundreds of millions and used these two institutions and the biggest lobby machine in Washington to corrupt and buy off Congress and any potential critic of the GSEs will remain in charge and continue their scams and gambling for redemption financial schemes. Thank you comrades Paulson and Bernanke for making official this socialism for the Wall Street, the rich and the well connected.

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

The chair of the Senate Banking Committee, Chris Dodd, has said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie. I am afraid he may be right. After all, an injection of the liquidity by the Fed is so much more politically expedient than an explicit fiscal subsidy, even though their economic effect is identical. This would not be a liquidity enhancement operation by the Fed, which would be a legitimate operation for the central bank to engage in. It would be a quasi-fiscal recapitalisation of two insolvent institutions, which is not part of the mandate of the Fed.

The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich. It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

For more on the extensive RGE Monitor coverage of the trouble at Fannie and Freddie see the following Spotlight Issues (available to RGE Monitor subscribers):

FreddieMac To Sell $3bn Short-Term Debt on Monday, Treasury Works on $15bn Capital Injection Plan for GSEs

The Costs and Benefits of the GSEs FannieMae and FreddieMac

See also the commentary and contributions that RGE’s group blog writers have made on Fannie and Freddie; these contributions include those of Chris Whalen, Josh Rosner, Jim Hamilton , John Jansen and Mark Thoma.

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252974361 Responses2008-07-11+18%3A34%3A46Nouriel+Roubini to “Insolvency of the Fannie and Freddie Predicted Here Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts””

the Guest • July 11th, 2008 at 7:13 pm

No Freddie, no Fannie and we are looking at the end of the 30 year mortgage, mortgage interest deductions and the return of the 5 year balloon payment mortgage. So basically the destruction of the teetering housing and mortgage industries for quite a while anyway. How will rentals be affected?Housing will be nationalized in addition to finance.Welcome to the NWO of managed global economies.

ptm • July 11th, 2008 at 7:14 pm

Yes, that’s the bottom line. Wake up Congress! We as a country cannot afford the bailouts. Oh, yeah, I forgot we don’t run the country, the bankers do! Well, thanks for that inspiring read NR, but it’s back to the salt mine for me. I’ve got children to raise and taxes to pay.

Guest • July 11th, 2008 at 7:24 pm

30 year mortgages and mortgage financing of homes will do fine without Fannie and Freddie. They will only be more expensive and force Amerikans – like most humanity – to live in normal smaller homes in normal cities, not in their pathetic monstrous huge MacMansions in the redneck boonies of suburbia. It is time to live like civilized people in civilized cities and not waste a fortune on monster SUV to commute to work, play and shop. The term civilization comes from the Latin for "civitas" or "city". Nature and suburbia are for savages and animals not for humans. It is time for Amerika to join civilization. Move to small apartments in cities, dump your SUV and enjoy civilized energy saving life.

Anonymous • July 11th, 2008 at 7:37 pm

Professor Roubini’s astute criticism that "U.S. subsidization of housing capital … will eventually lead to the bankruptcy of the U.S. economy" is an example of the kind of excellent scholarship that is not afraid of the "tyranny of the majority" (as Alexis de Tocqueville used the term in Democracy in America) which prevents most native scholars from challenging the status quo. In my opinion, it is Professor Roubini at his best. And by the way, since Professor Roubini is a naturalized U.S. citizen, Professor Roubini, himself, is Exhibit "A" for why immigration is so beneficial to America.

Anonymous • July 11th, 2008 at 7:45 pm

Wow! This is the first time I’ve seen Nouriel sound really steamed up. Keep it up! And kudos to him for starting to link the non-productivity of housing, the lack of investment in productive assets, and the whole insane way we have organized the economic and even physical landscape of the last few decades. It’s like he kind of morphed into the latter analysis as he was wrapping up a the end, so I welcome a coming column that talks about where we might take all this if we really had a rational allocation of goods, services, and our collective productive energies.

iww • July 11th, 2008 at 8:13 pm

I congratulate NR on his extraordinary prescience in these matters. His predictions are coming true with depressing regularity!

jo6pac • July 11th, 2008 at 8:26 pm

Oh sure 2 years ago but what have you done lately.That’s about when I found this place and all the wonderful commentors. Thanks NR and all you for your knowledge. It’s just keeps going down hill with the take over of Mac today. I can hardle wait until Friday each week, yes it’s the weekend for workers like me but what slim group goes down next. The FIDC will be busy this year for sure. I feel sorry for the employees, they’re the ones in the end that feel the pain.jo6pacThe race down hill continues.

Ryan Darwish • July 11th, 2008 at 8:35 pm

Nouriel,While in agreement with the spirit of what you are saying, the dimension of analysis that is opaque to me is what the derivative ramifications of a Fannie /Freddie meltdown would be. Your analysis of the consequences appears to be a first order level of analysis. It is likely the the derivative ramifications would amplify the effects to a financial mushroom cloud.Whatever might be the "rational and appropriate" policy response, it appears to me the political policy direction will be continued monetization and/or governmental debt repudiation. My bet would be on the former, and consequently, as I have written here numerous times, a bout of a hyper-stagflationary economic climate.The remediation is likely to be a public and/or private thrust towards infrastructure improvement and buildout, thus addressing your statement:"The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth."Unfortunately, my guess is that this is still several years, and a great deal of social upheaval, pain and economic distress, away.

kilgores • July 11th, 2008 at 8:54 pm

Setting aside for the moment the merits of Dr. Roubini’s call for a stop to any fiscal bailout of Fannie Mae and Freddie Mac, it remains difficult for me to believe that the federal government will allow either of them to fail. The economic fallout from declining to take such action would seem to me to have very real adverse political consequences for the elected, whereas a bailout which would ultimately balloon the U.S. debt and potentially cause a reduction in the debt rating of the United States would seem to be more palatable in the medium term because it would defer the painful consequences — perhaps involving a complete collapse of the U.S. housing market and of the U.S. banking system — to which a failure of the GSEs would, or could, lead. Americans have become habituated to living for the moment and putting off for as long as possible choices that may result in unpleasantness. I see nothing that would motivate anyone in authority now to change that trend.SWK

Yankee • July 11th, 2008 at 8:57 pm

NR-Scream it from the rooftops. Get on TV – NO BAILOUT.We are all truly fvcked if they bailout F&F.I may leave the US because while I do well, I don’t have that kind of $ and that means greater than 90% of the US does not either…

kilgores • July 11th, 2008 at 9:03 pm

Dr. Roubini:Pardon me if I appear dense, but what do you feel to be the salient differences between the absorption by the federal government of the troubled mortgages which you advocated a few weeks ago (and for which you were roundly criticized by a number of posters to this blog) and a bailout of Fannie Mae and Freddie Mac? I’m not sure I understand fully the reasons you would support the "nationalization" of mortgages but not the nationalization of Fannie and Freddie.Thank you,SWK

Be Prepared • July 11th, 2008 at 9:06 pm

Yankee @ 20:57:12Where would you go?

Yankee • July 11th, 2008 at 9:17 pm

a Caribbean island

Andrew Foland • July 11th, 2008 at 9:18 pm

Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.I don’t understand this sentence. Wouldn’t it increase the debt only by the amount of debt that actually defaulted? I can see that number being as large as 10% but not 100%. I feek like I am missing something obvious.

Yankee • July 11th, 2008 at 9:28 pm

See – the top 1% already has stashed cash offshore. The new law doesn’t matter because they are already set. The next 2-3% will be hurt – big time. But if you make 700k a year, even if your taxes double, you will not starve. Then there are people like me. In the 150-200 range. I am screwed. I have no write offs – single, no kids,and just paid off my mortgage last year. If they double my taxes, I WILL starve. People right below me – esp. those with no write offs, will be screwed too. The typical middle class and lower class will need more handouts. They will literally have no $ to pay. Where is this money going to come from? I just don’t want to be hassled. This is going to be one big shakedown.I don’t require that much and live pretty modestly. We have already dumbed this country down beyond recognition of what we used to see in the 50s-60s.I could easily live a simple life.

kilgores • July 11th, 2008 at 9:30 pm

@ Andrew Foland 21:18:11Good point. I don’t think we can assume Fannie and Freddie are holding $5 trillion of completely worthless paper, can we?SWK

Guest • July 11th, 2008 at 9:32 pm

Yankee-LOL, if you are in the $150-200K range, with no kide, no wife, a paid off house, and no debt and think you will starve, you have no clue about living a simple life.

Guest • July 11th, 2008 at 9:37 pm

Andrew,"Wouldn’t it increase the debt only by the amount of debt that actually defaulted?"No,it increases the debt by the amount of debt assumed.

kilgores • July 11th, 2008 at 9:39 pm

A propos the foregoing, it might depend on whether the U.S. merely guaranteed the debt or actually acquired ownership and control of the GSEs. If the U.S. had to carry $5 trillion in debt on its books owing to an explicit guarantee of the $5 trillion in mortgage debt and it did not take on the GSEs as public assets, then yes, I suppose it could be construed as a $5 trillion increase in U.S. debt. On the other hand, if the U.S. bought the GSEs outright (i.e., if the Treasury Department acquired 100% of their stock), then to the extent the mortgages were not bad, they would presumably be treated as assets on the books of the U.S., offsetting the increase in the debt.SWK

Yankee • July 11th, 2008 at 9:43 pm

I have lived in a 350 sq ft apartment before and was fine. I know I sound ridiculous. And it is. My point is that if I take home 30,000 with inflation on that which matters out of control that $$$is not necessarily enough in the future. Think about it:property taxes go way up,food way up, gas way up, etc.Maybe I will not starve, but there would be little margin. Our tax rates are about to go way up. Property taxes too. Municipalities are hurting….

AfA • July 11th, 2008 at 9:46 pm

@ Andrew Forland & SWKI agree that the whole $5b is not all worthless but there are enough assets backing them (say 90% of their value as you said). The problem is that the government cannot liquidate these assets in order to pay creditors (imagine how depressed the mortgage market will be).Instead I imagine that the government will issue treasuries in exchange of notes issued by these GSE. Some big part of the $5b will become treasury bonds and assets will remain where they are. Creditors will get treasuries yields, but the latter will take a significant hit, raising rates across the board. That is my understanding at least, which may be totally wrong, waiting for a confirmation.Professor. This will be the third time I say this today but "I love you too".

Guest • July 11th, 2008 at 9:47 pm

"Maybe I will not starve, but there would be little margin."Yes, I feel your pain, I can hear the violins as well.:)

iww • July 11th, 2008 at 9:48 pm

SWK and Andrew Foland, my understanding is that $5 trillion is the amount of debt obligation they’re holding — something like IOU’s written to Chinese. When they buy those mostly junk mortgages from banks, they finance their purchases by selling bonds to others (they don’t run a printing press that produces $5 trillion). So, yes, their nationalization would nearly double the public debt.

jam • July 11th, 2008 at 10:29 pm

Wow Doctor, that was a good writeup. With the press time you get and some of your connections you should continue to get the word out. A guy like you can really make a difference here.

JGU • July 11th, 2008 at 10:43 pm

Professor, do you think the rating (the rating agencies are a joke anyway) is that important? I mean if China lost huge money on the mortgage bond, do you really believe they’ll believe the AAA rating of the US sovereign debt anymore? I don’t think so. There is no way other than bailing them out if US doesn’t want to lose all of its credibility, because the loss of credibility is far devastating than some tax payer money. After all, Americans benefited from the low mortgage rate, isn’t that not true?By the way, you are adjusting your loss estimate from $1T to "$1T to $2T". Seems like your estimate is evolving with the situation.

Stuart • July 11th, 2008 at 10:45 pm

A key consideration in the treatment of the GSE’s will be what is the effect on foreign investment, or ensuring we continue to attract sufficient investment to offset the CA deficit. As we are dependent upon this inflow of capital, we better be very very thoughtful how we tread here else this will turn very nasty very quickly sparking a true fiscal crisis. Also we should use National debt as the reference for the increase, not public debt as it is a sub-component. The GSEs would increase the National debt by 50% since the minute the Treasury assumes controlling ownership, the US Govt is liable for the interest on the GSE debt.

GM • July 11th, 2008 at 11:22 pm

Stringiamoci a coorte,Siam pronti alla morte

Guest • July 11th, 2008 at 11:35 pm

@Andrew Foland: Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it…I don’t understand this sentence. Wouldn’t it increase the debt only by the amount of debt that actually defaulted? I can see that number being as large as 10% but not 100%. I feek like I am missing something obvious…”You’ll kick yourself, but the “obvious” is the federal government’s annual fiscal deficit averaging $4.6 trillion per year for the six years through 2007 added to the $5 trillion of GSEs debt held by their creditors.

Average Jane • July 11th, 2008 at 11:37 pm

Greetings, O People of the Blog, from Average Jane in the Midwest. To Afa, I lost my Mom a couple of months ago and understand your sorrow. To Peter JB and London Banker and Mike and Randy and SWK and Yankee and too many others to name, I enjoy you all immensely. And last but not least, the good Dr. Roubini, your wisdom and knowledge are so much appreciated. You sound angered on this post. I am glad, so glad to see that.If I may posit a question amidst the troubles of the foundering financial fops: are we not our brothers’ keepers? Even of the greedy ones? And to my middle-class brethren: when did it become “necessary” to pay $2 for a bottle of water? $3 for a cuppa joe? $100 a month for television? $150 a month for telephone? Two-and-a-half, then three, then four, then five times’ our annual income for a mortgage? With no down payment?I have seen mine enemy and it is myself. (Kirkegaard, a most rational human being.)

GMeli • July 11th, 2008 at 11:39 pm

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total, foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury’s most recent "Report on Foreign Portfolio Holdings of U.S. Securities."The prospectus for every GSE bond clearly states that it is not backed by the United States government. That’s why investors holding agency bonds already receive a significant risk premium over Treasuries.A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors.A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. There is $376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals.If China and Japan were dumb enough to invest in US agencies (and they were), then China and Japan should suffer the consequences, not US taxpayers.

Tangiers • July 11th, 2008 at 11:47 pm

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history."That is until the next one."If China and Japan were dumb enough to invest in US agencies (and they were), then China and Japan should suffer the consequences, not US taxpayers."I wonder if China and Japan suffered the consequences, whether or not it would be true that US taxpayers would not.

Nouriel Roubini • July 11th, 2008 at 11:49 pm

When i wrote that "Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it" i explictly used the term "gross debt". The increase in the net debt is equal to the value of those $5 trillion liabilities minus the value of the assets of the GSEs. If the GSEs are insolvent to the tune of $300 billion the increase in the net debt of the US is only "300 billion". Still even in this case the gross debt has gone up by $5 trillion and the US gov would be liable for any further future loss in the value of the assets of the GSEs that it has taken on.Nouriel

Guest • July 11th, 2008 at 11:55 pm

"If china and japan were dumb enough to "LOL, later all these mess, if countries around the world were dumb enough to trust USA. Correction, no one on this planet would trust USA anymore.

kilgores • July 12th, 2008 at 12:05 am

Dr. Roubini:Thanks for clarifying that. My last post now doesn’t seem as dumb as I was beginning to think it was!SWK

Donald Dross • July 12th, 2008 at 12:15 am

Of course the creditors should not be paid the final year’s 100 bps; this $50 billion if paid to them would be a REWARD (if they are indeed getting a complete bailout.)But Professor Roubini should go a step further, and advocate a 15% haircut to all GSEs creditors in order to match the government’s own requested 15% haircut to all ordinary mortgage lenders. This 15% at least tracks the general reduction in mortgage value in the country as a whole. Not to charge the creditors with it would be like giving them special treatment vis-a-vis ordinary mortgage lenders (whose rates, by the way, were already squeezed due to the unfair competition from the GSEs quasi-public pretenses.

JLC • July 12th, 2008 at 12:15 am

Kudos, Professor. I submit that this is your finest post to date.I’m hopeful that you are able to convey your conclusions to the media.The "default or print" moment may be upon us. Trying to print our way out of this mess by bailing out FNM FRE FHLB and the dozens of bank failures waiting in the wings will utterly destroy us.You have my sincere thanks and genuine appreciation.

JLC • July 12th, 2008 at 12:38 am

"Seems like your estimate is evolving with the situation."Yes, it seems even the uber-bear was not bearish enough. Doesn’t that scare the crap out of you? Everybody is increasing their loss estimates.This brings up a point lurking in the back of my mind. We have no idea how far this is going to go. As long as housing prices keep falling, the loss estimate is going to get larger. This beast is a vicious circle feeding on itself. The numbers are truly staggering.So suppose we do the haircut on Fannie and Freddie. House prices continue to fall, foreclosures continue to increase, and in 6 months to a year we are back in the same boat – talking about haircuts. Like all of the wide ranging solutions that have been propsed, the haircut postpones the day of reckoning but does not eliminate it. It arbitrarly assumes that a level exists where the losses will stop, and that we know what that level is.Having said that, I still believe the haircut is the best option even if we have to do it more than once. Could a series of haircuts be like a controlled crash landing?All options are bad, but printing our way out of this mess is the worst IMO.

Guest • July 12th, 2008 at 2:42 am

"Yes, it seems even the uber-bear was not bearish enough. Doesn’t that scare the crap out of you? Everybody is increasing their loss estimates."@ JLC on 2008-07-12 00:38:05The perception is in acceleration; still, only a very few percentage of the top investors and "dear-leaders" are aware of the future crisis; yet. The staff that work in the workplace of the financial industry have no real idea of what’s coming and would need to await instructions before moving towards a shift in practise. Life goes on.I am travelling at the present, in Asia, and I am amazed at the still horrific pace of "deals" and other financial investments as well as the tooling of technological products innovated by really outstanding scientific research. Nobody sees tomorrow pesssimistically although people are talking of trouble brewing from petrol price rises.The crisis will be lead by the grassroots in rebellion as the "elite" continue to attempt to bail out their colleagues in the financial industries and maintain – impossibly – the status-quo.What I also see is rampant corruption in fast acceleration as the "leadership" of all nations scramble for huge cash hoards and control over prime industries; It is hell out here. Insanity , panic and desperation. What we really need is more Ben, Hank and WH insanity (sarcasm). But, it is interesting still and definitely not boring.Ho humPeterJB

tutterfrut • July 12th, 2008 at 3:55 am

@GMeliI looked into the most recent "Report on Foreign Portfolio Holdings of U.S. Securities." As I am a citizen of Belgium(still a nation of savers) it worries me to see that from our little Kingdom $396 billion is invested in US debt of which $321billion long term corporate debt, $33billion agency long term debt, $14billion treasury long term debt, whereas Japan and China are more in treasury followed by agency debt.Is Fannie and Freddie’s debt paper agency debt?Anyway, it seems that Belgium and Luxembourg will see a lot of wealth destroyed if there would be a US corporate meltdown…(together they’re in for $1,1Trillion)

Guest • July 12th, 2008 at 4:19 am

@Guest on 2008-07-11 23:55:33LOL, later all these mess, if countries around the world were dumb enough to trust USA. Correction, no one on this planet would trust USA anymore.That brings to mind a question about the current rate of inflation in the U.S.Could one of the factors behind it be that the money flow from foreign countries has stopped, and that the treasury now has to print money to finance the operations of this country?

Bob • July 12th, 2008 at 5:10 am

Professor, would you please expand on how you think a company could go through an “out-of-court” Chapter 11? This seems illogical … or we would all be doing it. Additionally, could you expand on how a 5% bond reduction puts them in the green? The fact that these institutions are leveraged about 60 to 1 in a housing market that, you have implied, will most likely be reduce 10-20% further from this point and that they need cash clearly looks like a reduction much greater than 5%. We should also acknowledge that these two are currently buying 8 out of 10 mortgages sold today! I do prefer your route over nationalization however the cost of doing so would be greater than your estimate in my estimation.

London Banker • July 12th, 2008 at 5:37 am

@ Professor RoubiniWhatever kool-aid they served you in Davos seems to have worn off. It is good to have you back at full force, challenging the establishment.Nonetheless, you should not be surprised if your calls are ignored in favour of the crony capitalism that is the hallmark of the American government for the past generation. As Dick Cheney so profoundly put it, "The American way of life is non-negotiable." And that surely includes the McMansion as the cornerstone of the American Dream, with the foundation comprised of cheap credit and lots of oil. Oh wait. Oil and credit make a lousy foundation for a McMansion. No wonder America’s in trouble.

Mark H • July 12th, 2008 at 6:05 am

Because of the "fuzziness" of what an implicit guarantee actually is, most people have come to believe — rightly or wrongly — that it is in fact the same as an explicit guarantee. Therefore I can only see foreign central banks being willing to accept a nominal haircut on the notes which they hold in exchange for an explicit guarantee. I think the US government has to tread very carefully here otherwise the market will downgrade US debt and the cost of borrowing will become very much more expensive. I am of course assuming they take the nationalization route.

Guest • July 12th, 2008 at 7:49 am

Does anyone still think US interest rates can remain well below the rate of inflation forever? Unless global inflation is brought under control interest rates have nowhere to go but up.The biggest bond bull in history is over folks.And that at some point implies still more pain for stocks.

Mark • July 12th, 2008 at 7:49 am

All this hair cutting being bandied about, does it not bring up the question as to how hair is going to grow back? With less hair the cold winds of this economic storm is going to take its toll on everyone…For a glimpse of the future:Britain urging return to wartime food frugalityhttp://www.msnbc.msn.com/id/25642713Where’s Gloomy?Mark

Hong Kong fun manager • July 12th, 2008 at 8:08 am

Too bad as heliben still did nothing on the fed rate.He is killing the USA by NOT raising the rate.See oil at $160 next week…

Matthias • July 12th, 2008 at 8:19 am

Interesting assertion for high price of oil: South Korea increases currency market interventionDear Friend of GATA and Gold:The story appended here from the Korea Times in Seoul may be notable for disclosing some desperate central bank intervention in the currency markets and for quoting an economics professor’s observation that the high price of oil is supporting the dollar, since oil is traded largely in dollars and the higher oil goes, the more dollars are needed to purchase it. Of course there are lots of dollars to be absorbed lately, and maybe this is what President Bush and Treasury Secretary Paulson now mean by their "strong-dollar policy."http://www.gata.org/node/6417

K J Foehr • July 12th, 2008 at 8:42 am

IndyMac Seized by U.S. Regulators; Schumer Blamed for Failure By Ari Levy and David MildenbergexcerptJuly 12 (Bloomberg) — IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash. …http://www.bloomberg.com/apps/news?pid=20601087&sid=aAYLeK3YAie4&refer=home

kilgores • July 12th, 2008 at 9:12 am

Dr. Roubini:In re-reading your post, I note that you characterize as a $50 billion annual subsidy the premium holders of GSE bonds receive for having an implicit government guaranty rather than an explicit government guaranty. Candidly, I view this as the price the market has determined the additional risk — however marginal it may be — is worth to carry GSE bonds (with only an implicit guaranty of government backing) over Treasuries (explicitly backed by the full faith and credit of the United States government). The very fact that there is a debate as to whether Fannie and Freddie should be bailed out in the event they face imminent failure only confirms that a risk premium is appropriate for GSE bonds. After all, if the government were to follow your prescriptive measures and allow Fannie and Freddie to fail, these bondholders will lose out along with stockholders. You seem to have concluded that holders of GSE bonds would likely face either a modest reduction in the face value of claims or in the interest rate on their debt amounting to a relatively modest $250 billion "haricut," and have noted that the NPV of the $50 billion a year risk premium is much larger than this $250 billion; apparently, however, the market has determined that $50 billion is an appropriate premium for these bond holders to receive in exchange for the additional risk of not having an explicit government guaranty. I tend to think the market is usually pretty good about pricing in risk, and that if there were no real risk there, there would be no spread between Treasuries and GSE bonds in the first place.I fully agree that if the government truly never intends not to bail out the GSEs, it would save taxpayers a bundle by issuing explicit guarantees for debt issued by Fannie and Freddie. Apparently, however, the government wants to have the option of stepping in or not stepping in as particular circumstances may dictate. As I suggested in one of my recent posts, in the end, it will be political expediency that dictates the decision, and in my view, that means a bailout in some form, up to and including full nationalization of the GSEs.SWK

Guest • July 12th, 2008 at 9:27 am

Funny how the professor argued for the bailout of Bear Stearns and now argues for no bailout of Frannie/Freddie.

Tangiers • July 12th, 2008 at 9:30 am

@SWK"I tend to think the market is usually pretty good about pricing in risk, and that if there were no real risk there, there would be no spread between Treasuries and GSE bonds in the first place."This thought might be worth serious reconsideration as to its soundness, especially in light of the past year’s credit market events.

Anonymous • July 12th, 2008 at 10:52 am

Inflation will creep up but in due time will be dampened by demand destruction. A generational shift is currently in process where the former american dream is turning into a nightmare. The McMansion dream was never my own, and simply won’t be a possibility for others in the future. Dick Cheney may believe that the American dream is non-negotiable but thats only because he thinks that reality is. Reality is certainly not negotiable, and as energy becomes more dear the former auto-centric lifestyle becomes a lot less liberating and much more constricting. This recession will probably last as long as it takes for the american economy to realign itself in a less energy intensive fashion. (and by less energy intensive I don’t mean per GDP, I mean in the absolute sense, because in the absolute sense, we are depleting our energy reserves) Revolutions occur because of lack of freedoms not because of an excess of them. More and more as the freedom of the average citizen dwindles, the greater the likelihood of their demanding not merely the appearance of change but actual change. As resources are depleted the fantasy of unlimited supply clashes more with reality – and reality Mr. Cheney, will always win.

Guest • July 12th, 2008 at 11:40 am

@Guest: “Funny how the professor argued for the bailout of Bear Stearns…”Au contraire. NR was not in agreement with the bailout, his point being that Bear Stearns did not fall under the stringent regulations of a US regulated bank; that it was a private investment firm and the bailout was off the table.In that I cannot access the April Archives, I cannot give additional details of his position.

Guest • July 12th, 2008 at 11:52 am

“Fannie, Freddie, Fascist” by Llewellyn H. Rockwell, Jr.http://www.lewrockwell.com/rockwell/fascist-creations-fdr.htmlJuly 12, 2008 — Ludwig von Mises had a theory about interventionism. It doesn’t accomplish its stated ends. Instead it distorts the market. That distortion cries out for a fix. The fix can consist in pulling back and freeing the market or taking further steps toward intervention. The State nearly always chooses the latter course, unless forced to do otherwise. The result is more distortion, leading eventually, by small steps, toward ever more nationalization and its attendant stagnation and bankruptcy.When you think about the current Fannie Mae-Freddie Mac crisis, you must remember Mises’s theory of intervention. Reporters will not, but you must, provided you want to understand what is going on. President Bush is considering a fateful step in a 60-year-old problem: the nationalization of these mortgage companies. He wants to guarantee the $5 trillion (that’s trillion with a "t") in debt owned by these companies. Another option would be to put these monstrosities under "conservatorship," which means that you and I will pay for their losses directly.Either way, it turns out that there is no magic way to put every American citizen, regardless of financial means or credit history, in a 3,000 square foot home. Someone, somewhere, sometime has to pay. No matter what rescue plan they are able to cobble together, that someone is you.The heck of it is that any option would be devastating to the already-suffering housing market. The reason this sector was so wildly inflated is that banks knew that Fannie and Freddie were capable of buying any mortgage debt created by the banking industry. For these companies to be nationalized would effectively end their capacity to do this on a market basis. That means banks would suddenly have to act responsibly.Now, you might say, if that’s true, the real blame is with the individual bankers that had been making irresponsible loans under the condition that these government-sponsored enterprises would absorb them. But that’s not right. Put yourself in the shoes of a banker over the last twenty years. You have competitors. You have a bottom line. If you don’t extend these loans, you come off as a fool. Your competition eats your breakfast. To stay ahead of market trends means that you have to play the game, even though you know it is rigged.Place the blame not only on the banks, but also on the institutions that are siphoning off their liabilities for irresponsible behavior, and that would be Freddie and Fannie.And who created these? Travel back in time to the New Deal…They were created by FDR in 1938 to fund mortgages insured by the Federal Home Administration. They were used by every president as a means to achieve this weird American value that every last person must own a home, no matter what. So they were given the legal permission to purchase private mortgages and make them part of their portfolios. Still later, under LBJ and Nixon, they became public companies and sold stock. People called this privatization, but that isn’t quite right. They had access to a guaranteed line of credit creation with the U.S. Treasury. They had lower borrowing costs than any private-sector equivalent.Government-sponsored enterprises are not subject to market discipline like regular private sector companies. Their securities are listed as government securities, so their risk premiums were not dictated by the free market. They could leverage themselves at 50-, 75-, 100-1, pyramiding debt on a tiny foundation of equity. The financial markets have long believed that the GSEs would be bailed out no matter what. And so this put them in a completely different position from a company like Enron, which the markets watched closely. What’s causing the current panic is that the markets have wised up and started evaluating these institutions by market standards. Freddie and Fannie have collapsing market prices, and their bonds are carrying ever-higher risk premiums.In other words, we are not talking about market failure… the origin of both these outfits is with federal legislation. They are not market entities. They have long been guaranteed by you and me. No, they have not been socialist entities either because they are privately owned. They occupy a third status for which there is a name: fascism…

Anonymous • July 12th, 2008 at 12:05 pm

I don’t understand why GNMA-backed debt is trading at virtually identical yields as FNMA and FRE debt. If I remember corrrectily, GNMAs are explicitly backed by the government.

ptm • July 12th, 2008 at 12:11 pm

As one who sees inflation driving the economy at the moment, I would have to quantify inflation by pointing out the sources of new money, new debt, and credit (future debt). New money comes from the Fed in the form of treasury notes and even though M3 is will probably grow by a minimum of 16% this year, there is no clear evidence that the Fed is printing money. However, we know its discount is being used to exchange old debt for about $500 billion in cash with the option of rolling over these exchanges from month to month. So it appears that regional banks cannot use this cash as reserves for loans. Maybe they are using it in the commodities market to replace losses?As for new debt and new credit, they would possibly arise from banks using the discount window in the form of a fractional reserve loans, but it does not seem to be enough to push inflation. Then we learn in the last month from the BIS that credit derivatives have reached the $1 quadrillion mark which is a jump of $500 trillion in six months. Now there is some real debt and or credit.Actually, I do not understand exactly how the shadow banking system can create it’s own money. I think I understand the general idea of credit derivatives, but where does the authority to issue credit arise from? Could it be as simple as one investor announces that I am willing to be a counterparty to X and I will pay Y if this event occurs? Thus, any joe6pack can create money if he can get the others to believe he is a viable counterparty?Regardless, let’s assume all this new money (in the form of new debt or new credit) is buying into commodities, especially oil and subsequently pushing up inflation. Now let’s say the mortgage defaults continue to accelerate into 2009 and this forces an "unwinding" of the interrelationships among the credit derivatives, breaking one counterparty after another much like the first shot in a game of pool.What this seems to imply, is a sudden default on all the commodity options and a subsequent free fall in prices of everything including oil, gold, and silver? What do you think?

Medic • July 12th, 2008 at 12:23 pm

@ ptm:I think I don’t yet drink enough:-)Medic

a student • July 12th, 2008 at 12:40 pm

tax leakage? non residents escape tax obligations in their countries of residence. isn’t this how corporations transfer cash into tax havens /low tax jurisdictions then buy the bonds paying no tax on the resulting income?

Guest • July 12th, 2008 at 12:43 pm

Precisely! Professor Roubini. Your economic prowess puts you in the ranks of history’s great economists.In Henry Hazlitt’s parlance you rank with that rarity of economists who see the long-run effects of policies:“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”May I say that I am dumb-founded, awe-struck and amazed at the accuracy of your economic predictions.Speaking in street parlance, the genius of the economist Nouriel Roubini in economic detection is comparable to that of the great crime detective, Sherlock Holmes.Hopefully, those of us who comment here can assist as a Dr. Watson, as a foil to your abilities — the ordinary man against the brilliant. Or, as Watson put it:"[Holmes] was a man of habits… and I had become one of them… a comrade… upon whose nerve he could place some reliance… a whetstone for his mind. I stimulated him… If I irritated him by a certain methodical slowness in my mentality, that irritation served only to make his own flame-like intuitions and impressions flash up the more vividly and swiftly. Such was my humble role in our alliance."Watson

Insolvable Insurmountable Inevitable • July 12th, 2008 at 12:50 pm

Fed & Treas remind me of a forlorn property owner against the banks of the mighty Miss in oilskins frantically sandbagging as the river leaves its banks. Desperately. As if property and life were as one. Yet, not knowing that just upstream a large dam has just given way. His miniscule efforts will be overwhelmed in deluge. Just where his life and property meet the same end.

Guest • July 12th, 2008 at 1:01 pm

2 conflicting stories…Who’s telling the truth??Fed’s Bernanke tells GSEs discount window open: sourcehttp://www.reuters.com/article/topNews/idUSWBT00938820080711Fed Says No Talks With Fannie, Freddie About Loans (Update1) http://www.bloomberg.com/apps/news?pid=20601087&sid=a79GKfbIbW10&

Guest • July 12th, 2008 at 1:17 pm

Guest • July 12th, 2008 at 1:18 pm

@ptm: “ …though M3 will probably grow by a minimum of 16% this year, there is no clear evidence that the Fed is printing money. However, we know its discount is being used to exchange old debt for about $500 billion in cash with the option of rolling over these exchanges from month to month. So it appears that regional banks cannot use this cash as reserves for loans. Maybe they are using it in the commodities market to replace losses?”See this in the “Hyperinflation Special Report (April 8, 2008) you advanced by link:“The efforts by the federal government and the Federal Reserve to prevent a systemic collapse as a result of the banking solvency crisis has started to spike broad money growth, as measured by the SGS (Shadow Government Statistics)-Ongoing M3 measure, which currently shows a record annual growth rate of 17.3%. While the Fed has not been formally creating money – yet – by adding to reserves, it has had the effect of creating new money by re-liquefying otherwise illiquid banks, by lending liquid assets versus illiquid assets. As a result, a number of banks have been able to resume more normal functioning, lending money and creating new money supply. As the systemic bailout proceeds, formal money creation will follow and already may be starting to show up in official accounting.”John Williams continues: “In response to the rapidly deteriorating fundamentals underlying the value of the U.S. dollar, selling of the greenback has been intense, but contained…In the near future, dollar selling should build towards an extreme, with heavy foreign investment in the dollar fleeing the U.S. currency for safety elsewhere. With the domestic financial markets and U.S. Treasuries so heavily dependent on foreign capital liquidity, the Federal Reserve – now touted as the formal financial market stabilizer – will be forced increasingly to monetize federal debt. That process will build over time, given the federal government’s effective bankruptcy, as discussed in the section U.S. Government Cannot Cover Existing Obligations. Therein lies the hyperinflationary basis for the pending inflation…”Thanks!

AfA • July 12th, 2008 at 2:11 pm

@ SWK"In re-reading your post, I note that you characterize as a $50 billion annual subsidy the premium holders of GSE bonds receive for having an implicit government guaranty rather than an explicit government guaranty."I think what professor meant by that is deeper sense of how "implicit gurantee" is a scam and the the most foolish thing a government can do. See, if the GSE’s were backed by an explicit gurantee their notes will sell at much narrower spreads over treasuries saving the government and the public the $50 billion every year. If their was no guarantee at all (implicit or explicit), notes will be surely traded at higher spreads but then the government (that is taxpayer) money would not be at risk since the government would not be forced to bail them out.I think what he means is that the GSE’s are ‘subsidizing’ noteholders. Markets (that is noteholders) treat GSE’s as private companies (no government guarantee) when it comes to pricing their notes (ie. higher spreads) but they treat them as backed by an implicitly explicit guarantee (since they know the governmnet will surely intervene to bail them out) if the GSE’s fail, and in that case the government will have to eat the ‘spreads’ i.e. $50 billion: which means that the government is in fact EXPLICITLY subsidizing $50 billion a year to noteholders risk free (well for the same risk as treasuries). Bottom line

ptm • July 12th, 2008 at 2:25 pm

Medic on 2008-07-12 12:23:50 – I think I don’t yet drink enough:-)I’m probably wrong, but if we kick this can down the road long enough, we may be able to figure it out together.Guest on 2008-07-12 13:18:18 – Federal Reserve – now touted as the formal financial market stabilizer – will be forced increasingly to monetize federal debt. That process will build over time, given the federal government’s effective bankruptcy, as discussed in the section U.S. Government Cannot Cover Existing Obligations. Therein lies the hyperinflationary basis for the pending inflation…”I had lost track of Williams point that everything rests on the future action of the Federal Reserve. So your point is that the Fed’s monetization of the growing national debt will overwhelm any effect in the credit derivative market? Still, if we can believe BIS, then $500 trillion of new money seem mighty hard to overwhelm.

Guest • July 12th, 2008 at 2:27 pm

"Contraries are cured by contraries."be nice to people on your way up because you’ll meet them on your way down

Medic • July 12th, 2008 at 2:35 pm

ptm:Well, at least for the moment I am inclined to think that the biggest issues will begin to be dealt with now so that my kid won’t take over kicking the can for me when I’m dead. Then again, to steal a line from Rummy, we are talking about the government we have – not the one we want.Kick. Kick. Kick………

Free Tibet • July 12th, 2008 at 2:46 pm

Dr. Roubini,This is your best yet!

AfA • July 12th, 2008 at 2:58 pm

@ ptmSsshhh! It is not allowed to talk about it, you know, the one that starts with D.God knows how that derivatives monster will play out, but I guess it will be a good application for the Chaos Theory, IMO.Here is another argument in favor of inflation, although it is not strictly monetary. Many argued against inflation by stating that it is possible only under a wage-spiral and said that is not happening now because of layoffs, risk of recession and falling negotiation power of employees.However, they fail to say that labour is only one type of capital and costs that goes into finished goods/services and although we may not have a wage-spiral we could (and probably have) other inputs-spiral. Take oil for example and special circumstances we are in. As the dollar falls farther (for reasons we all know), oil prices go up. And as oil prices go up, it puts the US economy under more stress and push a little closer to recession, putting more weight on the dollar, the dollar falls and push the price of oil higher – an oil-price-spiral. We may argue that even if the US enters a recession, pushing US oil demand lower, may not have much impact downward on prices, because the ROW will be happy to pick up the slack and/or OPEC to decrease their production accordingly – keeping prices under stress in dollar terms since it is the reserve currency. I know this is a weak argument since it will work until it doesn’t: the prices are much higher even fot the ROW, global recession, decrease in political tensions … but the marginal effect is always there.The second argument is that the US labor is not critical or significant anymore, since virtually nothing is manufactured in US anymore. The Chinese and other Asian countries expressed their willingness to sacrifice price in favor of continuous growth. The overheating of Asian economies, importing of inflation to pegged or stricty managed currency countries to the dollar as a result of continuous slide in the dollar (and the Gross – if not net – inflationary policies of the Fed), wage spiral in China as labour market reaches capacity and other materials and commodities that enters into the manufacturing and transportation of goods into the US all significantly increase prices US consumers will have to pay. Now we may also argue that when the US enters a recession, demand for this things will fall driving prices down, but that may not be quite right. First, Americans do not really have other options than importing stuff they need (no manufacturing base in place), second, if their is a significant demand destruction, that will put US importers, and more importantly, Chinese exporters (and Chinese economy) under much stress. As wages spiral in China but profits and sales fall, it means Chinese will not need to buy US bonds and dollars as they had before. This will certainly have an impact on demand for US treasuries, driving yields up, and impact demand for US dollars, pushing exchange rates down, fueling another round of inflation – or at least price increase, but who gives a damn about what is the difference when you have to pay it.

KB • July 12th, 2008 at 3:06 pm

Dr. Roubini-Thanks for your truly outstanding work.Question for clarity? Do you believe hyperinflation (big spike in longer term interest rates) or deflation (lower long term rates, ala Japan 1990) in the US in the short to intermediate term?Simply put, where do you thing the intermediate to long US treasury rates are going from here in the next 3- 6 months?Thanks in advance.

Softwarengineer • July 12th, 2008 at 3:28 pm

DON’T WORRY: AMERICA CAN "GROW ITS WAY OUT OF IT" [OR SHOULD I SAY: "GROW ITS WAY" TO AN EVEN WORSE SCENARIO?]What is the typical quarterly GDP for 2008 [and please, exclude inventory hoarding (like hoarding bags of rice) to avoid higher energy cost impacts, this phony GDP will clearly reduce the subsequent quarter's GDP in my book]? 0.6%, less than that?But don’t worry, America’s bridges, roads, ports and other infrastructures our economy depends on are just fine and have nothing to do with the GDP; just smile and be happy Now, how do we get wage gains [instead of wage deterioration] assuming we add massive American growth with a stagnant GDP? I know, a magic wand?

AfA • July 12th, 2008 at 3:34 pm

"Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail."There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it."http://blogs.ft.com/maverecon/2008/07/time-for-comrade-paulson-the-pull-the-plug-on-the-fannie-and-freddie-charade/

hlowe • July 12th, 2008 at 3:44 pm

A spirited debate with Peter Schiff on Fannie and Freddie.http://www.europac.net/Schiff-FBN-7-11-08_lg.aspRegarding my question above.Professor, when you speak of commodities, I presume you are including gold, but this would not make sense to me as gold should continue to rise with the falling dollar, even if oil comes down due to demand destruction. No?From above–>[Sixth, the existence of GSEs and the implicit subsidy that they provide to the housing sector and mortgage market is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy.When you say cash is king, do you mean Gold?Written by Guest on 2008-07-12 13:17:16]hlowe

Guest • July 12th, 2008 at 4:19 pm

The NYT recently carried a story about hedge fund manager John DeVaney and the collapse of his Horizon Strategies fund. See this link:http://biz.yahoo.com/nytimes/080711/1194793330085.html?.v=19I wonder how many other hedge fund managers are in the same trouble as Mr. DeVaney right now – and trying to handle it the same way … they’ve already lost a bundle of their clients’ money and are now making desperate investments to try to "win it all back".PeteCA

Guest • July 12th, 2008 at 4:30 pm

Washington Mutual (WM) on the ropes now. Wachovia (WB) and Lehman (LEH) sinking fast.By the way, just saw the first Smart cars and Bubble cars driving around the suburbs in the South Bays of Los Angeles. This is a big change in thinking for American drivers … but understandable given gas costs. As far as I know, Ford and GM don’t have any part on the designs of these tiny fuel-efficient vehicles. Just another nail in the coffin for Detroit. I can understand why hybrid technology takes time and $$ to develop. But give me a break … a bubble car??? I could take a team of college engineering students and come out with a practical design for a bubble car – and priced lower than the current vehicles! F and GM really missed the boat.PeteCA

Medic • July 12th, 2008 at 4:47 pm

Pete,I saw a bubble car in Kennebunkport last night – first one I’ve seen here in ME. Oh and by the way, the town was largely empty – restuarants, shops – hell, even the ice cream place was dead. All bad signs for a Friday night in July around here. If Kennebunkport (home of the Bush family compound) is dead, that means even the well-off are staying home. Bad signs……

hlowe • July 12th, 2008 at 5:04 pm

PeteCAWashington Mutual (WM) on the ropes now. Wachovia (WB) and Lehman (LEH) sinking fastWhat’s the source?

Free Tibet • July 12th, 2008 at 5:04 pm

More on Freddy & Fanny. I know many of you are regular readers of Brad Setser’s blog. I hope you have all seen today’s posting.http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/#more-3650

Anonymous • July 12th, 2008 at 6:02 pm

Britain urging return to wartime food frugalityhttp://www.cnbc.com/id/25627279/for/cnbcEven though that should be the headline here, we will never see that.

Guest • July 12th, 2008 at 6:15 pm

I’ve written up an antibailout editorial to send to a major local newspaper.It’s title is:"Take the Load off Fannie (and Freddie), but Don’t Put It Right Back on Me"If it’s published my name and credit to NR and RGE blogers will appear.We can all do this.

Free Tibet • July 12th, 2008 at 6:23 pm

"Roubini’s post today is his most important contribution to date. Sadly, I anticipate, just like his early warnings of coming financial trouble, that it will be ignored." – Yves Smithhttp://www.nakedcapitalism.com/

Anonymous • July 12th, 2008 at 6:29 pm

EVEN CHINA IS AT RISK OF BLOWING UP http://tinyurl.com/6qlpb9

Capone • July 12th, 2008 at 7:35 pm

Bravo Professor ! I hope your voice is heard ! I do not know how you have come up with the 200-300 billion number in light of derivatives wrapped around the GSEs portfolios. However, if that is the number, go for it. I am deeply concerned that politicians who have received tens of millions if not more from these entities over many years can only speak of bailouts. It is sad. I really wish for once, true leadership and foresight would rise to the forefront and tackle the FNM and FRE disaster with integrity. The elections are in November, but all here know the real decision time is right now.

AfA • July 12th, 2008 at 7:46 pm

I want to ask you one question guys. What was the ‘trigger’ news or event so that FNM and FRE news were taken over by MSM. I mean that was not a news, we knew that both were insolvent since last quarter at least. Was it just the declaration of Poole?

AfA • July 12th, 2008 at 7:58 pm

http://www.nakedcapitalism.com/2008/07/uk-times-freddie-fannie-to-get-15.html"US Treasury secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms…."

Guest • July 12th, 2008 at 8:00 pm

@ Bob -An "out of court Chapter 11" means a reorganization of the debtor company accomplished by agreement of the creditors, without involvement of a court. Court Chapter 11′s are sloppy, uncontrollable and sometimes political. Where a company’s creditors are sophisticated, and few, they can negotiate with one another to create a plan, similar to a court-approved Chapter 11 operating plan, for a company’s recapitalization and perhaps partial liaquidation. All done by agreement, no messy court involvement.This happens all the time.For example, GM and Ford now state that they will not file bankruptcy – probably true, because they don’t have to use the bankruptcy court to reorganize. –They are fully leveraged to a few, sophisticated secured creditors who can and will do an out of court reorganization, with union participation, to reorganize and probably dilute existing shareholders when the situation reaches the disaster point.

ptm • July 12th, 2008 at 8:30 pm

At least in Canada the jury saw through these ridiculous early morning no-knock drug raids. Here the home owner was acquitted for killing the lead officer and wounding his partner.http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20080613/parasiris_mugabe_0806213/20080613?hub=CTVNewsAt11

Capone • July 12th, 2008 at 8:35 pm

"He wants to guarantee the $5 trillion (that’s trillion with a "t")" the "tr" reference was discussed with a friend over beers this afternoon. "TR" as in tree, trust, treason, whatever; TRillion. all i literally have to show for understanding this mess for years is ironically a pile of debt and near bankruptcy – good times… ha ha laugh or cry – since i have nothing else to show for, i would like to mention how outrageous it was and I duly noted it here when these gosh darn fools started plugging holes in this crisis by extending limits at FRE and FNM. it is not worth the effort to research exactly, but when they discussed it initially and implemented it, i lambasted the hell out of these two entities as they were being SOLD as part of the solution ! Please ! the amount of time between spin served up as magic elixirs for resolving this mess and those same baseless tales told by politicians / financial "leaders" to the media being proven as mere placebos seems to be getting shorter and shorter. REAL answers and final solutions, as in not those that make people smile for a day or week or maybe a month or garnish a few public opinion poll votes are required now. the SPIN cycle, like Bear Sterns is OVER. To any leader out there involved in resolving this fiasco, we need the truth ! The real freaking deal. Tap the brains creative capacity with an unbiased review of the situation at hand and a determine a REAL solution. Be Leaders !

ptm • July 12th, 2008 at 8:38 pm

The district attorney, Mike McDougal, at first denied that this had been paid for by drug money. He acknowledged that his office had a margarita machine at the fair. In fact, he said, they won first prize for best margarita. But he insisted they came by it fair and square. In any case, he pointed out, the county’s drug fund was at his discretion. Under Texas forfeiture law, counties can keep most of the money and property they rustle up.http://www.economist.com/world/na/displaystory.cfm?story_id=11707305

james • July 12th, 2008 at 9:31 pm

This whole bailout mess is turning out to be the worlds biggest cesspool, and it stinks, when this monstrous mess gets dug up the dollar will be at the bottom.

Prt1stAskQLater • July 12th, 2008 at 10:02 pm

JLC on 2008-07-12 00:38:05 wrote:We have no idea how far this is going to go.Where do you think it will go? First of all the kool-aid makers handed over a $500,000 dollar consumption asset to sub-prime folks who have routinely defaulted on their monetary obligations (minimum of three times). Next the kool-aid labeling movie critics slapped a PG-13 label on what should have an NC-17 rating. All the kids watched the orgy and they wanted to participate. It’s a goner. We now need to flood the market with Disney flicks and gradually recall the PG-13 labeled kool-aid. Print First Ask Questions Later.

Prt1stAskQLater • July 12th, 2008 at 10:11 pm

Anonymous on 2008-07-11 19:45:14 wrote:I welcome a coming column that talks about where we might take all this if we really had a rational allocation of goods, services, and our collective productive energies.Sorry to disappoint you and Prof. Roubini whom I highly respect for his unmatched post today. Politics drives Economics. The people have always voted for, what might politely be called, ‘distance’. Nothing you can do about it. It’s called majority rules – Democracy.The people voted for distance then.Suburbs, McMansions, private transportation and high property taxes seem to be created to maintain ‘distance’. People vote for ‘distance’ now. For example – tough immigration laws keep highly qualified workers (high tax payers) out. So if the people can’t go to the jobs, the jobs find a way of going to the people – jobs don’t need visas.People will vote for ‘distance’ in the future.That’s why Freddie and Fannie will be bailed out. What remains are the tough questions that need to be asked of the kool-aid makers, the kool-aid bottlers and the kool-aid labelers. Like Bear, another kool-aid maker is the hot seat for some tough questions. Ben, go ask them. Harshly.Print First Ask Questions Later.

Guest • July 12th, 2008 at 10:40 pm

Bailout this, bailout that… How long can we keep doing this? The money we’re using for these bailouts is not ours–someone is lending it to us. Who is going to bailout the coming generations who’ll be stuck with all this debt? Is anyone asking them?

Prt1stAskQLater • July 12th, 2008 at 11:14 pm

Guest on 2008-07-12 22:40:33 wrote: Bailout this, bailout that… How long can we keep doing this? The money we’re using for these bailouts is not ours–someone is lending it to us. Who is going to bailout the coming generations who’ll be stuck with all this debt? Is anyone asking them?I think we can keep doing this endlessly. The British Empire had perpetuals, the current generation of the British still don’t have to pay back the principal. The debt even financed The Victoria Memorial at Calcutta that makes the Taj Mahal look like a sand-box. http://en.wikipedia.org/wiki/Victoria_Memorial_(India) The British Empire only forgot to take care of dictators. She thought a ‘historic piece of paper’ was sufficient. We’re not making that mistake this time. It’s quite simple, the paper takes care of the bond holders, and the battle groups take care of the dictators. Anyone questioning our creditworthiness can have a collection conversation with our Carrier battle groups and JDAMs. Otherwise, our logical approach should be to guarantee the debt and never default on it – and as a service charge – inflate at will.Print First Ask Questions Later.

J. • July 12th, 2008 at 11:17 pm

@ptm,creation of credit money requires no authorization but is a simple function of lending/borrowing. Now while I appreciate Williamson’s ‘shadow stats’ it is certainly a mistake to speak of bank reliquification without taking account of changes in lending standards (which are undergoing substantial tightening) and the condition of those who this ‘new’ liquidity would be lent too. IOW, the potential to lend does not guarantee an equivalent potential to borrow, especially given the mass of accumulated debt the servicing of which ultimately depends on the real, nonfinancial, economy. M1 and M2 have, I believe, both stopped increasing over the last few months, which may be beside the point since there’s much more to price change than the old quantity theory of money has ever recognized.

Guest • July 12th, 2008 at 11:29 pm

hlowe: "what’s the source?"The market. Check WM, LEH and WB on http://www.stockcharts.comPeteCA———

Guest • July 12th, 2008 at 11:48 pm

There is really only one word for this bailout mess " hyperinflation "look at prices. You think its bad now, soon we will have to put are kidsto work to help pay the bills.

Etz • July 13th, 2008 at 12:03 am

Thank you NR.Some fresh air to The Founding Fathers while they roll over in their graves.

Guest • July 13th, 2008 at 12:03 am

One hope I have for the future, if we ever recover from this mess, is we banish the words Keynesian economics from are vocabulary.

Guest • July 13th, 2008 at 1:02 am

@Guest on 2008-07-12 23:48:29:There is really only one word for this bailout mess " hyperinflation "look at prices. You think its bad now, soon we will have to put are kidsto work to help pay the bills.U.S. is currently in the midst of heavy stagflation. Perhaps the only way to break stagflation is heavy government control of the economy.U.S. government is not against government control, anyway. Look at all of the bills passed to give the government more powers over its citizens: authority to track their phone conversations, their web surfing, their banking transaction, etc.The U.S. government often claims to promote "less government" but the only way in which they want less government is when it comes to things like the social security. In other words things that would require the government to provide a service or money to their citizens.

Dan Mellinkoff • July 13th, 2008 at 1:24 am

Guest • July 13th, 2008 at 2:32 am

@ ptm “What do you think?”When a few select groups have secret access to the Treasury, does it matter what the Fed, the Treasury, the Congress or the Executive Office say? It’s just distraction. When something’s not above board, when you can’t find out the details, when the rules apply to IndyMac but not to Bear Stearns, when subsidized behemoths the size of Fannie and Freddie turn out to be government waste baskets, the other world power centers are going to turn their backs on such reputation and bad debt. How could a simple barter system come to this?Here’s how Henry C K Liu, chairman of a New York-based private investment group, writing April 2, 2008 in the Asian Times in an article titled “A panic-stricken Federal Reserve,” puts it: “The recent moves by the US Federal Reserve in the months following the credit market seizure of August 2007 to inject liquidity into a failed credit market and to bail out distressed banks and brokerage houses that had been caught holding securities of dubious market value are looking more like fixes for drug addicts in advanced stages of abuse. "So far, many of the Fed’s actions taken to deal with the credit crisis have been self-neutralizing, such as pushing down short-term interest rates to try to save wayward institutions addicted to fantastic returns from highly leveraged speculation, only to cause the dollar to free fall, thus causing dollar interest rates and commodity prices, including food and energy, to rise.”Liu in a five-page article gives detailed summary and terms of Fed actions taken through March 2008 beginning four months after the August 27 credit market seizure, including, first, its Term Auction Facility (TAF) program and the Fed Open Market Committee’s (FOMC) authorized temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB); and second, the series of term repurchase transactions in which primary dealers might elect to deliver as collateral any of the type of securities – Treasury, agency debt, or agency mortgage-backed securities – that are eligible as collateral in conventional open market operations. He summarizes the Fed’s March 11 announced expansion of it securities lending program that includes a new Term Securities Lending Facility (TSLF), under which the Fed would lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing lending program) in exchange for $200 billion MBS of uncertain market value.Said Liu, “This new facility might well be a form of equity, if the Fed is willing to roll it over indefinitely and require payment only at the convenience of borrowers or when a normal market for them reappears. [Steve Randy Waldman of Interfluidity] thinks…the swap will be rolled over and over and over until the mortgage-backed security market stablilizes…essentially what happened in Japan."On March 16, 2008, writes Liu, “the Fed announced that the New York Fed has been granted the authority to establish a Primary Dealer Credit Facility (PDCF)… to provide overnight funding in exchange for a specified range of collateral…”Said Liu, “The TAF program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The TSLF program is an auction for a fixed amount of lending of Treasury general collateral in exchange for Open-Market-Operation-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The PDCF program now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.“The moves into new province suggest that the Fed has changed its traditional role in the economy…”Summarizing, Liu said, “Every few days, a new, stronger fix needs to be administered by the Fed to sustain a euphoric high in the market that will dissipate a few days later, with the inevitable result of a fatal overdose down the road. All that produces is a secular bear market, where every rebound is smaller than the previous fall, until the debt bubble fully deflates. The bottom line in the current financial crisis is no longer one of credit crunch, but of massive insolvency in the financial market that will spread to the general economy, which no amount of Fed liquidity injection can cure short of hyperinflation. Further, there is no guarantee that even accepting hyperinflation will save the economy from protracted stagnation. The history of central banking shows that central bank policies can cause problems more easily than they can solve problems they created earlier. Economic distress from monetary dysfunction cannot be solved by merely printing money, which central banks consider a divine right…”For details:http://www.atimes.com/atimes/global_economy/jd02dj03.htmlAnd now, here’s Fannie and Freddie…

JLC • July 13th, 2008 at 3:50 am

Print First Ask Questions Later,I have no idea how far this will go. But I liked your PG-13 orgy analogy, lol. I certainly saw enough shenanigans in the boom to recognize that your analogy is quite accurate.As I said back in winter, inflation? deflation? What is coming will be something we have never experienced, and very much of both. All the old models will be thrown out the window.So all I have done is focus on what I can control. Food, fuel, provisions have been stockpiled. The garden is beginning to yield a bountiful harvest. Business and household expenses have been cut to a minimum. I have warned friends, family, colleagues of what is coming, but most have dismissed my advice as "crossing over to doom and gloom". Funny, one year ago I was the biggest optimist of all.The savings portfolio is mixed between cash, gold and silver, foreign currency, and small short stock and long commodity positions. I am concerned about what lies ahead for what I have worked so hard to achieve. I am only trying to preserve capital at this point.I am fortunate to have something to protect; I worry about friends and family who are stretched thin. So much pain, and it has only just begun.This crisis has continually surpassed the worst estimates. I’ve decided my only course of action is to prepare for the worst and hope for the best. Priority #1 is keeping the family safe, warm, fed, and sheltered. Everything else is secondary at this point.

London Banker • July 13th, 2008 at 4:01 am

@ Guest on 2008-07-13 02:32:05Many thanks for the Henry C K Liu link. He is always worth reading. Every so often I go to Asian Times and Gulf Times to take the pulse in the parts of the world that will determine the outcome for US and UK. Both are excellent newspapers that give a very objective and throrough survey of global events. Asia and the Gulf have the capital and are exercising more political and diplomatic influence than ever. When they converge and collaborate on a work out and reform plan, the American hegemony era and Bretton Woods II will be toast.As the Spanish, British and Soviets learned before them, Americans too will learn that a global military force is a poor substitute for a productive, stable economy.

RedCreek • July 13th, 2008 at 7:33 am

Got a friend at Freddie. He just sold me his leather office chair for $29.99. This is a mere EUR 18.82. Given the time it takes to exchange goods, he was willing to accept EUR 10.00. He was not able to sell his desk because it had been nailed to the floor in the night from Thu to Fri.

Guest • July 13th, 2008 at 8:03 am

I’m confused. Didn’t you call for the formal nationalization of Fannie and Freddie in your March 19, 2008 post? What caused you to change your mind? Or am I misreading your earlier recommendation?Written by Dan Mellinkoff on 2008-07-13 01:24:16Dan – I agree with you. The Prof is flip-flopping. He did argue for the bailout of Bear as well. Let the Lemmings follow. He must have finally bought some Puts on the market.

The Swede • July 13th, 2008 at 9:51 am

@Dan Melinkoff.You should perhaps reread the professors post."To minimize the financial cost of this farce the administration should stop pretending that these are private institutions and go ahead and take them over and nationalize them since they are going to bail them out anyhow."

Anonymous • July 13th, 2008 at 10:13 am

Professor,Seems to me like the administration will allow the systemic collapse of the entire economy. Once that is completed and chaos ensues the path is paved for Bush to declare Martial law and impose his will on the American public and the rest of the world. Forget Mcain and Obama… Bush will rule the earth forever to his own profit of course!!!

Anonymous • July 13th, 2008 at 10:18 am

Bush has got a set of big oneshttp://www.timesonline.co.uk/tol/news/world/us_and_americas/article4322684.ece

Medic • July 13th, 2008 at 10:49 am

After reading the above article, I was shocked to find my country’s leaders are for sale. Next, I suppose someone’s going to tell me there is no Santa.Bush with big ones. Indeed.

Guest • July 13th, 2008 at 11:16 am

"After reading the above article, I was shocked to find my country’s leaders are for sale. "I’m always amazed at the propensity of our politicians to try to "immortalize" themselves and imagine that they have "done great things" for the country. But history is a painful teacher, and quite often the way people are actually remembered changes dramatically over the course of a few generations.I wouldn’t be at all surprised if the next generation of young Americans rises up and angst and rebellion at the current generation of American politicians. It’s very possible that our kids may take sticks and crowbars to the Wall St banks, presidential libraries, and other edifices that glorify the current Powers-That-Be. If our leaders were smart, they would be spending a lot more time building retirement homes and villas that are located a long way from the shores of America.Jim Kunstler often has something worthwhile to say – because he tends to look at the economic trends from a larger social persepctive. I usually like to read his work because he is a good writer. His latest article is at this link:http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/07/where-were-at.htmlQuoting Mr. Kunstler:"The US economy is crumbling because the way we conduct the activities of daily life is insane relative to our circumstances. We’ve spent sixty years ramping up a suburban living arrangement that has suddenly entered a state of failure, and all its accessories and furnishings are failing in concert."PeteCA

Guest • July 13th, 2008 at 12:07 pm

@Guest: “The Prof is flip-flopping.”This is history in the making – economic times that only Thomas Jefferson could have predicted because of the months he spent in France at the height of the Monarchy’s economic abuse, the economic model of what could go wrong. Roubini’s not saying in this post that Fannie and Freddie shouldn’t be nationalized. He’s saying creditors shouldn’t be bailed out. If anything, Roubini is not in favor of letting the banking industry collapse (as I am) so that a new bird can rise from the ashes. He’s trying to save the system with a minimal amount of public money and moral hazard. I can see where he says we can’t have Freddie and Fannie collapse, but he’s not in favor of opening the discount window or giving creditors/bondholders a chunk of money: “Such a bailout is neither necessary, appropriate nor desirable.” Regardless, as new facts emerge, facts not previously known, the wise will re-evaluate position in a financial tsunami – lemmings just follow each other off the cliff.Roubini’s conclusion:“So, all the above economic arguments and the need to control the moral hazard from the activities of the GSEs suggest that the creditors/bondholders of Fannie and Freddie should not be made whole, i.e. bailed out, once the insolvency hole of these institutions emerges. The optimal policy response would be to have such creditor take a haircut that is financially affordable and substantially desirable from a social point of view. The cost of borrowing for the GSEs after such haircut will be certainly higher but that is an outcome that is economically desirable: it will induce less unproductive and subsidized accumulation of wasteful housing capital.”Will this optimal policy solution – an haircut for bondholders – be undertaken? Most likely not…”

Guest • July 13th, 2008 at 1:08 pm

Prudentbear.com: Barron’s goes Schizo over Housing Bust Outlook:This week’s cover feature claims "Home Prices Are About To Bottom", and article is by Jonathan Laing. Bottom’s Up: This Real-Estate Rout May Be Short-Lived by Jonathan R. Laing"This real-estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery."As best I can recall, Laing’s is well-regarded by bulls & bears alike. So, has he sold out?And still, in the same publication, Alan Abelson talks about Porters Stansberry’s June 6 piece on "Freddie Mac and Fannie Mae are Going to Zero". Back then, Fannie was selling for a bit under 28, and Freddie a bit over 25. Much of what Porter forecast did indeed become reality, and in far less time than he’d predicted. Abelson thinks this bust if far from over.Abelson:"Porter warned the same trick that calmed investors after the collapse of Bear Stearns and so far has managed to forefend a similar fate for kindred shaky firms just might not work this time around. He feels the securities — U.S. mortgages — against "which a large part of the world’s financial assets are leveraged have significantly and permanently declined in price. All the king’s horses and all the king’s men can’t put Humpty Dumpty back together again."And, he believes, even if Congress decides to assume Fannie and Freddie’s liabilities "to prevent an unprecedented global calamity," Congress won’t bail out the firms’ shareholders."Freddie Mac and Fannie Mae are Going to Zero – Source: Stansberry & AssociatesPublished: June 6, 2008 It began at 5:12 a.m. The initial concussion ripped a gash in the earth – a 20-foot-wide crevasse through bedrock. In only 42 seconds, the wound spread across 296 miles. The force of the rupture was approximately one gigaton, or 1,000 times more powerful than the nuclear bomb dropped on Nagasaki. Rarely in the history of our planet have more powerful forces been unleashed. The earthquake was catastrophic. It destroyed one of the largest cities in the world in less than a minute. More than 3,000 people were killed, almost immediately, as their homes and apartments collapsed on top of them while they slept. Never before in U.S. history had so many civilians been killed on a single day. (This grim record was maintained until the September 11, 2001, terrorist attacks.) But as horrible as the original destruction was, the disaster that followed was much worse. The cause of the real tragedy wasn’t natural; it was economic. Residents of the city, which was known to lie on top of a major fault line, were denied earthquake-damage coverage in their homeowner’s insurance policies. They were not, however, denied fire protection. Thus, in the hours after the earthquake, many residents deliberately set fire to the remains of their homes, which had already been reduced to rubble. With so many fires burning and with the city’s water mains destroyed, firefighters could do little to stop the flames. The fire chief was dead, killed when his home collapsed in the earthquake. The surviving firemen and the local army garrison tried to contain the flames with dynamite and artillery shells, which caused more damage. Fires raged for four days and nights. More than 500 city blocks – the entire center of the city – were destroyed. The army was authorized to shoot looters on sight. Some 500 people were shot and killed for looting. (Some people were murdered while salvaging their own possessions, which the soldiers then looted.) Insurance industry estimates put the total loss of the 1906 San Francisco earthquake at more than $400 million in 1906 dollars, or about 1.6% of the U.S. gross domestic product (GDP) at that time. For comparison, consider that Hurricane Katrina, the largest insured loss since the 1906 earthquake, destroyed property totaling 1% of America’s GDP. In other words, the 1906 earthquake resulted in damages 60% more severe than Hurricane Katrina. Back then, paying insurance claims involved moving huge amounts of gold bullion. The gold standard didn’t allow the Federal Reserve to create money with a printing press. And most of the gold owed to San Francisco residents was in the European bank accounts of giant insurers, such as Munich Re and Lloyd’s of London. It took a long time for the insurance companies to withdraw their gold from the banks. But slowly, throughout 1906 and 1907, capital began to leak out of the banks and out of the capital markets. A huge amount of the world’s capital made its way toward the reconstruction of San Francisco. Banks, which normally enjoyed cheap access to capital, found it harder and harder to extend their short-term credit facilities – their lifeblood. As a result, they were forced to charge higher and higher rates for the margin loans extended to stock-market investors. As the supply of money began to dry up, more and more speculators were forced to sell their stocks simply because they could no longer afford the leverage they typically employed. Observant market watchers saw the crisis developing. Some made fortunes by shorting the collapsing stock market. As Jesse Livermore related to Edwin Lefevre in his legendary history of speculation, Reminiscences of a Stock Operator: Finally there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of small loss at the beginning, were now about to suffer total amputation – without anesthetics. A day I shall never forget, October 24, 1907… No money anywhere, and you can’t liquidate stocks because there is nobody to buy them. The whole Street is broke at this very moment… Jesse Livermore made more than $1 million on that day, covering his short positions as J.P. Morgan entered the fray, ordered banks to make their reserves available, and began buying stocks. Livermore saw his signal to start shorting when the railroads began advertising equity offerings that had earlier and earlier execution dates and accepted payment in installments. The crisis of 1907, the banking panic it caused, and the recession that followed led directly to the creation of the Federal Reserve system we have today. The creation of the Fed was supposed to make money panics a thing of the past. The banking cartel was supposed to ensure sound banks would always have money available. Much like the Titanic, though, the system got bigger, more powerful, and not one bit safer. The amount of money and credit available in the system became unimaginably larger, but the root cause of financial instability – too much leverage – was not abandoned. This leverage is the root cause of the predicament in which America finds itself today. And if you follow the advice in this month’s letter, it will make you a lot of money as two of our largest and most respected financial institutions collapse. But before we get to this month’s opportunity, let me show you how it arrived at our doorstep…The rest of the story:http://boards.prudentbear.com/bbs_read.asp?mid=699688&tid=699688&fid=1&start=1&sr=1&sb=1&snsa=A

kilgores • July 13th, 2008 at 1:38 pm

When private companies become face significant cash flow problems or become insolvent, they file for bankruptcy. Typically, they will file under Chapter 11 in an attempt to create a plan of reorganization which, if successfully executed, will allow them to return to a normal operating condition. A large percentage of Chapter 11 plans do not succeed, however, causing the Chapter 11 to be converted to a Chapter 7, under which the company’s assets are liquidated among creditors and the company is ultimately dissolved.Shareholders, who are the owners of the enterprise, are always at risk of losing 100% of their investment, since a Chapter 11 plan is usually likely to fail. Holders of bonds, who have loaned the company money (essentially) under contract, are creditors, and while they, too, may lose 100% of what they have loaned the company, they may be paid something, either under a reorganization plan or in liquidation of the company’s assets. Bankruptcy judges can have wide discretion to "cram down" — i.e., reduce unilaterally — the amount of debt due to a creditor in order to keep a company afloat, which is akin to the notion of the "haircuts" alluded to by Dr. Roubini.Since Fannie and Freddie are private companies, although sponsored by the government, it seems to me that if either got to a point at which ongoing business operations could no longer be maintained due to cash flow or insolvency problems, and the government did not step in with a bailout, the two companies could be subject to Chapter 11 and Chapter 7 proceedings, whether voluntary or involuntary. Perhaps there is some legislative exception that has been made for them in this regard, but if so, I am unaware of it. I can’t imagine what their proposed plans of reorganization would look like, but I suspect they would be hard-pressed to come up with anything remotely workable. With their control of over $5 trillion in mortgage assets, however, it would certainly be the mother of all bankruptcy actions.Just daydreaming here on a Sunday afternoon before what could prove to be a most interesting Monday…SWK

kilgores • July 13th, 2008 at 1:48 pm

Oh, I would point out, by the way, that bond holders are essentially unsecured creditors, so if the value of a bankrupt company’s assets is less than its debts, they wind up being not much better off than shareholders. Cram down rules tend to have relevance only for secured creditors (who can lien certain assets of a company in order to secure payment of the underlying debt, such as a bank that holds a mortgage to a house securing the payment of a debt under a promissory note).SWK

AfA • July 13th, 2008 at 2:07 pm

@SWKSince I am not a BK law savvy I have just to link an article discussing the topic from another point of view. Give us your opinion:"That rich legal fabric of law, institutions, and personnel, and hence market confidence [of Chapter 11 proceedings], is missing from a potential Fannie/Freddie conservatorship. There only thing to guide a GSE conservatorship (beyond general conservatorship law and principles, which may or may not be applicable) is a fairly barebones section of the US Code, 12 U.S.C. section 4620. It gives the conservator (which could be pretty much anyone, including a government agency) some avoiding powers (although more limited than a trustee in bankruptcy), prevents the operation of ipso facto clauses against the GSE in conservatorship, and creates a possibility (but not a requirement) of a 45 day stay of actions against the GSE. The 45 day stay is the real key because it provides a window for a workout to occur. But is it sufficient?The 45 day stay contrasts to the bankruptcy automatic stay, which continues until the end of the case unless lifted for cause. The 45 day stay appears to be modeled upon the stay for FDIC conservatorships, 12 U.S.C. 1821(d)(12). But the FDIC is in the business of doing bank conservatorships and receiverships–it is experienced and set up for handling failed banks. OFHEO, Fannie and Freddie’s regulator, is not, and the FDIC is not really set up to handle a failed GSE. 45 days is a good stretch of time for the FDIC to resolve a failed bank, in part because the FDIC can strongarm other banks into taking on assets and investments of the failed bank. But 45 days might not be enough time for a Fannie or Freddie workout. There no OFHEO conservatorship team or experience in handling failed GSEs. And the conservatorship provisions do not permit DIP management (see 12 U.S.C. 4619(a)(4)(B)(i)). And the scale of Fannie and Freddie is alone an obstacle. To be sure, the Treasury Department would likely bring significant pressure to bear on parties to a workout, but that might not be sufficient (remember the Master Liquidity Enhancement Fund debacle last fall?). It seems to me that if a Fannie/Freddie conservatorship were to be viable, the stay would have to be extended. On the other hand, if Fannie or Freddie went into conservatorship and couldn’t reorganize within 45 days, it might be as good as dead. Regardless, a major problem with the GSE conservatorship option is that it doesn’t have the infrastructure to work like a Chapter 11 reorganization. Although that arguably gives the conservator a freer hand, it also reduces market confidence in the ability of a conservatorship to set a faltering GSE back upright. And without faith in the ability of a GSE to reorganize, the reorganization is unlikely to succeed."http://www.nakedcapitalism.com/2008/07/what-would-fanniefreddie.html

Dubai Banker • July 13th, 2008 at 2:09 pm

Lots and lots of great discussion here…permit me to stir the pot a bit:Where is John Ryskamp when we really need him??

Medic • July 13th, 2008 at 2:36 pm

@ Dubai Banker:JR was proof that even those who have the answers must not be so acerbic that no one is willing to listen.Balance. Control. One of my instructors told me years ago that diplomacy is defined as being able to tell someone to go to Hell in a way that makes them look forward to the trip.

tutterfrut • July 13th, 2008 at 2:57 pm

You mean JOHN ‘BAN HOUSING EVICTIONS’ RYSKAMP. What heated discussions we had over here. Is it really already more than 2 years, I started reading this blog? When will all this be over? So we can return to the real world and start building the future again?

kilgores • July 13th, 2008 at 3:31 pm

@ AfA 14:07:15As characterized by Credit Slips, from which Naked Capitalism took these points, a conservatorship is one possible approach to Fannie’s and Freddie’s problems. It is not, however, the only possible approach.Title 11 of the United States Code — the statues of the United States — governs bankruptcy. 11 U.S.C. §109 governs who may file for bankruptcy protection under Chapter 7. Paragraph (a) of that section states that to be a debtor one has to be "a person that resides or has a domicile, a place of business, or property in the United States, or a municipality." As noted in previous posts to this blog, a corporation is a legally cognizable (albeit non-natural) person.Paragraph (b) of §109 limits who can file a petition under Chapter 7, i.e., a petition for liquidation of non-exempt assets and discharge from further liability to creditors. Unless I’m misreading it, it does not appear to encompass entities such as Fannie Mae and Freddie Mac. It states:(b) A person may be a debtor under chapter 7 of this title only if such person is not—(1) a railroad;(2) a domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, homestead association, a New Markets Venture Capital company as defined in section 351 of the Small Business Investment Act of 1958, a small business investment company licensed by the Small Business Administration under section 301 of the Small Business Investment Act of 1958, credit union, or industrial bank or similar institution which is an insured bank as defined in section 3(h) of the Federal Deposit Insurance Act, except that an uninsured State member bank, or a corporation organized under section 25A of the Federal Reserve Act, which operates, or operates as, a multilateral clearing organization pursuant to section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991 may be a debtor if a petition is filed at the direction of the Board of Governors of the Federal Reserve System; or(3)(A) a foreign insurance company, engaged in such business in the United States; or(B) a foreign bank, savings bank, cooperative bank, savings and loan association, building and loan association, or credit union, that has a branch or agency (as defined in section 1(b) of the International Banking Act of 1978 [1] in the United States.Paragraph (d) of §109 delimits who can file for reorganization under Chapter 11, which includes anyone who can file under Chapter 7 (except stockbrokers or commodity brokers), railroads, uninsured State member banks, and corporations organized under section 25A of the Federal Reserve Act that operates as a multilateral clearing organization under section 409 of the Federal Deposit Insurance Corporation Improvement Act of 1991. Again, it does not appear to exempt Fannie Mae or Freddie Mac.Now, 12 U.S.C. §1723(a) sets forth the powers of Fannie Mae (and Ginne Mae). It is fairly typical of the sort of powers clause one would find in a conventional private corporation, and includes the right of these GSEs to initiate and defend actions in courts and broad ancillary powers. What is atypical about this clause is the exemption of its property from being attached or enjoined:§ 1723a. General powers of Government National Mortgage Association and Federal National Mortgage Association(a) Seal, and other matters incident to operationEach of the bodies corporate named in section 1717 (a)(2) of this title shall have power… in its corporate name, to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal, but no attachment, injunction, or other similar process, mesne or final, shall be issued against the property of the Association or against the Association with respect to its property…and to do all things as are necessary or incidental to the proper management of its affairs and the proper conduct of its business.Based on the above, it seems to me that nothing would prevent Fannie Mae from filing for Chapter 11 reorganization or Chapter 7 liquidation and discharge. I’m not sure how the language precluding attachments and injunctions over its property would play out here, but I suspect it could potentially have some impact on the authority of the bankruptcy court, at least with respect to involuntary petitions filed by creditors or other adverse proceedings against Fannie Mae.The powers of Freddie Mac are established under 12 U.S.C. 1542, and include:(c) Powers of the CorporationThe Corporation shall have power…(7) to sue and be sued, complain and defend, in any State, Federal, or other court;…The only limitations on litigation involving Freddie Mac appear to be set forth in paragraph (f) of section 1452 (certain immunities are also set forth in section 1456, but these basically relate to qualifications imposed by any state laws). Paragraph (f) states:(f) Actions by and against the Corporation; jurisdiction; removal of actions; attachment or execution issued against the CorporationNotwithstanding section 1349 of title 28 or any other provision of law,(1) the Corporation shall be deemed to be an agency included in sections 1345 and 1442 of such title 28;(2) all civil actions to which the Corporation is a party shall be deemed to arise under the laws of the United States, and the district courts of the United States shall have original jurisdiction of all such actions, without regard to amount or value; and(3) any civil or other action, case or controversy in a court of a State, or in any court other than a district court of the United States, to which the Corporation is a party may at any time before the trial thereof be removed by the Corporation, without the giving of any bond or security, to the district court of the United States for the district and division embracing the place where the same is pending, or, if there is no such district court, to the district court of the United States for the district in which the principal office of the Corporation is located, by following any procedure for removal of causes in effect at the time of such removal.Based on the above, I would tend to believe there to be no impediment to Freddie Mac filing for bankruptcy protection, whether under Chapter 11 or Chapter 7. Again, it is possible that I’m missing something here, but there don’t seem to be any formal legal impediments that I can see.Now, what would be interesting would be whether a threat of a bankruptcy filing by Fannie Mae or Freddie Mac would provoke a federal takeover or bailout for political reasons….SWK

Guest • July 13th, 2008 at 3:59 pm

JR GET BACK NOW!SOMEONE HAS TO OPEN THE DISCOUNT WINDOW!

Gloomy • July 13th, 2008 at 4:07 pm

THE DAY OF RECKONING APPROACHESI arrived back from my vacation late last night and am still catching up a bit on the news. Many weeks ago I stated my belief that Fannie and Freddie would be the main course in this banquet. I am saddened that such delectable appetizers as Lehman and WaMu will be served as more of a cheese plate after the main meal, but really, what else can one do under such circumstances. When the goose is fully cooked it simply must be served promptly!!As others have stated the reaction to the news is as important as the news itself. In the past, every time the Fed has done something to "save the day", markets have reacted positively. In my opinion, we will know the day of reckoning has arrived when the opposite reaction occurs: when Fed and Congressional economic meddling finally is perceived correctly as placing significant new burdens on the national debt, treasuries are dumped, and the equity market tanks. Then government will be forced to cease interfering with the very painful, but necessary course of events and markets will enter free fall. We may be very close to this point, we shall see.

Alessandro • July 13th, 2008 at 4:33 pm

I’d like to stress the Bras Setser post pointed out by Free Tibet. EVERYBODY STOPS AND GO READ THE POST!http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/"In some sense, it is remarkable that the system for channeling the emerging world’s savings into the US housing market – a system that relied on governments every step of the way, whether the state banks in China, that took in RMB deposits from Chinese savers and lent those funds to China’s central bank which then bought dollars and dollar-denominated Agency bonds, or the Agencies ability to use their implicit guarantee to turn US mortgages into a fairly liquid reserve assets — hasn’t broken down after the “subprime” crisis. The expectation that the US government would stand behind the Agencies is a big reason why.That allowed the US government to turn to the Agencies to backstop the mortgage market once the “private” market for securitized mortgages dried up, as emerging market governments continued to buy huge quantities of Agencies.And it now seems that this game will break down on the US end before it breaks on the emerging market end. The Agencies will run out of equity before central banks lose their willingness to buy Agency paper….The costs of a system that channeled huge sums of emerging market savings into the US real estate market — contributing to a bubble in US housing that is now collapsing, at a significant cost to all involved (private market players who bet that housing would only go up, the US government, and emerging market governments who bet on the dollar) and now a surge in inflation in the emerging world — are now quite apparent. It has produced a massive misallocation of resources on a global scale. Nouriel is right. Emerging market savers will get a negative real return on their dollars because of the currency risk, and the US has over-invested in housing."

Alessandro • July 13th, 2008 at 4:38 pm

@Gloomywe’ve got IndyMac, but I agree once the main course is ready, no one notice the appetizers.

Anonymous • July 13th, 2008 at 4:46 pm

Willem Buiter, in his Financial Times blog, has a critique of the possible bailout of Fannie and Freddie that is even more scathing than the one of Roubini:http://blogs.ft.com/maverecon/2008/07/time-for-comrade-paulson-the-pull-the-plug-on-the-fannie-and-freddie-charade/#more-279July 12, 2008Time for comrade Paulson to pull the plug on the Fannie and Freddie charadeby Willem Buiter, Financial TimesAre Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) are government-sponsored enterprises of the US federal government. They are shareholder-owned corporations authorized to make loans and loan guarantees. Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal. For the next 30 years, it held a virtual monopoly on the secondary mortgage market in the United States.In 1968, to remove Fannie Mae from the federal budget and balance sheet – the financial demands of the Vietnam War made such financial window dressing politically necessary – Fannie Mae was converted into a private corporation and listed on the stock exchange. It also ceased to be the guarantor of government-issued mortgages. That responsibility was transferred to another GSE, the newly created Government National Mortgage Association (Ginnie Mae). Freddie Mac was created in 1970 to do effectively the same thing as Fannie May, that is to expand the secondary market for mortgages. The GSEs buy mortgages on the secondary market, pool them and sell them as mortgage-backed securities to investors on the open market. They institutionalised and popularlised securitisation, a development whose excesses ultimately brought us the subprime residential mortgage backed securities disaster (although the GSEs themselves did not issue or guarantee subprime mortgages).The US has, starting with FDR, socialised much of its residential housing finance arrangements since the 1930s. Since the recent financial crisis began in August 2007, most of what remained private has also been socialised.Together, Fannie May and Freddie Mac own or back about half of all outstanding home loans. Evidently impressed by the argument that farmers in the US don’t have their snouts deep enough in the public trough, the federal government in 1988 created the Federal Agricultural Mortgage Corporation (Farmer Mac), following the Fannie & Freddie model, as a a stockholder-owned, publicly-traded company to promote a secondary market in agricultural loans. In addition, the Federal Home Association, a branch of the federal Department of Housing and Urban Development, provides subsidised mortgage insurance. Currently the FHA has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. In addition, the 12 Federal Home Loan Banks (created in 1932) provide low-cost funding to private American financial institutions for home mortgage loans, small business , rural, agricultural and economic development lending. While they are owned by their (private institutional) members, they are exempt from state and local income taxes. They also don’t seem to go broke a lot. An agricultural version of the FHLB, the Farm Credit System, consisting of four Farm Credit Banks, one Agricultural Credit Bank and a number of other institutions rounds off the universe of federally subsidised public housing finance provision in the US. Formally, neither Fannie nor Freddie are backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection. However, the companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default. Irrespective of these legal niceties, de facto, everybody knows that, although the shareholders of these GSEs are (probably) not underwritten by the Federal Government, the Federal Government would bail out the rest of the creditors to both institutions before you could say the words “serious threat to residential mortgage finance”. The creditors to Fannie and Freddie are therefore not unduly worried, even as the shares of the two companies have tanked. Between May 1 and July 9, credit-default swaps tied to the senior debt of Fannie Mae and Freddie Mac climbed 35 basis points to 70 basis. That’s ludicrously low, if there is no implicit guarantee of federal financial support for these entities.During good times, Freddie Mac and Fannie May have been able to collect massive rents by being able to borrow at spreads over Federal borrowing rates that were much lower than was warranted by the quality of their portfolios. The implicit guarantee of the Federal Government, an implicit contingent liability of the tax payers, made this possible. These rents were partly appropriated by the orginal investors in Fannie and Freddie stock, and partly by the management and employees of the two GSEs.Now that the seven fat years have come and gone and the seven lean years have arrived, the Federal Government is likely to be called upon to bail out Fannie and Freddie. The deterioration in the quality of their balance sheet and the increase in the scale of their balance sheets – both the result of political pressure to ‘do something’ about the US housing crisis and the implosion and disappearance of the private home loan market – probably would have pushed both GSEs into insolvency by now had they been honest private corporations. These parrots are no more.On July 11, 2008, the New York Times reported that US government officials were considering a plan for the US government to take over Fannie Mae and/or Freddie Mac if their financial situations were to worsen due to the US housing crisis. These government officials were also reported by the New York Times as stating that the government had also considered calling for an explicit federal government guarantee of $5 trillion on debt owned or guaranteed by the two companies through legislation. You can see why the creditors to these GSEs don’t seem to be too worried.There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of
JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.The chair of the Senate Banking Committee, Chris Dodd, has said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie. I am afraid he may be right. After all, an injection of the liquidity by the Fed is so much more politically expedient than an explicit fiscal subsidy, even though their economic effect is identical. This would not be a liquidity enhancement operation by the Fed, which would be a legitimate operation for the central bank to engage in. It would be a quasi-fiscal recapitalisation of two insolvent institutions, which is not part of the mandate of the Fed.The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich. It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

Daltoni • July 13th, 2008 at 5:22 pm

FT columnist quoted by Anonymous: "Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA."This use of the term "socialism" here I find very troubling. The socialization of elites’ speculative losses in not socialism. It is the opposite of socialism. This is a propaganda device. As the theology of the holy blessed infallible deregulated market is found to be false, many priests of the holy blessed infallible deregulated market, fearing the populist blowback, are trying to shift the blame by playing tricks with words. They mustn’t be allowed to do this. This is not to defend socialism, necessarily. It is to make sure that people aren’t deceived about what has really happened. There will be a huge elite-serving propaganda effort to deceive the masses as this unwinds. There will be a similar need for honest people to explain to the masses what has happened, in way that the masses can understand, but without deceit.

kilgores • July 13th, 2008 at 5:40 pm

DOW futures up 65 points at 6:17 p.m. E.D.T. on Sunday, 07.13.08. I guess everything’s gonna be alright now!SWK

Anonymous • July 13th, 2008 at 5:42 pm

JR STILL LURKS HERE!!! HE IS SIMPLY BEATEN DOWN AND UNABLE TO FACE THE MASSES BECAUSE OF HIS SUPERIOR INTELLECT AND KNOWLEDGE OF THE SUBJECT MATTER.

kilgores • July 13th, 2008 at 5:46 pm

Oh, of course. No wonder.SWK___Paulson Seeks Authority to Shore Up Fannie, Freddie (Update1) By Brendan Murray and Dawn KopeckiJuly 13 (Bloomberg) — Treasury Secretary Henry Paulson sought authority from Congress to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of U.S. mortgage financing.Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity “if needed” in the firms, and to increase their lines of credit with the department from $2.25 billion each. The Federal Reserve authorized the companies to borrow directly from the New York Fed, in a step that could provide funding before the bill is passed.Today’s announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the firms that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee almost half the $12 trillion in outstanding U.S. mortgages. As lenders retreated from the housing market, they have grown to account for more than 80 percent of the home loans packaged into securities.Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow, and Paulson’s comments indicate a growing concern that a crisis of confidence may take hold if investors balk. The companies issue debt to raise money for their purchases of mortgage securities.Action This WeekPaulson spoke with congressional leaders and is confident that lawmakers will be able to add the measures in an existing housing bill and enact the package this week, a Treasury official told reporters on a conference call. The temporary authority granted to the Treasury may be for 18 months, the official said on condition of anonymity.The plan would give Paulson power to buy an unspecified amount of stock in Fannie Mae and Freddie Mac, the official said. He also said he didn’t recall any time in the past when the government has taken an equity stake in either company.Paulson also proposed that the Fed get a “consultative role” overseeing the companies’ capital requirements. The Fed said in a separate statement that the New York Fed was approved to make direct loans to Fannie Mae and Freddie Mac at the discount rate, currently 2.25 percent, charged to commercial banks.Facing White HouseThe Treasury chief read his statement before cameras on the Bell Entrance of the department’s building in Washington, facing the White House. The unusual step illustrated the significance of today’s proposals.Debt sold by Fannie Mae and Freddie Mac “is held by financial institutions around the world,” Paulson said in the statement. “Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets.”Freddie Mac shares tumbled 47 percent in New York Stock Exchange composite trading last week and Washington-based Fannie Mae lost 45 percent of its value, forcing Paulson two days ago to issue a statement of support for the companies in their “current form.”“Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer,” Paulson said.The government-chartered, publicly traded companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years. Freddie Mac said earlier this month it planned to sell $5.5 billion of equity after it reports earnings next month.To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.netDawn Kopecki in Washington at dkopecki@bloomberg.netLast Updated: July 13, 2008 18:29 EDT

Gloomy • July 13th, 2008 at 6:15 pm

"The credit crisis has obviously entered into a new phase — the government has one bailout left in them, and this is it," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion."One consequence of Freddie and Fannie is that other firms are allowed to go under," he said. "If you couldn’t get your act together after four months of unprecedented financing terms, maybe you don’t deserve to be thrown yet another lifeline."http://news.yahoo.com/s/ap/20080713/ap_on_bi_ge/credit_crisis_new_phase_8;_ylt=Apic1AHrXSc8UenSpoW_CH4E1vAI

AfA • July 13th, 2008 at 6:26 pm

Gloomy (in both meanings), welcome back!@Average Jane, thanks a lot for your kind words and sorry for your mom too. Hope they will join together where their soles rest in peace.

Gloomy • July 13th, 2008 at 6:35 pm

EXPLICITNow Fannie and Freddie have explicit guarantees. Now it is crystal clear that we, the people, are the proud owners of the liabilities relating to almost 6 trillion dollars of mortgage debt. Break out the champagne!! See those homes getting foreclosed down the street? You are now responsible for paying off the mortgage for those homes, which you never had the privilege of owning and had no say in approving the financing for the clowns who bought them with no money down and credit card debt up to their ears. Bend over America!! Time to take it up the …

Gloomy • July 13th, 2008 at 6:37 pm

@ Alessandro and AfAThanks for the welcome back. Good to be among friends, just as it all hits the fan.

Guest • July 13th, 2008 at 7:02 pm

Picking Winners and LosersLehman Brothers officials have consistently blamed bloggers and short sellers for helping to depress Lehman share prices with “rumors” of its capital problems. It turns out bloggers just don’t have the credentials to completely snuff a company, even if they wanted to. A U.S. senator could get the ball rolling though, as Senator Charles Schumer (D-N.Y.) has been able to prove in his action concerning IndyMacBank. One of the main chores taken on by financial agents of the government and officials at the Federal Reserve is picking winners and losers in this managed economy. And Schumer showed he can pick winners and losers just like the banking cartel, targeting IndyMac in a letter to the Office of Thrift Supervision (OTS). The agency’s director, John Reich, on taking over control of IndyMac this week, said “the immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts.”Government has power, of course. Still, one wonders if John Locke (“Treatises on Government," 1690) had officials like Schumer in mind with his classic quote: “The great question which, in all ages, has disturbed mankind, and brought on them the greatest part of those mischiefs which have ruined cities, depopulated countries, and disordered the peace of the world, has been, not whether there be power in the world, nor whence it came, but who should have it.”

ewulf • July 13th, 2008 at 7:10 pm

I guess that when economic cost and economic benefit do not match due to weak institutional framework,politics close the gap.That what governments are elected for.It is the issue between the normative against the positive approach to public policy.However, it is good to read the argument about the risk involved in each of these situations, because that is the way to improve the future institutional framework.

kilgores • July 13th, 2008 at 7:11 pm

@ Guest on 19:02:17IndyMac was already toast. The writing was on the wall long before Sen. Schumer’s letter, which did little more than accelerate the pace at which regulators would have to step in and take it over. I certainly don’t want to live in a world in which elected leaders aren’t free to express their minds for fear of tipping over a troubled bank or other company.SWK

AfA • July 13th, 2008 at 7:11 pm

I think this is what professor characterizes as "$50 Billion subsidy to premium holders of GSE bonds". This was a news from a couple of months ago:"[Bill Gross] the chief investment officer of PIMCO said his decision to raise exposure [to mortgage debt three times]in recent months stemmed from the U.S. government’s implicit guarantee of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE), the government-sponsored mortgage financiers."Government policy is moving to sanctify the status of the government-sponsored agencies," Gross said, according to the newspaper. "It became a question of which institutions would be sheltered by the government umbrella."

kilgores • July 13th, 2008 at 7:28 pm

Here’s the piece to be published in the New York Times tomorrow:Rescue Sought for Fannie and Freddiehttp://www.nytimes.com/2008/07/14/washington/14fannieweb.html?em&ex=1216094400&en=c4a1ba5fb993b18e&ei=5087%0ASWK

kilgores • July 13th, 2008 at 7:36 pm

J. • July 13th, 2008 at 8:07 pm

As someone who has observed the entire process of neo-liberal deregulation with its privatization ‘justified’ thefts of public assets, let me say that Daltoni’s earlier comment definitely bears repeating:FT columnist quoted by Anonymous: "Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA."This use of the term "socialism" here I find very troubling. The socialization of elites’ speculative losses in not socialism. It is the opposite of socialism. This is a propaganda device. As the theology of the holy blessed infallible deregulated market is found to be false, many priests of the holy blessed infallible deregulated market, fearing the populist blowback, are trying to shift the blame by playing tricks with words. They mustn’t be allowed to do this. This is not to defend socialism, necessarily. It is to make sure that people aren’t deceived about what has really happened. There will be a huge elite-serving propaganda effort to deceive the masses as this unwinds. There will be a similar need for honest people to explain to the masses what has happened, in way that the masses can understand, but without deceit.The looting began decades ago; it has been worldwide and extreme; why continue to accept what has been evident real and financial failure.Thanks

Guest • July 13th, 2008 at 8:21 pm

NIkkei is turning green,oZ s&p is turning green, (fighting)SWK this is worse than a mkt crashits like investors have gone MAD!!i think they’re hanging their hopes on a piece of worn,torn string

lenny • July 13th, 2008 at 8:23 pm

…this is an amazing, to me anyway, interview with bud burrell who seems to have the experience to identify corruption in u.s. capital markets…i listened twice and picked up more the second time… http://www.financialsense.com/Experts/2008/Burrell.html... he says the head of a short-selling syndicate still operates his website from prison…some of you may remember him…the egyptian national who tried to liquidate his son’s college trust the day before 9/11…amr elgindy……i have no faith that the sec reported the truth about shorting prior to 9/11…citizens of new york have 20,000 signatures for a ballot initiative to create a commission to look into 9/11…if it happens, they must force open those books…

Jason B • July 13th, 2008 at 8:49 pm

Daltoni on 2008-07-13 17:22:24Thats right. This isnt socalism, its fascisim.

Guest • July 13th, 2008 at 9:08 pm

im confused…2 of the largest US GSE mortgage co go bust and stock go green??

Guest • July 13th, 2008 at 9:08 pm

@July 13 (Bloomberg) — "Treasury Secretary Henry Paulson sought authority from Congress to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac…The plan would give Paulson power to buy an unspecified amount of stock in Fannie Mae and Freddie Mac…"This action underscores how bad it is. But, it isn’t going to work. The GSEs are a sink, filled with garbage. We’re talking about a major part of all the bad loans in the United States. There isn’t enough money to fix them. Things are going to go from bad to worse: banks failing and going under, greater inflation, deepening recession. This is the path down, not the path up.It was Fed central bank planners, starting with Greenspan, who used public money to drive up inflation to create a housing bubble so that the financial sector could make money. When it began to look as if they were going to lose it all, Bernanke reduced interest rates again but it didn’t work so now they’re moving in to take more and more public money to try to fix the problem that they created in the first place.Freddie and Fannie were the invention of the government – just like the monster created out of old body parts was the invention of Dr. Frankenstein. No private company would have taken on this kind of junk. No private company wants to dispose of government waste. The government created these entities as losers, with junk parts. So how could they exist as big hits, except with breaks? They’ve been on the ropes for several years. And, now, Paulson says he’s going to save the sinking couple.This isn’t about Freddie and Fannie. It’s about Lehman Brothers and the others closely tied in with the purchases of sub-junk. These people don’t care a fig about the faltering homeowners, GSE employees or the taxpayer’s purse. It’s when it gets close to home, as it had to do with the exposure of these investment banks, that the bleeding has to be staunched. When Paulson says it will be a crisis if the GSEs collapse, what he means is it will be a crisis for the investors. Government already has said it would try to help out the homeowners. So what’s this about? It’s about a big step to saddle the public with an unlimited obligation to pick up all of the private mistakes made in housing over the last several years. In the end, the public purse won’t be able to cover it. After that, the news will get worse. The public, IMO, will see Paulson’s rescue efforts as a waving red flag that things are much worse than thought. Paulson’s grab for the wheel doesn’t solve anything; he’s just driving us deeper and deeper down the same old road. That’s why we’re in this dumpster cab now, saddled with two loser receptacles for all the junk in the world, because Paulson looked the other way as investors and officials of both GSEs scavenged off the profits, with a nod and a wink that if anything goes wrong, we’ll save you.

AfA • July 13th, 2008 at 9:19 pm

Bravo Mr. Paulson!Earlier we were debating about whether or not the Government should gurantee the GSE’s debt, now we are guaranteeing shareholders. Mr. Paulson came up with the best alternative (well it was not an alternative) to put taxpayers money in the riskiest spot, ie Equity. Is this some kind of maneuver? A kamikaze operation or an insane "Mututal Assured Destruction" strategy? After this, FNM and FRE cannot possibly fail because it will lead to a direct loss of taxpayer’s money.

AfA • July 13th, 2008 at 9:19 pm

Guest • July 13th, 2008 at 9:25 pm

“Credit Fallout Is Just Beginning: A shrewd observer of the US credit mess says the problems are "considerably worse" than reported. He’s betting on financial-system upheaval, failing companies and an even-slower economy.” By Bill Fleckenstein The problems gripping the credit arena continue to occupy the headlines. Two weeks ago, I reprised the view of George Soros. This week, I would like to share like-minded comments from Ted Forstmann, IMG’s chairman and CEO.In a recent Wall Street Journal interview, Forstmann warned:"We are in a credit crisis the likes of which I’ve never seen in my lifetime. . . . The credit problems in this country are considerably worse than people have said or know. . . . It’s hard for me to believe that it gets fixed without upheaval in the financial system. Things are going to fail. Enterprises are going to fail. The economy is going to slow."As to Forstmann’s timeline: "I think we’re in about the second inning of this." (That guess is not so dissimilar to that of a friend I call the "Lord of the Dark Matter," who says he doesn’t know what inning it is but is sure it’s going to be a double-header.)Ironically, even though Forstmann cites monetary policies and financial innovation as the root cause of our problems, he does not blame former Federal Reserve chief Alan Greenspan. Quite frankly, I don’t see how one can understand the situation as Forstmann does and not peg Greenspan as the man at ground zero…Regular readers know my long-standing view: that Greenspan pursued reckless policies during his two-decade term as Fed chairman. In fact, it was a climate hospitable to risk taking generically and stock speculation specifically. And Greenspan’s "lesson" survives: With "muscle memory" intact, stock bulls have proceeded to pile into risky technology stocks…http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/CreditFalloutIsJustBeginning.aspx

Guest • July 13th, 2008 at 9:29 pm

Franklin Delano Bush (Posted by Lew Rockwell at July 13, 2008 08:51 PM)Surprise! The Fed and the Treasury have announced a huge bailout of corporate state enterprises Fannie Mae and Freddie Mac. That is, Americans will suffer more inflation and taxation for the benefit of the power elite. Bush Canute commands the tide, but he cannot stop the financial meltdown nor the collapse towards reality of housing prices. He can make us all poorer, however, and that is exactly what he is doing. (Thanks to Stephen B.)http://www.lewrockwell.com/blog/lewrw/archives/021973.html

Guest • July 13th, 2008 at 9:49 pm

My ten-year-old daughter says she doesn’t want to be a shareholder in Fannie Mae and Freddy Mac. If she had she would have bought them herself instead of U.S. Treasuries. She asked if it was legal for her to be forced into the gambling market like that. I said I don’t know but it’s certainly immoral and if it is legal there is something wrong with the law.

Average Jane • July 13th, 2008 at 9:57 pm

Oh, Gloomy, welcome back!!Did anyone watch NBC’s hour-long special with Jim Cramer, “The American Dream” this evening? I just couldn’t, just because of the title. The American Dream of managing your money so’s you can retire early and race cars, indeed. (When the average family is struggling to buy groceries and gasoline.) And don’t forget the American Dream of Home Ownership. (A chicken in every pot, and all that.)As Ayn Rand would say, “check your premises.”I must tell y’all that the mutterings on Main Street in the Midwest are becoming interesting. Many of my Middle Class brethren, whom everyone thinks is zoned-out-in-front-of-the-TV (and I must admit I sometimes share that judgment) are starting to talk about bailouts of the mortgage robber barons, the Fed bailing out not only the rich investment bankers but Fannie and Freddie now too (and who knew they were in trouble?), the financial fraud that’s everywhere, and by gosh and by golly they’re not liking what they’re hearing from either the guv’mint or the Corporate Media. Could it be? Are the sheeple waking up? Stay tuned–

Guest • July 13th, 2008 at 10:09 pm

@Kilgores “IndyMac was already toast. The writing was on the wall long before Sen. Schumer’s letter…”Perhaps you could give us an exact list of upcoming bank takeovers. Unfortunately, IndyMac depositors didn’t have your and Schumer’s clairvoyance until they heard the rumors perpetrated by his letter, causing the run that brought down the bank. Perhaps you might also give us advance warning as to the next time he might be inspired to cry “Fire” as an elected official “free to express his mind.” I’d like to be in the exits.Daniel’s clairvoyance regarding “the writing on the wall” came from God”:“This is the inscription that was written: MENE, MENE, TEKEL, PARSIN.” Daniel read the words off of the wall before turning to face the king to solemnly announce, "This is what these words mean: MENE: God has numbered the days of your reign and brought it to an end. TEKEL: You have been weighed in the scales and found wanting. PERES: Your kingdom is divided and given to the Medes and Persians."A fitting warning, perhaps?I fear Chuck Schumer’s clairvoyance might have come from the person he had dinner with the night before.

Guest • July 13th, 2008 at 10:17 pm

"huge bailout of corporate state enterprises Fannie Mae and Freddie Mac"moral hazard one after another. USA is not credible anymore. Nor are central banks peg their currency to dollar. Gold and commodities price holds the truth.

Guest • July 13th, 2008 at 10:23 pm

"Earlier we were debating about whether or not the Government should gurantee the GSE’s debt, now we are guaranteeing shareholders."man, you sound surprised. how naive, look at paulson’s record. tauting strong dollar -> weaker dollar everyday. tauting no bailout shareholders -> guranteeing shareholders. man, American people love to be lied to.

Guest • July 13th, 2008 at 10:28 pm

my target for dollar will be below $60 before end of this year.

Guest • July 13th, 2008 at 10:31 pm

The markets apparently see all this as a positive development…eternal optimism at its best!INDEX VALUE CHANGE OPEN HIGH LOW TIMEDJIA INDEX 11,184.00 88.00 11,096.00 11,190.00 11,089.00 20:13S&P 500 1,252.40 12.60 1,240.40 1,253.10 1,240.40 20:16NASDAQ 100 1,838.75 18.25 1,820.50 1,840.00 1,818.75 20:15Amazing!SWKEconomists rarely made good stock traders. Trade the market…that’s how you make money. A Monday rebound was an easy call after Friday’s action and Gov intervention rumors. Don’t hesitate to take your profits.

AfA • July 13th, 2008 at 10:39 pm

"A Monday rebound was an easy call after Friday’s action and Gov intervention rumors. Don’t hesitate to take your profits."Yes. To paraphrase the bulls, "average up your shorts".

Medic • July 13th, 2008 at 10:47 pm

Gloomy,Welcome back! You were so missed that a few of us took turns doing our impressions of you. Alas, we just could not measure up. Glad to have you back – among friends – for all the fireworks.Is anyone else feeling like the morning is going to be a big let down?I just got off shift. Gotta catch up on the goings on….

Guest • July 13th, 2008 at 10:49 pm

wall street boys get bailout plan. cheers.

Guest • July 13th, 2008 at 10:54 pm

i dont think Asia market like the Fed and gov’s move. let see if Europe market hates the move. I dont think emerging market will like the move.

Guest • July 13th, 2008 at 10:57 pm

medic we have come this fardon’t let down your defenseit is times like this that we should be more vigilant

Guest • July 13th, 2008 at 11:08 pm

@ Guest: "i dont think Asia market like the Fed and gov’s move. let see if Europe market hates the move. I dont think emerging market will like the move…"Nor do I. The dollar is going lower than Gloomy — a millstone likewise for European companies competing in the United States.

Guest • July 13th, 2008 at 11:22 pm

Just posted by Hellasioushttp://suddendebt.blogspot.com/“The Ripples Are Getting VERY Big”July 14 — The ripples in the financial crisis pond keep getting bigger and bigger. IndyMac was just taken over by the Feds and now the behemoths Fannie and Freddie are, too. Obviously, this is very bad news: hundreds of billions of taxpayer money will be needed. Like I said in the previous post, this is orders of magnitude bigger than all previous bailouts. These are no longer ripples but waves.And what if it doesn’t work out? What if, after an initial positive knee-jerk reaction, the market prudently decides to "give" (sell to) the Treasury as much stock in Fannie and Freddie as it has, while there is a big buyer? What will the government do then? Double up and buy even more? Trying to put an artificial floor under stock prices is a fool’s game and always ends up creating a bigger mess.And the size of the two GSEs is so large that a BIG mess is all but guaranteed. The real danger here is that these actions ultimately lead to a cross-infection of the Treasury bond market. If this happens the wave will be a tsunami that will wipe the US off the global financial map.I have reason to fear, too. This is the same band of incompetents that "managed" New Orleans into near oblivion. ( END)Yes, the tide that has raised all boats will start sinking all boats.

Guest • July 13th, 2008 at 11:24 pm

He’s not heavy. He’s my investment banker.

Rime of the Ancient • July 13th, 2008 at 11:47 pm

"Glass-Steagall protected bankers against themselves," Eveillard said. "Bankers are sheep. They don’t mind going over the cliff if everyone else goes over the cliff."

Anonymous • July 14th, 2008 at 12:07 am

Two points:1. The increase in the GSEs’ direct lines of credit to Treasury are only slightly above the rate of inflation. $2.25 B line was established 40 years ago. Now it will likely go to $15 B, a 4.86% annualized increase. According to the BLS, annualized inflation from 1968-2008 was 4.51%. So how is this a big deal? We complain about the AMT not being indexed for inflation and see similar "apparently large" changes from the original legislative intent to today.2. It’s odd that in his blog post, Prof. Roubini would spend so much time discussing a "haircut" for the bondholders, but at least he acknowledges it’s politically unfeasible and altogether unlikely. Two reasons for this:2a. A haircut on agency MBS means their prices go down, so their yields go up. So the borrowing rate for new conforming mortgages goes up, making mortgages for homeowners more costly and extending the housing crisis.2b. Foreign central banks and sovereign wealth funds own so much of this paper, we’d be nuts to punish them and have them stop the flow of Chinese consumer goods, Russian minerals or Middle East oil.

Crammer • July 14th, 2008 at 12:08 am

OPEN THE DISCOUNT WINDOW!!!!!YOU HAVE NO IDEA HOW BAD IT IS OUT HERE!!!

Pillars and Anchors of Sand • July 14th, 2008 at 12:10 am

A millstone around my neck for a flotation device is better than any future drafted by the US Treas and Fed. Is it US Treas or Treasonry…er, Treasury. Gulags were filled with 25 to lifers for much less weighty crimes in Russia. Poor will pay for the profligate. The devastation of Roman Empire and even England’s coast by Goth, Visigoths, Vandals, and Vikings took pillage, mayhem, savagery to its literally flesh-and-blood finish. A very human touch-if-not-provincial approach that has been mastered and sophisticated into a much cleaner surgical similarity today. WE (TPTB) can use fiat currency, tax policy, market manipulation, our own rumours and vagaries to plunder all within the realm. No need to grime our hands or haunt our consciences with shedding blood (which would be necessary under older regimes). Instead we have instituted such clever devices in the exchange of goods and control of commerce that we may do it on the silent. We may devalue the paper money. We may arbitrarily alter the amounts extracted under duress from the annual earnings of all. We may manipulate prices by deviant devices for each of the basic needs and necessities of man. We have devised the means to take without physical opposition. We have contrived to plunder without use of lethal force. We have muddied the feudal system so well, that slave does not know his position, nor that he is born and bred to servitude. But WE know full well, oh so well, that we are MASTERS. Masters born to rule, Cruel Rule, Overseers with Rigour. By decree we allot the crumbs which fall to quench hunger or by same decree enforce famine. All the while our dominions and minions will fly flags, sing anthems, promote ideals, sing to liberty and hard-won values. Of which, they have none. They are stripped and bereft. And best of all, they are ignorant of their barrenness. Wearing crowns of thorns and feet shod not, they venture where we direct and act as we demand. Toil without reward, and sleep on the tokens of a day’s labour to awake finding themselves robbed.

Guest • July 14th, 2008 at 12:23 am

aaaah now the asian mkts are moving (down) correctlysee how EU reacts

KJ Foehr • July 14th, 2008 at 12:28 am

Government not expected to help more companies By JOE BEL BRUNO and STEPHEN BERNARD, AP Business Writers 32 minutes ago NEW YORK – The U.S. government is signaling it won’t throw a lifeline to struggling financial companies — except for mortgage linchpins Fannie Mae and Freddie Mac — marking a shift to a new and potentially more volatile phase of the credit crisis. Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses — unlike Bear Stearns Cos., whose buyout the government helped orchestrate in March. That is bound to unnerve an already turbulent Wall Street and make investors even more anxious as they await financial companies’ earnings expected to be down a stunning 69 percent from a year ago when all the numbers are in.And, for consumers already squeezed by tightening credit standards, it could mean getting a mortgage will become even harder.…Meanwhile, the Federal Reserve said it will provide additional loans if needed.But some of Wall Street’s biggest investors believe there was another message in the government’s announcement — the rest of the financial sector seems unlikely to get a helping hand. Global banks and brokerages have already written down nearly $300 billion in soured mortgage investments — a number projected to ultimately reach $1 trillion."The credit crisis has obviously entered into a new phase — the government has one bailout left in them, and this is it," said Jeffrey Gundlach, chief investment officer of TCW Group in Los Angeles, which invests $160 billion."One consequence of Freddie and Fannie is that other firms are allowed to go under," he said. "If you couldn’t get your act together after four months of unprecedented financing terms, maybe you don’t deserve to be thrown yet another lifeline."…http://news.yahoo.com/s/ap/20080714/ap_on_bi_ge/credit_crisis_new_phase_24S&P futures now up 9+ points, DOW +65, but with news like this the F&F rally on the Federal help news may not last long. The sellers may turn their attention to Wamu and Lehman now.

Alessandro • July 14th, 2008 at 12:42 am

Guest on 2008-07-13 22:09:44: "Perhaps you could give us an exact list of upcoming bank takeovers."The blogshere has a number of picks: WM and WB are the more picked in the national bank category, I’m looking up a list of smaller banks.

Alessandro • July 14th, 2008 at 12:50 am

Forget the stock market, the real play has moved to the bond market already.Due to the more explicit government garantiee the spread between agencies and treasuries should tighten, but there are two rate that can move to the lower spread, and friday action sent a hint that higer trasuries rate might be coming.It is my opinion that long term US debt has next to no chance to be repaid (in real terms), and the central-bank-engulfed bond market appears to have started a slow realization last friday.

friend of washington mutual • July 14th, 2008 at 1:07 am

Many more bank failures likely after IndyMacSun Jul 13, 2008 5:16pm EDTRelated NewsFDIC says overwhelming majority of U.S. banks are safe13 Jul 2008Related NewsU.S. seizes IndyMac as financial troubles spread11 Jul 2008Regulators to run IndyMac until buyer found11 Jul 2008iPhone UK websites swamped before Friday launch08 Jul 2008LG Display Q2 seen surging but LCD outlook dimmer04 Jul 2008powered by Sphere SphereFeatured Broker sponsored linkBy Jonathan Stempel – AnalysisNEW YORK (Reuters) – U.S. banks may fail in far greater numbers following the collapse of the big mortgage lender IndyMac Bancorp Inc (IMB.N: Quote, Profile, Research, Stock Buzz), straining a financial system seeking stability after years of lending excesses.More than 300 banks could fail in the next three years, said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.Banks face pressure as credit losses once concentrated in subprime mortgages spread to other home loans and debt once-thought safe. This has also led to investor worries about the stability of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz); IndyMac is not related to either.While analysts declined to say which banks will fail next, several smaller lenders and one large one, Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz), appear already to have elevated levels of soured loans, relative to their sizes."You have to look at companies with the greatest exposure to the highest-risk assets, which include construction loans and exotic mortgages," Cassidy said. "The final nail in the coffin for any depository institution would be a funding crisis where it is unable to gather deposits at reasonable cost, or wholesale funding markets are cut off."The Federal Deposit Insurance Corp seized IndyMac on Friday after a bank run in which panicked customers withdrew more than $1.3 billion of deposits in 11 business days.This followed comments on June 26 by U.S. Sen. Charles Schumer questioning the Pasadena, California-based thrift’s survival. Some withdrawals also followed IndyMac’s July 7 decision to fire half its work force and halt most mortgage lending.IndyMac once specialized in Alt-A mortgages, which didn’t require borrowers to document income or assets. It was founded in 1985 by Angelo Mozilo and David Loeb, who also founded Countrywide Financial Corp, once the largest mortgage lender. Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) bought Countrywide on July 1.As of March 31, the FDIC had put 90 banking institutions with $26.3 billion of assets on its "problem list." This excluded IndyMac, which alone had about $32 billion of assets, and close to $19 billion of deposits.Well over 2,000 banking companies failed in the 1980s and early 1990s. Cassidy said the government may need to set up a liquidator similar to Resolution Trust Corp, created for the earlier savings and loan crisis.The largest U.S. bank failure is the May 1984 collapse of Chicago’s Continental Illinois National Bank & Trust Co. IndyMac was roughly the same size as American Savings & Loan Association of Stockton, California, a September 1988 failure.DANGER ZONECassidy called the probability of failure "very high" in which a bank’s nonperforming assets exceed the sum of tangible equity plus reserves for loan losses.Richard Bove, a Ladenburg Thalmann & Co analyst, in a July 13 report titled "Who Is Next?" said a "danger zone" is where nonperforming assets, including loans at least 90 days past due, exceeded 40 percent of common equity plus reserves.Citing FDIC data as of March 31, Bove said that IndyMac had been at the greatest risk among more than 100 of the largest U.S. lenders, with a 146.2 percent ratio.Among the other banks high on the list include Newport Beach, California’s Downey Financial Corp (DSL.N: Quote, Profile, Research, Stock Buzz), with a 95.4 percent ratio; Fort Lauderdale, Florida’s BFC Financial Corp (BFF.P: Quote, Profile, Research, Stock Buzz), which invests in BankAtlantic Bancorp Inc (BBX.N: Quote, Profile, Research, Stock Buzz); Coral Gables, Florida’s BankUnited Financial Corp (BKUNA.O: Quote, Profile, Research, Stock Buzz); Chicago’s Corus Bankshares Inc (CORS.O: Quote, Profile, Research, Stock Buzz); Los Angeles’ FirstFed Financial Corp (FED.N: Quote, Profile, Research, Stock Buzz); Troy, Michigan’s Flagstar Bancorp Inc (FBC.N: Quote, Profile, Research, Stock Buzz), and Washington Mutual, at 40.6 percent.The list also includes Puerto Rico’s Doral Financial Corp (DRL.N: Quote, Profile, Research, Stock Buzz), First BanCorp (FBP.N: Quote, Profile, Research, Stock Buzz) and Santander BanCorp (SBP.N: Quote, Profile, Research, Stock Buzz)."We’re surprised to be near the top of that list," said Bert Lopez, BankUnited’s chief financial officer, in an interview. "Our underwriting standards have been very conservative, we have insured a substantial portion of our loan portfolio, and our losses remain low on an overall basis."He declined further comment, citing a pending $400 million stock offering. BankUnited shares closed Friday at 77 cents. Other banks did not immediately return requests for comment.Bove wrote: "The system is not anywhere near the danger that existed in the late 1980s and early 1990s despite all of the whining by public officials. Perhaps, the second quarter numbers will prove them right."BUYING THE REMNANTSThe FDIC will reopen IndyMac on Monday as IndyMac Federal Bank, and then try to sell the company as a whole or in pieces. Regulators expect the takeover to cost the FDIC $4 billion to $8 billion. The agency insurance fund has about $52.8 billion.Among IndyMac’s assets are its deposits, 33 southern California branches, its Financial Freedom reverse mortgage unit, and a fast-deteriorating loan book.Cassidy said thrift deposits tend to be less valuable than deposits at commercial banks because they yield more, and customers might be quick to leave once those rates disappear."For the right price, those branches and deposits are valuable, probably to someone with a footprint in southern California," he said. "Would a Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) or a U.S. Bancorp (USB.N: Quote, Profile, Research, Stock Buzz), which are strong and healthy and would want to expand their franchise, look at it? I think so."Neither bank immediately returned requests for comment.Most IndyMac depositors will get their money back; the FDIC typically insures deposits up to $100,000, and up to $250,000 on some retirement accounts. The seizure came without warning."There are many regional banks that are under a great deal of pain," said Daniel Alpert, an investment banker at Westwood Capital in New York. "Some of them will probably have guys with yellow tape showing up soon."(Additional reporting by Dan Wilchins; Editing by Martin GolanYES BABY FINALLY THE WORD IS OUT WASHINGTON MUTUAL HAD THE BIG BOWEL MOVEMENT AND IS GOING OUT OF BUSINESS .LETS DANCE BABY BIG CELEBERATION.

John Katz • July 14th, 2008 at 2:08 am

Yes Nouriel – your extraordinary insight is validated again. Thank you. But what’s missing is what we should do to protect ourselves against the fallout. Buy gold. We look forward to your comments on this in future. John Katz. Author The Goldwatcher.

Free Tibet • July 14th, 2008 at 6:02 am

This is funny.From: APUS spells out Fannie-Freddie backstop planSunday July 13, 6:32 pm ET By Jeannine Aversa, AP Economics Writer Fed offers to lend to mortgage companies, Treasury plans possible equity investmentQuote: “The official, who spoke on condition of ANIMOSITY, [my caps] also sought to send a calming message about Fannie’s and Freddie’s financial shape, saying: "There’s been no deterioration of the situation since Friday." Not since Friday, huh?

AfA • July 14th, 2008 at 6:21 am

@Free TibetThat is another accomplishment to be added to the current administration’s "Wall of Shame". I perfectly understand why did the guy ask for ANIMOSITY though. If (s)he didn’t, I think (s)he would make a serious candidate for Mr/Ms. FOOL of the year. But I might have a guess on who the "official" might be. I think he meant "There’s been no deterioration of the situation since Friday [under their current form]".Talking about Paulson, don’t you think guys that he might did not forget his quote that a monetary intervention to help the dollar is "never off the table"?

Anonymous • July 14th, 2008 at 7:36 am

This is both socialism and fascism…!

Guest • July 14th, 2008 at 7:41 am

Looks like Paulson thinks he is still at Goldman and has turned the US Treasury into the mother-of-all hedge funds!

Free Tibet • July 14th, 2008 at 7:56 am

@ London BankerIt’s hard for me to write for a blog. I try to use precise language and concise sentences. But things always come out sharper than I mean. Or not what I mean at all. You do a much better job than I.Once you upbraided me for suggesting that a dollar crisis would lead to a fragmentation of global markets. I may have said that there was nothing in the wings to take the place of the $ as a reserve currency. Not the Euro, not the yen, not the RMB. I’ll stand by that. It would be more than a generation before the Euro is mature enough to assume the roll of the $. But I believe that you felt that I had meant that the EC itself would fragment. And that’s not exactly what I meant. Alessandro, for example, will accept the majority decision to return Berlusconi to office though that may be contrary to his preference. And Matthias would agree both with Alessandro and should the same occur in his own country also. As you say, democracy is well established in the EC. But differences between the two concerning appropriate policy on any given issue is likely to be much sharper. I have never meant to suggest that this would lead to a break up of the EC. Though it could more probably lead to a paralysis of policy. We are rather too familiar with that here in the US. There are issues that need to be worked out. And they will have to be worked out within the present structure; weak as that may be. Paralysis is not a solution.Please see this article which was linked at the home pageOpinionsProject SyndicateDani Rodrik Jul 13, 2008 Death of globalisation consensushttp://www.business24-7.ae/Articles/2008/7/Pages/07132008_0e2fdaac2526432cad20a95916ed4bc4.aspx

Alessandro • July 14th, 2008 at 8:19 am

Free Tibet: "Alessandro, for example, will accept the majority decision to return Berlusconi to office though that may be contrary to his preference.""Accept" it’s too strong a word. I still look around shocked and in disbelief, wishing for fellow Italians exactly what we deserve and will be served (and it ain’t pretty).In other news the best known Italian clown offer solution for oil price shock:"oil consuming countries should meet to fix a maximum price they are prepared to pay for oil"http://uk.reuters.com/article/oilRpt/idUKPAB00419520080713

Anonymous • July 14th, 2008 at 8:22 am

It’s all about playing into the hands of the marginal buyers of agency paper and T-bonds for now. Last time I checked that was the Chinese and the Middle East. These are our masters for today/tomorrow.In the short term they need to have their value preserved, but in the long term will divest out of $US Financial assets into real assets (Land/Farms/Energy/Food/Commods). That only means one thing.We will get to the point where a non productive economy can no longer finance itself , I think its just the speed at which you get there is in doubt.I kind of believe that all the Paulson/Benanke plans to date, TLSF, Super SIV, Bear , TAF and now this are just fingers in the dyke. Ultimately the invisible hand of the market will have its way.Much weaker currency, much steeper curves and higher absolute yields, much higher cost of marginal capital. All of which is a big negative for a long time to come, maybe forever.

Guest • July 14th, 2008 at 8:47 am

What a sad day for America.PeteCA

Guest • July 14th, 2008 at 8:56 am

Wow, oil and gold going up againgood job Fed and gov, keep monetary pump going!!

Guest • July 14th, 2008 at 8:56 am

The Fed’s acquired function is to pick winners and losers. Since it is a private cartel of bankers with its most powerful man in the treasury picking up the remaining pieces – now referred to as the government — it’s hard to believe they are disinterested judges. In the end, they pick themselves as the winners.

Guest • July 14th, 2008 at 9:02 am

USA currency or Treasury bond worthless. Lets wait for a run on global scale.

Hubbs • July 14th, 2008 at 9:11 am

End of an era?Fannie and Freddie essentially insolvent. The flagship beer company of USA being sold to foreigners. All that is missing is for GM/Ford to declare bankruptcy and you have the big three traditional American consumer icons- home, beer and car soon to be fond memories. What I think is that the people and politicians have to make up their minds. If you are going to have govt bailouts then you need strict govt controls on business and banking. If you want a capitalist economy, then the govt should not be meddling with explicit or implicit guarantees. The people and the politicians want it both ways, which creates the tunnel thru which the "enterprising" financiers make off with all the assets.

TruNorth • July 14th, 2008 at 9:20 am

A question :If I offered you the opportunity to buy a 50% equity stake in a distressed company but gave you little transparency on the balance sheet of that company, no seats on the board, no other executive positions, and your opinion on the operations of the company "might" be solicited in the future (but only in a consultative role), would you consider that a good investment ?That’s what the US taxpayers are getting with the equity initiative. If the situation weren’t so urgent there is no WAY even the lame-o Democrats would roll over without more legislated oversight. Fyi, our housing regulator just moved to enforce minimum housing down payments, mortgage amortization periods, and other mortgage parameters. At least someone is learning from Fed/OFHEO/FHA/HUD mistakes…

Guest • July 14th, 2008 at 9:27 am

LOLOLOL better late than never I guess!10:24 a.m. Fitch cuts IndyMac Bank ratings to default

Guest • July 14th, 2008 at 9:37 am

@Guest > Looks like Paulson thinks he is still at Goldman and has turned the US Treasury into the mother-of-all hedge funds!Looks like he thinks he is the whole darn government, and by gad, maybe he is.

Guest • July 14th, 2008 at 9:47 am

It is about time we see some reputable people (Nouriel included!) finally get publicly pissed off about what the govt is doing to the US and its taxpayer!!! Jim Rodgers on Bloomberg:“I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, 65, said in an interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.”

AfA • July 14th, 2008 at 9:53 am

Damn it. I was hoping I can grab some positions to average up my shorts. No way, the market was faster! And the dollar gave up all what it eupherically gained since last night.Anyways, IndyMac sisters are beaten down this morning.

Guest • July 14th, 2008 at 9:53 am

@ Yves Smith: Naked Capitalism today > “Oh, minor detail, the plan still has to be approved by Congress, which will hopefully roll over. But what if it doesn’t? Anyone with an operating brain cell knows that these moves put the US on the path to having taxpayers assume Fannie and Freddie liabilities. That in the end is probably unavoidable.”Yes, Yves, “hopefully” this dog of a Congress will “roll over” while Bernanke and Paulson stroke its big fat lazy bloated sagging gluttonous treasonous belly for being a good doggie while I’m out working to feed the dumb beast to be a good watchdog while they take my property. And when I get home and everything I’ve slaved for is gone, I find Yves Smith with a grin-and-bear-it smile plastered on his face, with the sick assurance “that in the end [it was] probably unavoidable.” What a messenger!

Guest • July 14th, 2008 at 9:56 am

The Dow WILL NOT BE ALLOWED to drop below 11K. It is clear that Paulson and Bernnake are now the new leaders of the "free" world and they won’t let their buddy’s 401K’s get decimated (like they should)

Guest • July 14th, 2008 at 9:57 am

Ohhhh-way to have some balls Fed…5 fu^%&ng years too late!10:54 a.m.Fed bans risky mortgage practices

Free Tibet • July 14th, 2008 at 10:02 am

Alessandro, I appologize if I’ve drawn an incorrect analogy.

Free Tibet • July 14th, 2008 at 10:06 am

Alessandro, it’s getting pretty ugly here too.

Alessandro • July 14th, 2008 at 10:14 am

The analogy was correct even if so much painful. No problem .

Alessandro • July 14th, 2008 at 10:16 am

@Free Tibet, where is ‘here’? (Tibet would be my primary guess, but there things should be quite ugly already)

Guest • July 14th, 2008 at 10:21 am

Your Watchdog Congress at work:July 14 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke picked a good time to ask Congress for the biggest expansion of his office’s powers since the Great Depression. He has to make the most of an opportunity that may prove fleeting.Bernanke, who testifies before Congress this week, has stored up goodwill with lawmakers after reducing interest rates at the most aggressive pace in two decades and acting to prevent a financial-market meltdown.“The chairman has done a good job at crisis management,” says Representative Carolyn Maloney of New York. “I like the moves he’s made,” says Representative Mel Watt of North Carolina. Both are Democratic members of the House Financial Services Committee, which will question Bernanke July 16 after he delivers his semi-annual report on the economy to Congress. The favorable reviews on Capitol Hill will serve Bernanke, 54, well as Congress considers his bid to expand his authority over the financial-services industry…http://www.bloomberg.com/apps/news?pid=20601109&sid=acx4qeVVbyVg&refer=homeApparently, there’s no shortage of “Yes Men” and “Yes Women” on the financial services committee: at this point who’s going to take on the investment banks even if you’re a Democrat. — Guest

Guest • July 14th, 2008 at 10:32 am

5th save of Dow 11,100 alredy today!

Bernardo A • July 14th, 2008 at 10:35 am

Bernardo A on the desirability of Fannie and Freddie bailout from an economics perspective ( http://thedailyeconomist.blogspot.com/ ):I think that Fannie Mae and Freddie Mac should definitely be rescued by means of a publicly funded bailout scheme rather than not, simply because the result of refraining from bailing-out the GSEs would be less efficient than the outcome of undertaking the rescue scheme. This is because, while a bailout scheme would yield a net social cost of zero, a non-bailout scheme would yield a positive net social cost equal to the monetary value of Freddie’s and Fannie’s default. No benefit will offset this latter cost because the US government’s revenues will certainly not increase if the bailout will not be carried out.Another interesting question is: Who will finance the bailout scheme? Or, put in more intriguing terms: Who should be more liable for the rescuing of Fannie and Freddie? Should all US citizens finance the bailout equally? Or perhaps, should reckless borrowers give up a greater amount of their own weekly earnings, as compared to parsimonious citizens, in financing the monetary transfer? In my view, the Freddie and Fannie bailout scheme could turn out into a good opportunity for the US government to make justice in the subprime scandal. By imposing a greater burden on those who have provoked the subprime crisis, – and ultimately the default of Fannie and Freddie – the Bush administration will hopefully have the chance to get two birds with a single fiscal policy.Thus, as prof. Krugman reminds us, even this financial crisis may end with a bailout of a financial institution. It probably will, if US policymakers will be so wise to follow the lessons of economic efficiency.

Guest • July 14th, 2008 at 10:42 am

RE: SCHUMER AND INDYMAC: “I certainly don’t want to live in a world in which elected leaders aren’t free to express their minds for fear of tipping over a troubled bank or other company.” SWKRealistically, we all need to be aware of the actual country we now live in. To become and continue to prosper as the senior U.S. senator of The Empire State is not the role played by your average citizen-supporting public servant. Schumer’s most important constituency, of course, is composed of the largest and most influential banks in the world.Major statements that please them are a plus…any major statement out of line and you’ll need a new job at the end of your term.To believe Schumer’s poison pen letter on IndyMac was public spirited is to believe Charlie Rangel is not going to run for re-election.

Guest • July 14th, 2008 at 10:49 am

Looks like WM in trouble. Down over 30% today!

Guest • July 14th, 2008 at 10:53 am

the law of intended consequences goes along with the theory of large numbers the three essessaturation,stagnation,sanitation – yep sanitation to clean up all those nagging lagging indicators that hit the fan.

tutterfrut • July 14th, 2008 at 10:58 am

Nation City trading halted…to be continued

KJ Foehr • July 14th, 2008 at 10:59 am

National City (NCC) halted, news pending, down 27%. Looks like we are headed for capitulation.

tutterfrut • July 14th, 2008 at 10:59 am

NationAL City

Alessandro • July 14th, 2008 at 11:10 am

@KJ FoehrLee Adler has an interesting take on capitulation during bear markets. Short summary: you need much more blood on the streets during bear markets before you get a relief rally.http://wallstreetexaminer.com/?p=2909

Free Tibet • July 14th, 2008 at 11:17 am

@Free Tibet, where is ‘here’? (Tibet would be my primary guess, but there things should be quite ugly already)USA. I’ve never been to Tibet. I’ll explain sometime. And I should change that name. I do believe deeply in a person’s right to express himself freely, religiously and otherwise. And I’m envious of Tibetans who have the Dali Lama while we, a country of 300mm, have Obama. I’m OK with change. I’m suspicious what represents real change. TPTB are TPTB because they have been able to manipulate the system to their benefit. They have an enormous interest in maintaining the status quo. I don’t see that changing under any circumstance.

Guest • July 14th, 2008 at 11:35 am

@Free TibetDalai Lama was sent to India for exile.IMO, W should go there too, US needs a fresh start.And Obama is going to Berlin this month:I am a Berliner..The Germans like him, maybe they keep him there

randy • July 14th, 2008 at 11:41 am

@AlessandroIs this wall street examiner newsletter any good? I’m looking for a good one to help me shape my thoughts about the market. Thanks for all the insight….:>

KJ Foehr • July 14th, 2008 at 11:42 am

Alessandro on 2008-07-14 11:10:25“Short summary: you need much more blood on the streets during bear markets before you get a relief rally.Thank you for the link. I agree. I don’t believe we are close to a cyclical bottom, but it felt like we were heading for significant bloodletting before NCC and WM made their announcements. One more failure or bank run this week would do it for sure. But I am wondering if the Housing bill will be the catalyst for a significant rally. What if we don’t get significant bloodletting this week and just continue the slow slide in the indexes, will the signing of the Housing Bill by itself, be enough for a tradable bottom?What do you / others think?

Alessandro • July 14th, 2008 at 11:49 am

IMHO, when all will be said and done, the current PTB will not be in power any more. Other PTB will be on the rise and the smartest ones of the old school will lead them, but TPTB in the present form will be gone.If you are as optimist as London Banker you may even expect the next PTB to be somewhat gentler and more enlightened, or the system itself, somewhat more resilient.

GM • July 14th, 2008 at 11:55 am

Stringiamoci a coorte,Siam pronti alla morte

Alessandro • July 14th, 2008 at 11:59 am

About Wall Street ExaminerI’m not subscribed, so I don’t know their stock picking ability. They keep track of FED outstanding credit, which looks like a powerful technical indicator and the in public part of their blog they discus quite some interesting trading indicators and strategies (interesting for me, but I’m a newbie when it came to trading).They are worried about inflation long term, so I don’t agree with them on the big picture, but I find a lot of useful data.@KJ FoehrIf the market sell off on a bailout (apparently it is doing it right now) then we are a confidence in TPTB inflection point and it can get much uglier than that IMHO.A lot depends if PPT is still in control or not. And Miss America didn’t answer my call for his opinion.

randy • July 14th, 2008 at 12:03 pm

Anyone have ideas on capital one? I’ve been shorting them for quite a while and they report on thursday. I’m thinking of covering with todays downswing but my greedy side is telling me to wait.Any thoughts would be appreciated………:>

tutterfrut • July 14th, 2008 at 12:08 pm

market is having a re-leave rally…

Guest • July 14th, 2008 at 12:16 pm

@ Bernardo A on the desirability of Fannie and Freddie bailout from an economics perspective… 10:35:40On the first morning of the Fannie and Freddie bailout, Bernardo Aito’s column is the first of many gimmicks that economists and Wall Street toadies will be bombarding us with. Aito’s is one of the more convoluted approaches, but in the end, all of them have one bottom line: The people on the hook for government extravagance, mismanagement and larceny are the taxpayers, you and I.The famous French economist, statesman, and author, Frederic Bastiat, said industries who claim to be essential to an economy are entities defending their “acquired rights.” Writes Bastiat, a business “will claim that the state is obligated to protect and encourage his particular industry; that this procedure enriches the state because the protected industry is thus able to spend more and to pay higher wages to the poor working men.”No industry is more “indispensable” than the banking industry, according to the banking industry. Bastiat warns against claims such as this: “Do not listen to this sophistry by vested interests. The acceptance of these arguments will build legal plunder into a whole system. In fact, this has already occurred. The present-day delusion is an attempt to enrich everyone at the expense of everyone else; to make plunder universal under the pretense of organizing it.”According to Aito, bailout is okay; it just needs to be organized.

ptm • July 14th, 2008 at 12:39 pm

Looks like domestic oil producers get better prices off shore!http://www.cnbc.com/id/25518912A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore waters and Alaska’s Arctic National Wildlife Refuge to drilling.

Guest • July 14th, 2008 at 12:56 pm

Paul Craig Roberts on LewRockwell.com today:I recently read that Brigitte Bardot, now in her 70s, has been arrested as a hate criminal for complaining that Muslims in France slaughter sheep without first stunning them. The famous actress is known for her sympathy with animals, but the French government preferred to interpret her remarks as hatred for Muslims. Prosecutor Anne de Fontetts promised to throw the book at Bardot.There are many incongruities here. The French are persecuting one of their own for taking exception to the practices of an alien culture. But then, perhaps this is just being broad-minded. What really jumps out is: if Bardot’s animal rights position makes her a hate criminal, what does French President Nicholas Sarkozy’s foreign policy position make him?According to Information Clearing House’s running tally as of July 12, 1,236,604 Iraqis have been slaughtered as a result of the Sarkozy-supported US invasion and occupation of Iraq. If Bardot is a hate criminal under French law for complaining about how Muslims prepare their mutton, why isn’t President Sarkozy a hate criminal for supporting an American policy that has resulted in the deaths of 1,236,604 Muslims and the displacement of 4 million Iraqis?http://www.lewrockwell.com/roberts/roberts252.html

Randy • July 14th, 2008 at 1:23 pm

what does the Bardot thing have to do with financial markets and this blog?Can you take that stuff elsewhere, please.

KJ Foehr • July 14th, 2008 at 1:39 pm

Written by randy on 2008-07-14 12:03:18“Anyone have ideas on capital one? I’ve been shorting them for quite a while and they report on thursday. I’m thinking of covering with todays downswing but my greedy side is telling me to wait.Any thoughts would be appreciated………:>”I have shorted it in the past, but moved on to weaker banks; it may be a good short going forward, but I have not heard it mentioned as a candidate for failure, so, unless it’s financial position worsens significantly, it will probably lag the BKX: the BKX is down about 6.5% today and COF is down about 4.4%, as I type.I don’t like to hold a position through earnings unless it is long-term; it is impossible to predict the earnings report and the market reaction to it.If you have a good profit, I would side step the report and re-evaluate after the earnings conference call, but that is just what I would do – you must make your own decision.Good luck.

KJ Foehr • July 14th, 2008 at 1:53 pm

Wham! Wamu! Down 36% now!Also,IMB suspended by NYSE; to be delisted.

randy • July 14th, 2008 at 1:58 pm

@ KJFThanks for the info. I’ve had this COF short for a while. It’s a Jan 09 leap that’s in some money now but has been underwater almost the whole time I’ve had it. A friend once told me "you don’t go broke taking a profit"…and that sticks in my mind………we’ll see…..

HousingDepression • July 14th, 2008 at 1:58 pm

wow! I sold my FNM calls today. It seems like the fed has lost all the credibility. When they came out with their plan, I thought FNM would jump. It jumped in Pre-market but then came back down.I am still short but not as much as before. If there is an upside, I wil just short more.

Gloomy • July 14th, 2008 at 2:04 pm

ROUBINI UPDATEI just realized that NR added an update to his post last night, and it is a beauty!! For those of you missed it, check it out above.

KJ Foehr • July 14th, 2008 at 2:04 pm

Trading in Indymac Bancorp was suspended at 14.5 cents per share.Congratulations to all shorts who held it all the way down!

ptm • July 14th, 2008 at 2:10 pm

After liquidating $32 billion in assets, the FDIC still has to add some $4 billion to $8 billion more to make sure $18 billion of deposits are made whole. So in the worst case scenario, the liquidation value of IndyMac’s $32 billion of assets is $10 billion, or in other words, the true market value of IndyMac’s assets is only 31% of their stated book value. In the FDIC’s best case scenario, the liquidation value of IndyMac’s $32 billion of assets is $14 billion, which is still only 44% of their stated book value.http://www.goldmoney.com/en/commentary.php

Capone • July 14th, 2008 at 2:13 pm

if it is possible for PPT to lose the handle, are we not sitting on the fence of that moment now ? isn’t pointing at the major averages while financial armageddon takes place all around them getting a bit preposterous ? perhaps the PPT has won the DOW, S&P and Nasdaq crash battle ? what have they really won / accomplished though ? death by 1,000 paper cuts ? I wonder if at some point they will realize this way gives too many of the average ordinary sheeple time to get out. They can’t have that now can they ? how did the Federal Reserve "BANK", PPT and Treasury do in regards to the BKX Philadelphia "BANK" Index ? (Please Note: Federal Reserve BANK and BANK index shared word in name – one ruling institution and one measure of financial performance of BANKS) It looks like it crashed from where I am sitting… outside of the pockets of equity nuclear winter which have neither been plunge protected or well-contained or whatever BS vernacular being served up lately is fitting, it appears the rest of the market is going to be strung through to July expiration ? perhaps my view is not clear as my positions are all stagnant – does anyone else feel that things are calm / subdued for a VIX reading of 28.50 ? if the well anticipated SPIKE actually occurs, my estimates for the peak are going above the mid 40s and perhaps even to a 5 handle… BTW, i just checked charts from previous crash / deep corrections and when all was said and done, everything was taken out – EVEN defensive names and value.

randy • July 14th, 2008 at 2:31 pm

"BTW, i just checked charts from previous crash / deep corrections and when all was said and done, everything was taken out – EVEN defensive names and value."Capone: What exactly do you mean with this? As we sit here on the brink, I’d just like to make sure I don’t do something stupid because I misunderstood you. Thanks……Randy

AnonV • July 14th, 2008 at 2:35 pm

And yet the sheeple do nothing. They do nothing because they are not aware of what is being done. They have no understanding of it. As was said once before a long time ago…"My people are destroyed for lack of knowledge"

AfA • July 14th, 2008 at 2:44 pm

"What do you / others think?"I think that since recently, any rally became shortable, the downside of which is increasingly bigger and longer than the upside. That goes for indexes as well as financials.

Capone • July 14th, 2008 at 2:45 pm

@Randy, i should not even post these days as i have shorted the WRONG WRONG stupidest f ing moronic stocks ever up to this point. JNJ, MCD and IBM ha ha joke is on me. all i am saying is in 87, for example, even the strongest names stuck in there to the very final days and each and every name in the DOW was annihilated 30+% even if it was say $1 dollar from its high (like JNJ now!). most deep corrections (going back to 87) featured names such as these taking at least a 10% hit. so far, these stocks are BULLET PROOF ! FWIW, on capital one – scale in scale out. set your ins and outs / limits and stick to them. if you are long 10 winning puts and want to sell some, hold onto at least 1 just in case the big one happens or at least sell enough so you are long the rest of position for free. these things i understand on paper not so much in practive of course, these are your calls to make – all the best to you

AfA • July 14th, 2008 at 3:18 pm

Wow, Professor is real pissed off. Calling Bernanke and Paulson "Marxist comrads". Well, I would prefer using the word fascist instead, but that would do it for now.Professor, go to Bloomberg, CNBC, CNN. With enough "noise" we can make that charade stop. I believe that with increasing critics, like the one made by Rogers this morning, from influential economists we can force them to come up to the public and apologize (well, I can just hope anyway).

Guest • July 14th, 2008 at 3:28 pm

Very good synopsis in the Nation by Willima Greiderhttp://www.thenation.com/blogs/notion/336722"People need to get angry–really, really angry–and take it out on both parties. What the country needs right now is a few more politicians in Washington with the guts to stand up and tell us the hard truth about out situation. It will be painful to hear. They will be denounced as "whiners." But truth might be our only way out."Dems and Repubs are both corrupted. This bailout has not passed yet. I am angry. And at the very least letting my congresspeople know.

FRIEND OF WASHINGTON MUTUAL • July 14th, 2008 at 3:33 pm

DOOOOO DOOOO DOOOO DOOOOO DOOOOOO DON’T WORRY BE BANKRUPT WASHINGTON MUTUAL . EVERY ONE LETS SING TOGETHER DON’T WORRY BE BANKRUPT.

The Dane • July 14th, 2008 at 3:41 pm

AfA, I am joining you on that one, the USSA is a farce! Translated it means "banana republic". Do not forget to read the update. Great post Nouriel, thank you again.The Dane

FRIEND OF WASHINGTON MUTUAL. • July 14th, 2008 at 3:43 pm

READ THE LINK BELOW FROM FABIUS MAXIMUS BLOG TITLED IS USA GOING BANKRUPT.http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

The Dane • July 14th, 2008 at 3:51 pm

Any comments on this?:"BULLET: AGENCIES/FHLB: Tsy is asking for Congress OK to buy..AGENCIES/FHLB: Tsy is asking for Congress OK to buy FHLB debt, the Federal Home Loan Bank system is saying. Their statement: Today, the U.S. Treasury clarified that it will ask for Congressional approval to temporarily increase its authority to purchase FHLBank obligations. Currently, the U.S. Treasury has authority to purchase up to an aggregate principal amount of $4 billion of FHLBank obligations. "In the interest of maintaining consistency in its policies towards all GSEs, we understand that the Treasury also intends to propose expanded authority for its purchase of FHLBank obligations," said John Fisk, CEO of the FHLBanks Office of Finance.Provided by: Market News International "From my broker.The Dane

Guest • July 14th, 2008 at 4:01 pm

history rhymes? 1962 Meanwhile, almost every company which has an overseas subsidiary has screamed to Congress against the President’s plan to tax American companies at home on the profits they make abroad.By equalizing the tax imbalance, Mr. Kennedy hopes to stop American companies from moving their operations overseas and taking jobs away from American workers.http://vlex.com/vid/36718908#fn5

tutterfrut • July 14th, 2008 at 4:11 pm

OTSomething brewing in the Kingdom of Belgian brewer Inbev(you know the one that brews your Bud)Our gouvernment collapses as I speak. It took nine months to form a government, it lasted 6 months…Thistime the disagreements between the Flemish(dutchspeaking part) and the Walloons(frenchspeaking) seems to reach its highs. Maybe it’s finally time for a Tsech-Slovak like split up in two countries. Time will tell…

TruNorth • July 14th, 2008 at 4:23 pm

@ The Dane,The FHLB story is not yet understood by the media. From Deutsche today : "FHLB maintains a claim senior to depositors, secured and unsecured creditors as well as receiver, conservator, or trustee. Effectively in case of a bank default, the FHLB claim is senior and most other claims are subordinate,thus FHLB has access to additional assets if the collateral supporting the advance is not sufficient to meet its claim.Not only is the FHLB owed the principal and interest on the advance, but also the prepayment penalty – due to the difference between the rate on the advance and the reinvestment rate. Note that FHLB advances are considerably over-collateralized to begin with. Further,FHLBs may demand additional collateral or substitutes for their advances."Also from Deutsche today : "IndyMac Bank’s failure and takeover by FDIC• IndyMac Bank was taken over by the FDIC after Friday’s close. This is the 3rd largest bank ever taken over, and the biggest in nearly 20 years.• IndyMac’s balance sheet as of March 2008 consisted of $34 bn in assets, with whole loans of $19.6 bn, securities (nearly all non-agency MBS) of $5.3 bn, a trading portfolio of $1.1 bn, and cash 0.8 bn.• IndyMac relied to a substantial extent on FHLB advances for funding, so much of the balance sheet is encumbered as collateral for the advances. The FHLB has a perfected interest that supersedes depositors, the FDIC, or most of the collateralized lenders. FHLB San Francisco, the regional FHLB that made the advances to IndyMac, stated that $21.6 bn of mortgage loans and MBS are pledged against $10.1 bn in advances. Thus there is little cash left over to pay depositors or debt holders. The FDIC’s Deposit Insurance Fund will likely have to be used to initially pay off the FHLB advances immediately. We think that IndyMac’s case is not unique; in fact, the regional banking system as a whole is quite weak, due to the weakening housing market. Since home loan advances have grown by $300 bn in the last year, a significant amount of bank assets are pledged as collateral for advances, thus making the $53 bn size of the FDIC’s Deposit Insurance Fund seem quite low. The potential burden to taxpayers is likely to increase, not only from Fannie Mae and Freddie Mac, but also via the support for deposit insurance. This is bearish for Treasuries in the long run, and bearish for the dollar."The FHLB, owned by banks, financed largely by debt (the FHLB system itself has less than 3% capital versus assets)has a $4 billion credit line to the Treasury, against which it can pledge its own debt. The line is also about to be indefinitely increased at the discretion of the Treasury secretary. As of March, they had $913 billion out in advances to its members. Oh ya, and the FDIC says there are 90 other banks out there that are in critical condition. Not good.

The Dane • July 14th, 2008 at 4:38 pm

Great post TruNorth, thanks.The Dane

Guest • July 14th, 2008 at 5:19 pm

Bloggers on RGE Monitor:When the government makes a major U-turn into the darkness someone needs to stand and identify the excessive wrongs being committed, the wrongdoers, the implications of the wrongdoing and the measures to try and stop the expected decline. That someone last night was our Professor Nouriel Roubini. Please, please don’t anyone miss it, go back to read the “Sunday Evening Update” added to his initial blog last night—the strongest warning against America’s slide into economic socialism for the well-positioned ever presented by someone of the Professor’s stature.

Guest • July 14th, 2008 at 5:28 pm

My heartfelt thanks, Professor Roubini. If someone with your knowledge and ability to communicate and position doesn’t stand, what good does it do if I stand?Sondra

Guest • July 14th, 2008 at 5:40 pm

"People need to get angry–really, really angry–and take it out on both parties. What the country needs right now is a few more politicians in Washington with the guts to stand up and tell us the hard truth about out situation. It will be painful to hear. They will be denounced as "whiners." But truth might be our only way out."Dems and Repubs are both corrupted. This bailout has not passed yet. I am angry. And at the very least letting my congresspeople know.Written by Guest on 2008-07-14 15:28:37Our leaders are either incompetent or liers!What about the publishers of this article, do they have any credibility? the imminent collapse of the U.S. economy to occur by September 2008;http://www.leap2020.eu/GEAB-N-22-is-available!-Global-systemic-crisis-September-2008-Phase-of-collapse-of-US-real-economy_a1298.htmlThis crazy e-mail I received from my gold dealer and posted here some time ago keeps coming to mind. My apologies for providing such propaganda? I can’t bring myself to put my name on the board.Last week’s session (Th 3/13/08) was only the 6th time in the last 176 years that Congress has closed its doors to the public. Word has begun leaking that not only did members discuss new surveillance provisions as was the publicly stated reason for the closed door session, they also discussed: the imminent collapse of the U.S. economy to occur by September 2008;the imminent collapse of US federal government finances by February 2009;the possibility of Civil War inside the USA as a result of the collapse;advance round-ups of "insurgent U.S. citizens" likely to move against the government;the detention of those rounded-up at "REX 84" camps constructed throughout the USA (see http://en.wikipedia.org/wiki/Rex_84);the possibility of retaliation against members of Congress for the collapses;the location of "safe facilities" for members of Congress and their families to reside during expected massive civil unrest;the necessary and unavoidable merger of the United States with Canada (for its natural resources) and with Mexico (for its cheap labor pool);the issuance of a new currency – THE AMERO – for all three nations as the proposed solution to the coming economic armageddon.Members of Congress were forbidden to reveal what w as discussed. See House Holds Closed Session to Discuss Surveillance Bill: http://www.huffingtonpost.com/2008/03/14/house-holds-closed-sessio_n_91490.html; House Approves New Eavesdropping Rules: http://www.foxnews.com/printer_friendly_wires/2008Mar14/0,4675,TerroristSurveillance,00.html; International Experts Foresee Collapse of U.S. Economy: http://www.intelligencer.ca/ArticleDisplay.aspx?e=918803************************************************************************************See: Beginning of Martial Law: http://www.youtube.com/watch?v=begEaAe4XYE Preparation of martial law in the USA has begun. Is our country turning into Fascism? What are WE going to do about it? Can anything below be denied?1) The president asserts the right to ignore part or all of laws passed by the national legislature. 2) Massive warrantless searches. 3) The president and other officials regularly lie to you. 4) Fraudulent election counts. 5) Government monitoring of letters, emails, phone calls and checking accounts. 6) Secret courts. 7) A government subservient to the interests of the country’s largest corporations. Use of torture on prisoners. 9) Courts that support presidential use of unconstitutional powers. 10) Massive spying on citizens, especially those involved in political dissent. 11) A government that uses words like democracy, freedom and peace while engaging in acts dramatically at odds with such words. 12) Government agencies or officials declaring themselves exempt from portions of the law or constitution. 13) Creation of watch lists, no-fly lists and similar exclusionary documents. 14) National ID cards. 15) Growing number of citizens incarcerated for a growing number of offenses. 16) Massive use of cameras to spy on citizens. 17) A media supportive of, or obsequious towards, the government in covering its police state activities. 18) Security bubble around government leaders’ public appearances including pre selected audiences and limit on proximity of protests. 19) Disarming of citizenry. 20) Dissent characterized as disloyal by government and its supporting media. 21) Increasing government control over private behavior. 22) Lack of legal recourse to stop illegal government actions. 23) Prison without trial and arrests without charges. 24) It is difficult to borrow books from libraries pertaining to controversial subjects such as fascism. 25) Transfer of powers from legislatures to executive. 26) Assassinations of popular public figures. 27) Expansion of prisons and laws that lead people to prisons. 28) President claims right to make war whenever he wants. 29) Words misused to mean their opposite: i.e. peace for war, democracy for fascism. 30) The president sets himself up as the sole moral authority for the entire country, using his personal beliefs as the basis on which to declare what is ‘good’ and what is ‘evil.’ 31) Federal takeover of functions formerly considered essential state o r local responsibilities such as state militias and public education. 32) Creation of a mercenary military force used for foreign and domestic purposes. The concentration camps have already been built HERE IN America. FEMA Concentration Camps: Locations and Executive Orders http://www.mindfully.org:80/Reform/2004/FEMA-Concentration-Camps3sep04.htm Un hidden Agendas: Off To Camp FEMA http://www.youtube.com/watch?v=ZTvPljNxYTI&NR=1 Detention Center, concentration camp? http://www.youtube.com/watch?v=Bqi123hBw2A&NR=1 Concentration Camps being built for U.S citizens http://www.youtube.com/watch?v=dJBxdRIQx7Y&NR=1 Concentration Camp In Texas http://www.youtube.com/watch?v=TxYxTly-yo8&NR=1 FEMA Camp with Better Quality Video http://www.youtube.com/watch?v=l0pfGOH4uxA&NR= 1 FEMA Camp Footage (Concentrations Camps in USA) http://www.youtube.com/watch?v=0P-hvPJPTi4&NR=1 Beech Grove Indiana FEMA Camp – April 5 2006 http://www.youtube.com:80/watch?v=v9Ut-t7k_zY&NR=1 NEW WORLD ORDER OF FEMA CONCENTRATION CAMPS IN USA EXPOSED http://www.youtube.com/watch?v=HnlKg5ZXPu0&NR=1 FEMA camp Chicago http://www.youtube.com/watch?v=I0da_83BzqM&NR=1

Anonymous • July 14th, 2008 at 5:47 pm

Blockbuster!!!!!!!!!!!!Most all the lines in Professor Roubini’s Sunday evening update on Fannie and Freddie added last night are powerful; don’t miss this one…referring here to Fannie and Freddie management:“These sleazebacks who fattened their incomes by the hundreds of millions and used these two institutions and the biggest lobby machine in Washington to corrupt and buy off Congress and any potential critic of the GSEs will remain in charge and continue their scams and gambling for redemption financial schemes. Thank you comrades Paulson and Bernanke for making official this socialism for Wall Street, the rich and the well connected.”

Guest • July 14th, 2008 at 6:31 pm

Sunday Evening Update:Right on! Vivre La Revolution; it is all downhill from here as the edge has been breached and the centre will not hold.Ho humPeterJB

Guest • July 14th, 2008 at 6:39 pm

Indymac was not even on the FDIC watch list?!?!"The FDIC disclosed last month that it was closely watching 90 financial institutions on its "problem list," up from 76 in the first quarter of 2008. The total assets of "problem" institutions rose from $22.2 billion to $26.3 billion, the FDIC said. The FDIC does not publish a list of trouble banks out of concern it could spur a bank run"http://biz.yahoo.com/cnnm/080713/071308_indymac_fdicstatement.html?.v="IndyMac lost $184.2 million in the first quarter of 2008, on top of $614 million last year, and announced last week it was expecting a wider loss for the second quarter. However, it was not on the FDIC’s list of 90 "problem" banks being monitored by regulators, Bovenzi said."http://edition.cnn.com/2008/US/07/13/indymac/"However, bank runs are unpredictable. To be sure, IndyMac did hold an extremely high number of defaulting loans compared to its total loans and reserves — but the Southern California lender was not on the FDIC’s list of 90 banks that could be in danger of failing."http://biz.yahoo.com/ap/080714/banks_earnings_preview.html?.v=1

Guest • July 14th, 2008 at 7:08 pm

@Guest > "Indymac was not even on the FDIC watch list?!?!"From that same AP article today — “After IndyMac’s failure, which bank could benext?” – I hope that no more U.S banks are crucified by the “Schumer kiss.”AP – July 14Certainly, not all banks are going the way of IndyMac Corp., which was seized by the government on Friday. In fact, analysts expect several banks to come out on top as the industry consolidates in the coming years.But for now, investors aren’t taking any chances. After IndyMac was seized — the seventh bank to fail since the credit crisis began last summer, and the second-largest bank to fail in the Federal Deposit Insurance Corp.’s 75-year history — stocks in nearly all the nation’s banks were clobbered Monday as the market bet that there will be more failures.Stocks that were hit the hardest Monday included First Horizon National Corp., which operates in the Southern United States; Zions Bancorp, located in Utah and Idaho; and Washington Mutual Inc., the nation’s largest savings and loan. Stocks of bigger banks such as Wachovia Corp., Citigroup Inc., Bank of America Corp., and Wells Fargo & Co., also tumbled.It’s going to take more than a few hopeful corporate outlooks and capital raising plans this earnings season for investors and consumers to feel at ease again. No matter how much cash a bank has on hand, if enough customers are worried about their deposits and withdraw them, that bank will be in trouble, said Adam Schneider, a principal with Deloitte Consulting LLP."The noise becomes the story after a while," Schneider said. "Any institution can be hurt by a run on the bank." A virtual run by investors who had bought securities through Bear Stearns Cos. led to its demise in March, when the flailing investment bank was bought by JPMorgan Chase & Co.By examining banks’ ratios of defaulting loans to total outstanding loans and to reserves and stock — two measures of a bank’s health — only a handful of companies appear to be in jeopardy, according to bank analyst Richard Bove of Ladenburg Thalmann. These small banks include Downey Financial Corp., Corus Bankshares Inc., Doral Financial Corp., BFC Financial Corp., BankUnited Financial Corp. and FirstFed Financial Corp. However, bank runs are unpredictable. To be sure, IndyMac did hold an extremely high number of defaulting loans compared to its total loans and reserves — but the Southern California lender was not on the FDIC’s list of 90 banks that could be in danger of failing.This is why even those banks that have worked to raise extra cash are still losing investors…

AfA • July 14th, 2008 at 7:20 pm

That’s outrageous. Any nationalization of FNM and FRE should make at least all of the following explicit terms: – Total or very significant wipe out of shareholders. – Immediate and smooth deleveraging of their mortgage portfolios to "reasonable" limits (eg. 10-to-1) – Firing and persecuting existing and previous management – Hair cut on Agency notes (the percentage of which may be debatable and probably scalable to the loss due to deleveraging process). – Let banks who sold dubious mortgages to them eat the losses – New laws making the firms formally government agencies (financed through treasury) – Strict regulations to shrink the size and impact of both firms and rules on what constitues "affordable housing"…Absent these terms, I think this is a good reason to march on the streets until Paulson and Bernanke are on the death row (well that would not solve the problem, but I think making the execution public ‘may feel good’)Well, after a second thought, there is 0% chance that these terms will be required by Treasury or Congress, so just let march."Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction."Albert Einstein

GLOOMY • July 14th, 2008 at 7:26 pm

DOESN’T THIS SOUND LIKE A STORY FROM 1929?Bank Stocks Are Battered as Unease Grows Even as the Bush administration moved to rescue the nation’s largest two mortgage companies, confidence in the banking sector spiraled downward Monday.In the Los Angeles area, lines snaked around IndyMac Bancorp branches for blocks, as customers made withdrawals from the bank, which failed last week. In Cleveland, National City Corporation denied a rumor that its customers were also demanding their money. In Washington, federal regulators tried to broadcast the message that plummeting stock prices should not cause consumers to panic about the safety of their savings. And on Wall Street, analysts began circulating lists of regional and local banks that might be next to fall.Investors continued to beat down bank stocks, fearing that the government’s resolve to help Fannie Mae and Freddie Mac, the giant companies at the center of the nation’s mortgage market, would not hold back the rising tide of bad loans unleashed by the weakening housing market and faltering economy. Financial stocks, a Merrill Lynch analyst wrote bluntly, are “value traps.” Stocks on Standard & Poor’s 500 Bank Index fell nearly 10 percent, and regional banks were particularly hard hit, declining nearly 11 percent. Several regional banks lost nearly a third of their value, as investors bet that these smaller banks might be the ones the government would let fail."It’s about to start getting real bad," said Christopher Whalen, managing director at Institutional Risk Analytics. The Federal Deposit Insurance Corporation, he said, should just move on with the process and “close not just one but a half-dozen institutions at the same time.”http://www.nytimes.com/2008/07/15/business/15bank.html?partner=rssyahoo&emc=rss&pagewanted=print

Guest • July 14th, 2008 at 7:31 pm

So, this is Benson’s "Housing Hell." Wonder when we’ll get back to "Housing Heaven?"

Guest • July 14th, 2008 at 7:56 pm

@ Gloomy > DOESN’T THIS SOUND LIKE A STORY FROM 1929? “…National City Corporation denied a rumor that its customers were also demanding their money. In Washington, federal regulators tried to broadcast the message that plummeting stock prices should not cause consumers to panic… Investors continued to beat down bank stocks…YES! And also Aesop’s “The Boy Who Cried Wolf” once too often. Says Wikipedia, “When the boy was actually confronted by a wolf, the villagers did not believe his cries for help and the wolf ate the flock… The moral is stated at the end of the fable as:Even when liars tell the truth, they are never believed. The liar will lie once, twice, and then perish when he tells the truth.”If Washington IS broadcasting the truth.

Guest1977 • July 14th, 2008 at 7:59 pm

Oh, I can see it now: The United States Bank of America. Coming to a Wal-Mart near you.

KJ Foehr • July 14th, 2008 at 8:01 pm

Re: Paulson’s F&F plan and the related posts here recentlyWhen did the world become only capitalist or communist? When were we ever completely a free-market capitalistic economy? When did socialism become synonymous with communism? In high school I learned that the Soviet Union was communist, the USA was capitalist, and Europe was socialist, which was described as “a system in the middle, between the two extremes, and with aspects of both”. I still agree with that broad view: the economic systems of nation states form a continuum from laissez-faire capitalism at one extreme to totally centrally planned (communist) at the other end. In the middle we find many mixed economies, incorporating varying degree of both capitalist and communist systems.In truth we have always been a mixed economy somewhere in the middle, further to the free-market side than most European countries, but never completely laissez-faire / free-market. So adopting the emergency actions being proposed by our government now does not make us communist; it merely moves us a little farther from the free-market end of the spectrum, making us a little more of a “mixed economy”. But we have been there before, most notably in the 1930s.Did we not survive the GD? Didn’t our country then see many emergency economic actions very similar to those we are seeing now? Weren’t many of them even more “socialistic” than the current ones, e.g. WPA, NRA, CCC, TVA, etc? Didn’t we survive that “socialistic” period to later enjoy America’s golden age in the 1950s and the Reagan free-market revolution of 1980 to 2007?And what choice do we have in our current situation? Would you have the government not take emergency actions in an attempt to prop up the economy and save untold hardship and suffering of our citizens? Many here think the our economy is headed for collapse; some are arming themselves and stockpiling food and water. So if things are really that bad, do you expect the government to stand by and do nothing to try to prevent it?We have many thousands of private companies in the country and, IMO, “bailing out” or even nationalizing a few of them does not constitute communism.Therefore, debating whether emergency actions proposed now will make us "communist" is superfluous. Instead the important debate should be about what course of action will best save our economy, minimize the suffering of our people, and prevent potentially irreparable damage to our culture, way of life, and even the republic itself.

Guest • July 14th, 2008 at 8:08 pm

KJ, if we do not stand and fight for what we believe in and live forwhat are we?soldiers died in the name of democracy, so now US is not a democratic countrywhat we have been told and taught are all useless info?? (or even worst lies)i like New Hampshire motto..LIVE FREE OR DIE

Capone • July 14th, 2008 at 8:14 pm

@Gloomy, i hope you had a nice holiday. sounds like 1929 ? the ink on the pages of history is still wet. from these days forward, for decades if not longer, the comparisons will be made to now… perhaps my 4 am wake ups lately are related to the fact that each sunrise brings a fresh new page of financial history unfolding right before our very eyes… amazing stuff "you see an agent you do one thing, you run !" you still have deposits in a bank, you do one thing, YOU RUN ! By 2008 AD technology had progressed so quickly and dramatically, the masses were lured in through their child-like curiousity to all presented to them by the mass media networks. They happily used their cell phones, GPS devices, ATM cards, retinal and fingerprint IDs, etc. to consume, drive, and live freely. One day, the citizenry woke up to realize the society actually in ruins and the same devices previously viewed as harmless tools of convenience and progress captured their every movement in a vastly monitored, controlled, computerized military state free from any threat of rebellion from the people. They woke up and realized they were living in The Matrix. on a lighter note, This too shall pass their may be a SILVER lining in all of this for those so inclined to hedge themselves ?

Guest • July 14th, 2008 at 8:20 pm

i was sad seeing how Ron Paul was treated,almost every single word he said was true,where was US headed to, the power grab,i think i know why he wasnt nominatedthe US people doesnt deserve a good man like him..

AfA • July 14th, 2008 at 8:21 pm

@ KJFYou are playing devil’s advocate, right?"We have many thousands of private companies in the country and, IMO, “bailing out” or even nationalizing a few of them does not constitute communism."Indeed, socialism, even communism, would be a compliment in this case."And what choice do we have in our current situation?" The professor make an excellent case about what and how the nationalization should be. But no. Under the pretext of ‘emergency’ we give the reckless more money to stay that way."Instead the important debate should be about what course of action will best save our economy, minimize the suffering of our people, and prevent potentially irreparable damage to our culture, way of life, and even the republic itself."Don’t you find that these "bailouts" provide no economic benefit, put more risk on the economy, maximizes the suffering of people who will have to pay losses, produce irreparable damage to our culture and republic itself. The only think it may prevent is the current "way of life" for few, which might be ok for you to support the bailout, but certainly not for me.

Guest • July 14th, 2008 at 8:22 pm

While America burns and her Congressmen contemplate their navels, China builds.Dave Chiang says on Brad Stetser’s Blog: Follow the Money on July 14th, 2008 at 1:24 pm:China moving to rebuild Africa’s Congo infrastructure with State Investmenthttp://www.theage.com.au/world/chinese-spend-big-to-secure-africas-favour-20080714-3f1v.htmlCHINA has entered a new phase in its modern-day scramble for Africa by moving to rebuild 3300 kilometres of roads in the Democratic Republic of Congo.The project is part of China’s largest single investment in Africa – a $A9.2 billion services-for-minerals deal signed in January.China has also promised to repair more than 3000 kilometres of largely defunct railways, build 32 hospitals and 145 health centres, install two electricity distribution networks, and construct two hydroelectric dams and two airports.In return, it has won the rights to five copper and cobalt mines in the Congo’s southern minerals belt.The deal extends Beijing’s dominance over parts of Africa previously allied to the West.One senior European diplomat in the capital Kinshasa said: “They are setting themselves up as being unlike other donors who are seen as too slow and always telling governments what to do.”Some 2000 kilometres to the south, Mambwe Katenta, 45, stands beside a corrugated earth road snaking through dense bush. A mechanic is trying to fix his battered pick-up, damaged by Congo’s atrocious roads.He said: “It is only (48 kilometres) to the city but we cannot reach there with the things we have to sell – tomatoes, cassava, charcoal … It has always been this way. But now we hear that the Chinese will come and fix this.”He will not have long to wait. South of his village, on the other side of Congo’s second city, Lubumbashi, the Chinese are on their way. The Chinese Railway Engineering Company is rebuilding the road linking Congo’s south to Zambia.

KJ Foehr • July 14th, 2008 at 8:24 pm

“KJ, if we do not stand and fight for what we believe in and live forwhat are we?soldiers died in the name of democracy, so now US is not a democratic countrywhat we have been told and taught are all useless info?? (or even worst lies)i like New Hampshire motto..LIVE FREE OR DIE”I am asking, what is it that we truly believe in? And how best can we achieve it? Before we stand and fight, we must understand exactly what we SHOULD BE fighting for! In the ‘60’s, the young people wanted revolution; we wanted to throw out “the establishment” because we disagreed with civil injustice, war, and corporate greed, etc. But were we not throwing out the baby with the bath water because we really had no idea what to replace it with.What does bailing out F&F have to do with democracy and freedom, anyway? I am saying that, if we don’t do whatever is necessary to save the economy, then we may lose those freedoms and our democracy, not the other way around.

Guest • July 14th, 2008 at 8:46 pm

@AfaDid you really mean"- Firing and persecuting existing and previous management"or "prosecuting"?I can see the persecuting might feel fun and well deserved but we really must prosecute them (first).

Guest • July 14th, 2008 at 8:48 pm

if we don’t do whatever is necessary to save the economyyou meant save the wealthy..

AnonV • July 14th, 2008 at 8:48 pm

@ KJ Foehr As a Marine, I and all my Brethren werre never released from this oath."I do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God." We do understand what is a lawful order…….

ptm • July 14th, 2008 at 9:26 pm

Miss America has probably already thought of this, but it just occurred to me that the 52 BILLION offer to August Busch IV and the rest of Anheuser-Busch stock holders was a steal!It was a cultural steal in that much of community support and quirky enterprises sponsored by Anheuser-Busch will disappear (not to mention the Super Bowl commercials). It was also a financial steal in that inflation will eat away at that 52 billion, and with the coming economic chaos, a lot of it could just go poof to money heaven.Meanwhile, Inbev will have a viable inflation proof business that will go on and on. Why are these people so short sighted?

kilgores • July 14th, 2008 at 9:37 pm

Well, Asia is not favorably impressed, per Bloomberg stock futures:NIKKEI 225 12,840.00 -210.00 @ 22:00HANG SENG 21,438.00 -588.00 @ 21:58SPI 2004,824.00 -113.00 4@ 22:17SWK

AnonV • July 14th, 2008 at 9:39 pm

I’m not so sure that the American public is that dim.They loved the commercials and they loved their beer. That dosen’t translate to they will love the new Company…..The American Public is very fickle at times and I think this may be one of them…..Say goodnite Inbev

kilgores • July 14th, 2008 at 9:40 pm

@ AnonV 20:48:21We can surely use more folks — civilians as well as military personnel — who understand the difference between lawful and unlawful orders. Semper Fi, my friend.SWK

AfA • July 14th, 2008 at 9:47 pm

@Guest"I can see the persecuting might feel fun and well deserved but we really must prosecute them (first)."Sorry for the typo. I was excited at that time and probably my subconscious was asking for stronger words. But hey, hell they deserve both.

Guest • July 14th, 2008 at 10:31 pm

@ptm: “Why are these people so short sighted?”The short of it is that the Anheuser–Busch family decided to make a fortune and the heck with it. The long of it is:There have been several generations of family. The origin Anheuser-Busch began as a small brewery located in St. Louis, Missouri. In 1860, Eberhard Anheuser, a German-born prosperous soap manufacturer, became owner of the struggling brewery. He’s the one who loved the company. This current guy, August Anheuser Busch IV, known at “The Fourth,” has only been running the company as president and CEO since December 2006. He’s a young guy not necessarily skilled (born 1964), who’s been in trouble with women and the law, wrecking a couple of cars, and arrested for drunk driving. The family lawyers always got him out of it. He is the great-great-grandson of Anheuser-Busch founder Adolphus Busch, the son of former chairman, president and CEO August Busch III. All the board members are family or controlled by the family. A hostile takeover probably could not have been avoided because the stockholders have been so upset. Things have really been going down hill, and the family seemed totally oblivious to the problems. The shareholders would have taken them all out anyway, so I guess the family just thought they’d get rich and walk away.“The Fourth”’s Wikipedia history: In 1983, while attending college in Arizona, Busch was involved in a wreck that killed a young woman riding with him in his Corvette. According to Tucson police, Busch had left a bar early one morning and wrecked his vehicle while making a sharp turn at high speed. His passenger, a local waitress, flew through the sunroof, and was killed in the accident. Busch left the scene of the accident without informing the police. Police found him at his Tucson townhouse eight hours later with blood still on his body. Manslaughter charges against Busch were eventually dropped after evidence (blood and urine taken from Busch the day of the accident) was lost or damaged.Busch was arrested again in 1985 after leading police on a high-speed car chase. He was accused of intentionally trying to run over two officers with his Mercedes. He was acquitted by a St. Louis jury.Soon after, he was found guilty of another speeding violation, and received a one-year probation.The brewery at Anheuser-Busch world headquarters in St. Louis is the largest of the Anheuser-Busch breweries It was opened in 1852 and includes three buildings that are listed as National Historic Landmarks. The company keeps a rotation of its famous Budweiser Clydesdales at its headquarters. The bulk of the herd is kept at the company farm in St. Louis County, known as Grant’s Farm (having been owned by former President Ulysses S. Grant at one time). The historic landmarked area includes 189 structures spread over 142 acres, including many red brick Romanesque ones "with square crenelated towers and elaborate details." The Brew House, built in 1891-1892, has a "multi-storied hop chandelier, intricate iron-work, and use of natural light.”I have not looked at the Anheuser-Busch website recently, but the last time I looked it was one of the most vicious anti-American sites I have ever come across.

Guest • July 14th, 2008 at 10:45 pm

Dollar Falls Before Bernanke, Paulson Testify on Credit Losses July 15 (Bloomberg) — The dollar fell against the yen and euro before Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson address U.S. lawmakers on their response to widening credit-market losses.The currency declined to a 25-year low versus the Australian dollar on speculation losses at Fannie Mae and Freddie Mac will deepen even after the U.S. government pledged support for the two-largest buyers of home loans. Gains in the yen may be limited by speculation the Bank of Japan will keep interest rates unchanged at 0.5 percent today, the lowest among major economies, eroding the allure of yen-denominated assets…The yen may rise as high as 100 per dollar this year as the Bank of Japan is more likely to raise interest rates than the Federal Reserve, said Toyoo Gyohten, former currency-policy chief at Japan’s Ministry of Finance… “The situation in the U.S. financial sector has become very serious,” said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France’s second-largest bank by market value. “Even if Bernanke and Paulson announce possible support measures, it’s not easy to buoy the dollar…”http://www.bloomberg.com/apps/news?pid=20601087&sid=aFEsBg8jXpJE&refer=home

Guest • July 14th, 2008 at 10:45 pm

I was a little bit surprised today when I read John Hussman’s latest market commentary (www.hussmanfunds.com). In the past Prof. Hussman had some very strong things to say about the Bear Stearns bailout. So I didn’t expect his relatively calm reaction to the news that the US Treasury would act as a financial backstop to Fannie Mae and Freddie Mac. For me – frankly I find it hard to be reassured (apparently the market felt the same way after it digested the news). Let’s suppose the losses are roughly 20% of Fannie’s holdings, and something like another $1 trillion gets added to the US debt. Is this something which we should be calm about? Perhaps if I were a professional investment manager I could take this shot on the chin – and keep grinning. After all, the debt just bounces up from $9.5 trillion to $10.5 trillion. What’s the big deal? But when I look at it as a parent, and I honestly wonder how my two kids (and all the other young Americans) are EVER going to pay this back … it is enough to provoke a tirade. Just what are our kids going to do to find enough high-paying jobs – so that the US Treasury ever gets all this back in taxes? Now that the banking industry and the auto industry are going the same way as the techs did in 2000, what’s left?So the reality is … US bonds are on their way to becoming "junk bonds". Which means that the long end of the US yield curve is far too low. It’s hard to imagine that we’re not headed towards a future where those interest rates will be running at 8-10%. Even countries (like China and Japan) who can’tt bear to do the unthinkable … must sooner or later act to cut any further losses.And the bottom line?Really … it’s in John Hussman’s article.It the LEVERAGE.How on earth did we wind up with FNM and FRD having leverage of the order of 40 on available capital? And didn’t Congress just recently approve a raising of this leverage – in a brilliant effort to save these financial elephants? That worked just great didn’t it?It appears that Wall St and all our major financial institutions have become "hooked on leverage". It’s a drug, and they can’t even kick the habit. And neither the Gov’t nor the regulators have the guts to act now and push down this leverage … before it has more serious repercussions. How can we have a colossal global derivatives market when some of the major players are insolvent, and a bunch more people couldn’t possibly make the margin calls if they came tomorrow. This is nuts.PeteCA

ptm • July 14th, 2008 at 11:01 pm

Guest on 2008-07-14 22:31:30 – The short of it is that the Anheuser–Busch family decided to make a fortune and the heck with it.Yeah, that was the point I was trying to make. They say the first generation builds it; the second generation runs it; the third generation destroys it!Your background does not paint a particularly "American Values" picture, but rather the typical undisciplined privileged upbringing – the same thing we see in our president.In spite of Anheuser-Busch foibles, it is a solid business and, like the Indians on Manhattan island, the idiots gave it up for baubles (cash) that will turn to dust in the upcoming economic chaos.On the other hand, if they have good advisors, maybe they can do a Ted Turner. Through Turner Enterprises, he owns 15 ranches in Kansas, Montana, Nebraska, New Mexico, Oklahoma, and South Dakota.[4] Totaling 1,910,000 acres. http://en.wikipedia.org/wiki/Ted_Turner

KJ Foehr • July 15th, 2008 at 12:59 am

AfA on 2008-07-14 20:21:57“Don’t you find that these "bailouts" provide no economic benefit, put more risk on the economy, maximizes the suffering of people who will have to pay losses, produce irreparable damage to our culture and republic itself. The only think it may prevent is the current "way of life" for few, which might be ok for you to support the bailout, but certainly not for me.”The risk in the economy was put in place gradually over the past 25 years. What they are doing does not increase the risk: we have already gone over the cliff! The “bailouts” and other actions such as the economic stimulus and the housing bill are intended to soften the landing. Do you really believe it would be better for the poor and middle classes to allow the financial system to meltdown, including a stock market crash? W, Paulson, Greenspan, and the rest of the Ayn Rand, Milton Friedman, free-marketeers have already done all they could to add to the wealth of the few over the past 25 years. Now they are being forced to betray their beloved laissez-faire philosophy in order to TRY to keep the house of cards they have erected from collapsing on ALL of us. I feel certain they take no joy in acting like European socialists instead of neo-con cowboys. Do you really think W wants to sign the housing bill after saying weeks ago that he would veto it? I don’t, but I believe he will now because he (they) knows he must.If people resent their actions to help the rich to the detriment of the poor, why did they not complain when the Republicans dismantled regulations, castrated regulatory agencies, eliminated loan standards, developed new accounting principles enabling Enron and off-balance sheet assets, absconded on their oversight responsibilities, rewrote tax laws to favor the wealthy, overturned Glass-Steagall, etc.? Why do people only complain now when the Fed and the W administration are forced to take emergency actions that will actually help protect us from the fallout of their 25 year-long experiment in rapacious capitalism? The time for complaining has long passed. It is too late to worry about moral hazard now, we are all in the same boat, and if we don’t do all we can to save our ship, then we will all go down together.IMO, these “bailouts” are not part of some orchestrated plan to further line the pockets of the wealthy. TPTB are scared shitless, with good reason; they know we are on the verge of collapse and bankruptcy and everything they do now is an attempt to prevent it.

Alessandro • July 15th, 2008 at 2:52 am

@Pete CAduring GD I the meldown of the long end of the curve was the game over for the economy. Looks like GD II is following a similar trajectory. But in GD I bonds were actually paid back with enormous sacrifice, I’m not so sure it will happen again.

Guest • July 15th, 2008 at 4:52 am

Alessandro,GD1 brought us WW2,who knows wht GD2 brings

Jason B • July 15th, 2008 at 5:17 am

The posts here are becoming more outraged and breathless. Remember this is only the second inning, if that. Save some for next year, and the next. This housing unwind will bottom in 4 years or so. Its going to get worse before it gets better. This is a marathon, not a sprint.

Alessandro • July 15th, 2008 at 5:23 am

Guest on 2008-07-15 04:52:57: "GD1 brought us WW2, who knows wht GD2 brings"This is exactly my worst nightmare.

Medic • July 15th, 2008 at 5:25 am

I am going to my bank today to sign on a loan that will allow us to install our solar equipment. The process of getting my home appraised and the loan approved was lengthy and left us short of what were looking for. As a result, we will only be installing the solar domestic hot water portion for now. It will do the most to reduce our oil consumption.The interesting thing, to me anyway, was the lack of equity available in my home. I am a realist, and as a reader of this site have what I believe to be a good sense of what is happening. Alas, even I was surprised (and disappointed) by the appraised value of our home and the limited line of credit I could secure.Don’t misunderstand; this is not a complaint. I am just thinking this is perhaps moving much faster now. After speaking with my bank yesterday and listening to an uncomfortable laugh from the loan officer when I asked if they were still making loans in this environment, I was left with a sense that they may not be taking many risks these days.In the end, we will get what we wanted – to not be dependent on oil for heat – but things are certainly changing as our experience of the past 6-8 weeks has shown. And this morning, Asia and Europe are down; the dollar is at a record low against the Euro and gold is back on its trajectory to break $1000 and move into much higher levels. Tighten those seat belts folks. The large area of turbulence is just ahead.

tutterfrut • July 15th, 2008 at 5:29 am

We’re already in WW3, it’s a financial war…so far

Guest • July 15th, 2008 at 5:35 am

china securing oil/gas commodities in Afrika,russia is flexing its gazprom muscle,tutterfrut i cant agree more,people should open their eyes

Alessandro • July 15th, 2008 at 5:41 am

@tutterfrutWealth destruction has started in earnest, but foreign investors (aka the greater fools) are still pouring billions of dollars worth of real stuff on the US in exchange of IUO (US treasuries and agencies).When the wealth destruction will hit the foreign home (by monetary inflation or default), then the international landscape will become rough and there is the distinct probability that someone will start to think to hard solutions (aka wars).

Indian Banker • July 15th, 2008 at 5:54 am

Fitch cuts India to Negative Fitch has affirmed long-term local currency rating at BBB- (BBB minus) and has revised FY09 GDP growth forecast to 7.7%. The worsening fiscal position is the reason for a lower ratings outlook

tutterfrut • July 15th, 2008 at 6:49 am

Nouriel is on Gloomberg, repeating what he said above, but now to a broader investment audience…

Free Tibet • July 15th, 2008 at 6:58 am

Tutterfrut;What’s going on there? Is there a new question, or is this just a new front in the same 400 year old question? I saw a Bloomberg article this morning which said something about where to put Brussels. Surely, that can’t matter?

tutterfrut • July 15th, 2008 at 8:23 am

@Free TibetFor the history of Belgium (created by warlords in 1830)you can look up the web, but in short the situation is as follows:We have two lingual and thus cultural communities, a 60% Flemish(dutchspeaking) in the North and40%Walloons(frenchspeaking)in the South.But we also have a third region, namely The Brussels capital region geographically IN the borders of the Flemish region(a kind of enclave) with mostly frenchspeaking population. All three regions have their own governments, but we have also have a national government(for all the important issues) and a joint national account in which we put money according the means and spend also according the means. Now, the Northern part(since always) puts in much more per head and takes out much less per head,it’s called solidarity and there’s nothing wrong with that. BUT, the Southern(frenchspeaking) part has with a 40% of the population an at least equal political weighing in the democratic process.It’s (ab)used by Southern politicians to block any reform that otherwise would be undertaken by the Northern part. Now the Southern politicians want ‘a land corridor’(no joking) over Flemish territory to the Brussels capital region to also make a physical annexation whereas the Northern politicians want to prevent frenchspeaking citizens of Brussels boardering communities on Flemish soil, to vote for Southern political parties. In short, a big mess about language, culture, political power, money and a huge national debt(290billion euros for 10.5million people). It’s what could happen to Europe when they would have one joint account(now only 1% of countries’ revenues go into Europe’s account). That’s why I’m pessimistic about Europe, now that the ECB is loading up those toxic US and other CDOhno’s. Who will want to pay them off, we don’t even have a crossboarder FDIC vehicle in Europe while banks are trading worldwide. More than a year in this financial war and if we get a run on a European bank you get 20.000 euros insurance in Belgium while you get 70.000 euros in France, when maybe the losses are made in the US, Ireland or Spain.Sometimes I think they should have me, tutterfrut, at the board of the ECB, but than again, who would take care of my children?

tutterfrut • July 15th, 2008 at 9:02 am

Caputulation…

Alessandro • July 15th, 2008 at 9:04 am

Black Tuesday?? Do stocks crash on Tuesdays?

Guest • July 15th, 2008 at 9:53 am

New Thread

Anonymous • July 20th, 2008 at 5:34 pm

The real question for the conspiracy theorists is- has all this been organized to happen as it has? If peak oil is correct, and it seems to be, and society is hurtling towards a condition of upheaval and chaos that would continue to worsen, the real movers of the system may have decided to bring forward the system collapse to allow them to take over before peak oil really hits hard. If this hypothesis is correct then we will increasingly see an authoritarian government take over and the abrogation of democratic rights.

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