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Fannie and Freddie’s Bust and Deeply Flawed Government Bailout

Author: Nouriel Roubini  ·   ·   › Share This Print

The government takeover of the two insolvent GSE’s – Fannie and Freddie – is no surprise to the author of this blog. Two years ago – in August of 2006 – this forum argued that the biggest bust in housing since the Great Depression would lead to a systemic banking crisis, a financial crisis, a severe credit crunch, as serious recession and the bust of Fannie and Freddie . As we wrote then:

The scariest thing is that 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 … 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 …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 claims 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…Either way, a serious housing bust followed by an economy-wide recession implies serious financial risks for the entire financial system, not just risks for the real side of the economy. A systemic risk episode triggered by a housing bust cannot be ruled out

The recent New York Times Magazine long profile article of yours truly (as “Dr Doom”) reminded readers that this bust of housing, of the mortgage market and of Fannie and Freddie was predicted here exactly two years ago today’s date (September 7th):

“On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.”

So the bust and now bailout of Fannie and Freddie is no news for this author and the readers of this blog: it is one of the severe toxic collateral damages of the biggest housing and mortgage bubble and bust in US history.

Details on the US government bailout of the two GSEs – as well as the bailout of the other GSEs, the Federal Home Loan Banks that recently wasted hundreds of billions by lending to troubled mortgage lending institutions – are still partial but the overall picture is not pretty. This bailout plan has mostly lousy features that exacerbate the moral hazard of this government intervention and the overall fiscal costs of such intervention. Specifically consider the following ten flawed features of the plan:

First, common shareholders instead of being fully wiped out –as they do deserve – will only be diluted and hold about 20% ownership of the GSEs. There is no justification for this even partial bailout of the common shareholders as the two GSEs are insolvent.

Second, the government will inject capital – possibly and eventually hundreds of billions of dollars – in the form of preferred shared, not common shares. So instead of wiping out current shareholders that deserve to lose their entire capital such shareholders will be still technically speaking the owners of these firms. And the fiscal cost of this bailout will be very expensive: we estimated in June that the eventual losses for the government from this bailout could be as high as $200 to $300 billion, an estimate that is now shared by former Fed Governor William Poole. This is a huge figure on top of the other trillion dollar plus of fiscal costs of bailing out the
financial system that will occur once the current systemic financial and banking crisis takes its full toll.

Third, the current preferred shareholders will not be fully wiped out –as they should be – and it is not even obvious whether they will take any haircut on their preferred shares; so they may be bailed out too. The government decided not to fully whack the preferred shareholders as this group includes many smaller and regional banks and insurance companies. But this additional bailout action exacerbates moral hazard and the fiscal cost of the bailout of the two GSEs.

Fourth, the subordinated debt holders and the unsecured debt holder will not be subject to a haircut. Thus, since preferred shareholders are second in absorbing losses (after common shareholders) the preferred shares of the government are junior to such debt holders.

Fifth, while not hitting the unsecured debt holders may have made some sense (as a lot of the agency debt is held by foreign central banks, sovereign wealth funds and other investors who would have fled the agency market if they had been subject to a haircut) not touching the subordinated debt of the GSE makes no sense; that is another additional bailout of a category of agency creditors that adds to the fiscal cost of the bailout.

Sixth, a number of authors including myself, Bill Ackman and Josh Rosner had argued that the proper way to recapitalize (and reduce the excessively high debt to equity ratio of) Fannie and Freddie and put them on sound and sustainable long run footing was to hit the agency debt holders with a haircut and convert part of the agency debt into equity. Instead having the government injecting capital in the GSE (as the Treasury plan does) does not resolve the problem that these are zombie giant institutions that are currently not viable and that need to drastically changed and scaled down to reduce their systemic risk and allow them to provide appropriate services to the mortgage market.

Seventh, the government plan includes the provision of credit lines – of an amount that is not specified but is potentially as high the Treasury wants – to Fannie and Freddie and to the other 12 FHLBs. The Treasury statement does not clarify whether these credit lines will be senior to other subordinated and unsecured agency debt or not. Since this provision of credit is a form of debtor in possession financing – like IMF lending to countries under distress – it should be de jure senior to the debt issued by the GSEs; it should also be senior to the mortgage claims that the GSEs have guaranteed. Instead, the Treasury’s silence about this matter suggests that these credit lines will not have any seniority compared to the unsecured debt of the GSEs.

Eighth: Treasury will purchase mortgage-backed debt issued by the GSEs in the open market. This is another form of government intervention and manipulation of the MBS market that is totally unwarranted.

Ninth, the GSEs will increase their MBS portfolios through the end of 2009 as a way to prop the mortgage market. In order to limit the moral hazard from this action that further increases the size and roles of the GSE the Treasury plan claims that the GSEs will reduce by 10% a year their portfolios from 2010 on. However, the short term increase in the portfolio of the GSEs is reckless and a further waste of taxpayers’ money. The problems of the GSEs mounted as they increased their activities and portfolios; and the decision earlier this year to increase their portfolios, reduce their capital requirements and increase the limit for conforming loans accelerated the demise of Fannie and Freddie. Thus, for the government to now say that their portfolios will be further expanded until 2009 is to add insult to injury. Their portfolios should have been reduced years ago and should be reduced now; it should not be reduced – a wishful statement with little substance as it can be reversed any time in the future – two years from now.

Tenth, the Treasury plans says nothing about how the two GSEs will be eventually restructured, downsized, split into smaller institutions that are truly private, competitive, not sources of systemic risk and not a further drain on the taxpayers’ money. This plan does nothing to restore the long term viability and efficiency of such institutions. It is just a very expensive taxpayers’ funded bailout of the shareholders and creditors of these institutions. Like the action taken in the Bear Stearns case and other recent government interventions and bailouts of private and quasi private financial institutions this is a form of privatization of profits and socialization of losses; it is socialism and corporate welfare for the rich, well connected and Wall Street.

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213 Responses to “Fannie and Freddie’s Bust and Deeply Flawed Government Bailout”

Guest • September 7th, 2008 at 2:11 pm

Here are a couple of good links for Hurricane Ike, as it barrels across Cuba and heads for the Gulf of Mexico.First, Jeff Masters’ blog has a lot more interesting discussion about the predictions for the path of the hurricane, and how the system gains (and loses) energy over warm water. Here it is …http://www.wunderground.com/blog/JeffMasters/show.htmlSecond, there are a variety of predictions (computer models) for paths for the hurricane. But this particular site has well-done graphics, allowing the user to plot both past path and future predictions.http://www.stormpulse.com/hurricane-ike-2008It will be interesting to see how the oil market prices in these developments this week (if at all).PeteCA

Sondergaard • September 7th, 2008 at 2:14 pm

Does this unprecedented, cataclysmic bailout guarantee that the US Government will default on its debt sometime in the next five years?

Widows of Ashur • September 7th, 2008 at 2:42 pm

It is presumed that the defacto full nationalization (socialization) of the mortgage (therefore housing) market will lead to a huge rally in equities. Expanding on that logic, if the entire industrial and service base of the USA economy were to be socialized and communism adopted, there would be no more equity downside.FNM/FRE bailout means more US debt obligations. Bailout is red-letter warning that economy is in very, very fragile state. Bailout will ruin common and preferred equity holders in GSEs. If banks use such stock as a required reserve calculation, they may tip into FDIC troubled bank list or receivership. (Or they may need to enter the markets to sell assets or commodities to raise cash). Mutual and pension funds who hold GSE equity will get big haircut; when statements hit JOE6PK, redemption calls will abound. Either way big government is in the game of picking winners/losers…and they aren’t defending the weak. The predations of the strong will strip the home equity, savings, investment funds of the lower and middle classes. What isn’t taken by overt government intervention and manipulation will be scoured away with currency printing gimmicks, forex erosions, or policy of increasing taxes and debt spending.Pretending that this is just an elevated garden variety credit and financial crisis is foolhardy. This is the REAL Thing–this is the BIGGEST EVENT. This will define the generation. Is there much debate or knowledge discovery about it in the MSM? Why, do you think?

MITCH • September 7th, 2008 at 2:50 pm

Roubini doesn’t have his facts straight: First, Common and Preferred’s dividends will be eliminated (ouch); secondly, their priority will be crammed-down below FHFA’s new Preferred/Convertibles and thirdly, they’ll both be diluted into oblivion.Already, Paulson is bracing the Banks that hold these Preferreds (around $36B outstanding) for major Balance Sheet hits.

Dave in Oregeon • September 7th, 2008 at 3:03 pm

How is the Treasury “investment” in GSE MBS not monetization of that debt? Whether it is Fed Gov debt, Agency debt, or Homeowner debt, monetizing debt is the same. No?Sure, some or much may or will be repaid, will Treasury have the Fed cancel that fiat creation?Time to watch the M’s more closely…

DESO resolution • September 7th, 2008 at 3:04 pm

GSE assumption by Fed gov’t has a stated purpose of increasing availability of mortgage financing for those desiring to purchase a home. How can they stimulate demand for housing (and thereby put a floor in on housing prices) if anyone who could legitimately afford a home already is in one? And where in past neg-am, Alt-A and Subprime lending already gathered in the deeply marginal buyer? Also with a background of collapsing prices, steepening job loss, failing banks and financial institutions, and gloomy future expectations; what buyer is going to step up to comply with the more stringent lending conditions and downpayment requirements? Furthermore, these bailouts, interventions, and forbearances are serving notice to every citizen of the USA that any upfront cost accomodations and being put on the backside via sovereign debt. Purchase of any home, but especially of any larger scale, put you directly in the crosshairs as a tax cow to be further squeezed for local, state, federal revenue to pay down debt and provide services.The savvy should avoid anything more than very modest holdings, keeping their savings and future accumulations under the radar. They must remain extra vigilant as moves to monetize this unsustainable debt will ruin possessors of paper money.This action has not saved the GSEs from failure! It is the full and total admission of complete failure. It has always been known that upon GSE failure, it would come upon the balance sheet of the USA.That day is today. Now watch as the other deeply impaired line up for bailouts. Ultimately to find the bottom, the USA gov’t must assume all the insolvencies via FDIC, Fed, Treasury or allow defaults and failures to take their course. In any event, the insolvency is far too extensive for a traditional emergence aka Asian crisis, Russian crisis, Nordic crisis etc. This is not a collateral economy. This is the final bagholder. It cannot sustain the injuries!

Guest • September 7th, 2008 at 3:38 pm

Peter, is this really possible given that these cities, excepting Vladivostok, reside in non-energy rich countries?Energy is what runs everything.Mark@ Mark on 2008-09-07 10:37:59Energy will not be the prime objective of this Time Zone: it will be infrastructure; global infrastructure; real infrastructure. This will be the engine of civilization building; it will be the preparation of the socio-economic build for colonizing space.Energy is a wild card.Ho humPeterJB

Guest • September 7th, 2008 at 3:45 pm

“Like the action taken in the Bear Stearns case and other recent government interventions and bailouts of private and quasi private financial institutions this is a form of privatization of profits and socialization of losses; it is socialism and corporate welfare for the rich, well connected and Wall Street.”@ RoubiniIndeed and perhaps premeditated too as suggested by Miss Italy. Moral Hazard or criminality; it makes little difference as both cases lead to the same end for the USA and the rest of the World, demographically speaking.It is a “leadership” crisis consisting of incompetence and stupid. Predictable.Ho humPeterJB

Guest • September 7th, 2008 at 3:47 pm

I read you article with great interest. I agree that the bail out plan is bad but for different reasons and am prepared to have a debate with you on this.I am disappointed that you have also blindly taken the line of Alan Greenspan and Buffett. If you were to analyze the maths of this crisis carefully you will come to realize that without reviving the third pillar of financing that is equity(beside debt and saving), the reality is this crisis cannot be resolved with expensive debts or US govt securities purchases from a deficit and ultimately taxpayers will stand to lose much more.Rather then taking the politically current stance, academics must help to shed light on real issues. Shareholder or market confidence is crucial in solving this $1.5 trillion dollar problem. Therefore your suggestion to wipe out shareholder value is rather flawed and will only serve to further worsen the current crisis and possibly bankrupt the country.The FED plan is flawed precisely because it does not address the providing of this confidence to bring back global and private investors to have faith in the FED policy of safeguarding the capital market system. Mark my words – only the market can really solve this mortgage crisis – it includes the debt and equity market

Guest • September 7th, 2008 at 4:29 pm

China can declare and win a non-conventional war over the USA without even needing to fire a missile. China, Russia, and others now have the US over a barrel as you can’t fund military equipment and future wars without capital – and if and when they decide its “game over”…they’ll turn off the $spigot and turn the USA into a Third World country overnight. The rating agencies, particularly those overseas that aren’t under control of the US power-brokers, have already teed up the US for a downgrade below AAA…no doubt.Shame on the people for letting the cronies at the Fed and in Washington in letting the few destroy a once great country for the many.Ron Paul, Ross Perot, and a handful of others were right…we just were too blind, dumb, fat & happy to listen and act…

London Banker • September 7th, 2008 at 4:31 pm

The corporate welfare queens are loving the Bush administration! They’ve never had it so good. They get to spend holidays gambling in Vegas or Atlantic City (well, the NYSE, NASDAQ, CME and OTC derivatives markets anyway), and when they lose the get their rent and utilities and food stamps from Uncle Sam to keep those dividends and bonuses being paid. Real nice deal. Reagan would be proud.

Cedric Regula • September 7th, 2008 at 4:47 pm

I’ve got two questions:1) Does this all make the taxpayer a property insurer too? i.e. I’m a firm believer of jingle mail in post earthquake and hurricane zones. Especially when you can’t really buy property insurance in these areas anymore.2) There are $62 Trillion in Credit Default Swaps on F&F debt. Doesn’t that mean it’s sort of insured? Why then is this the taxpayers problem?Don’t tell me. Someone made a ton of money selling $62 Trillion of snake oil?

Anonymous • September 7th, 2008 at 4:49 pm

Mitch, the prof got it right in his analysis.First, the gov preferred shares are of course senior to common shares and to preferred shares but they are junior to the agency debt, even the subordinated one. So public money is at risk if GSEs losses continue.Second, common shares and preferred shares are of course diluted (the value of common share has already sharply fallen) but they are not fully wiped out or diluted into oblivion.Third, the fact that dividend payments for common shareholders are suspended is the minimum that the government could do given the insolvency of F&F. Did you expect the bailout to include continuation of the dividend payments?So it looks like a stinky bailout where the gov takes a significant amount of capital and credit risk.

RedCreek • September 7th, 2008 at 4:53 pm

Professor Roubini’s points are all valid. The deal represents moral hazard and should have wiped out at least current equity and prefs holders.Just assume that they had wiped them out. This would have meant that the current network of banks feeding mortgages into f and f gets cut off so reviving a currently dead US mortgage mkt would turn out to be far more difficult once the housing mkt will have stabilized.I believe that the current deal minimizes sytemic risk. Which is far more important than wiping out a number of investors. This is scary. I believe that we are far beyond the point where we can afford to worry about moral hazard.

devils advocate • September 7th, 2008 at 5:12 pm

obviously, Bill Gross is in the thick of deliberations behind the scenes-Bill’s saying the Fed has to keep printing money to buyF and F, stocks and R.E.China etc. will continue buying US shorter term notesthe US is in Intensive Carethe intravenous tubes are filled with green currencythe public can only be distracted by bread and circuses ( $ stimulus and politics)almost no one is discussing the real inflation rate – the real problems in the economythe patient’s problems are too overwhelmingwill the patient live?

Cedric Regula • September 7th, 2008 at 5:12 pm

As soon as they suspend the div on the common and preferred, the stock is headed towards zero anyway. The preferred may sell for a penny more than the common at that point.My guess is 99 an 98 cents, but that’s just a wild guess.So the question is will the gov makes a buyout offer above market price for the stock.

Guest • September 7th, 2008 at 5:14 pm

Talking of corporate socialism and financial socialism which appear in the below referenced article, to infer fascism (?) one gets the impression that Mr. Benanke should be re-handled as ‘Bail-out Ben One San’.Larouche calls the F&F schema “treason”.However, “The economic choice is clear”! But don’t expect clarity to be translated to implementation as this is about something else.”The economic choice is clear: either maintain a fiat-money-creation system and reinstate the asset proscriptions of the Glass-Stegall Act or abandon or modify the existing system of money and banking altogether, possibly including elements of a gold standard. Without some basic alteration in rules, the entire economic system will continue to be at risk, as will America’s predominance in the world of finance.”http://www.mises.org/story/3098Ho humPeterJB

antiroubini • September 7th, 2008 at 5:16 pm

So, is the permabear case for housing still valid? What will permabears say when they wake up tomorrow and discover that all relatively cheap houses under half a million have disappeared from their local realtor’s database? Mortgage rates drop from 6.5% to 5.5% = prices go up 20%. It was a no-brainer.

RedCreek • September 7th, 2008 at 5:24 pm

@ Cedric Regula on 2008-09-07 17:12:32″As soon as they suspend the div on the common and preferred, the stock is headed towards zero anyway. The preferred may sell for a penny more than the common at that point.”I dont think so. f and f not going bust now so I think that the value of the common stock will be along the lines of a long term out of the money call option on f & f stock. so if you like a gamble, put a black & scholes model on this thing and enter your bets on timing and speed of the financial recovery!

AfA • September 7th, 2008 at 5:26 pm

Does Nash equilibrium and the MAD theory applies to global finance and more specifically to the relationships between US and China? How could it even be called equilibrium when the equilibrium is a transition and momentary state? Or is it Nash equilibrium in reverse?i.e Black Mail Disequilibrium or Mutually Assured Suicidal (MAS)In this environment, the parties are not mutually threatening to keep each other in inaction, but rather to entice each other to act. Under this disequilibrium, one party, in a state of despair, may threaten, or if done, effectively destroy the other party, by threatening, or trying, to destroy itself.Isn’t that what US treasury, China, multinational banks, SGE’s are doing?F**k’em. The only way this environment can cease to exist is for one party to demonstrate, at least once, that it cannot be manipulated by the other party’s suicidal attempts or threats.Sorry, RedCreek, we cannot afford not “afford to worry about moral hazard”. Ask a junkie!

Guest • September 7th, 2008 at 5:48 pm

Widows of Ashur on 2008-09-07 14:42:48

Expanding on that logic, if the entire industrial and service base of the USA economy were to be socialized and communism adopted, there would be no more equity downside.

I do not think that U.S. would adopt communism per se, at least nothing like the USSR version. I think the developments are more toward a society with more government control but in more underhanded ways than in which this was done in USSR. Less privacy rights, yes. Broader, on-going government surveillance, yes.Just as 9/11 was used as an “reason” to restrict / remove privacy rights, this crisis will likely be used as a “reason” to restrict / remove “financial” rights (rights related to buying, selling, borrowing, or entitlements such as Social Security).But knowing U.S. many of the changes will not be openly advertized. Some of them will be introduced as attached to other bills going through the legislature.The fact that U.S. economy is already very much a war economy will probably also color the end result of the nation. With this in mind, here is a investment tip……the company behind this robot will probably make tons of money in the next U.S. “civil war”…Boston Dynamics Big Doghttp://www.youtube.com/watch?v=W1czBcnX1Ww

PhilT • September 7th, 2008 at 6:22 pm

Ninth, the GSEs will increase their MBS portfolios through the end of 2009 as a way to prop the mortgage market. In order to limit the moral hazard from this action that further increases the size and roles of the GSE the Treasury plan claims that the GSEs will reduce by 10% a year their portfolios from 2010 on. However, the short term increase in the portfolio of the GSEs is reckless and a further waste of taxpayers’ money.

The phrase Moral Hazard is no longer applicable – we are well beyond it at this point. With all the intellectual and creative assets in this forum, I am sure that a new word/phrase will emerge (possibly in this thread) that more accurately describes what is taking place.Furthermore, after watching Paulson LIVE on C-SPAN this morning, I was convinced that he is convinced that he/others have done a great service to the country in the 4-weeks of time that he said they allocated to arriving at this best plan.Incidentally, each time that he mentioned that he was looking to protect the taxpayer with this plan, it was always the third item on the list behind Wall Street and the other institutions.

Guest • September 7th, 2008 at 6:24 pm

“a banking regulatory expert in Washington, said there was no way to know how much the takeover would ultimately cost the taxpayer.”http://www.marketwatch.com/news/story/us-government-takes-control-fannie/story.aspx?guid=%7BC99D796B%2DCB3C%2D47A8%2D8A56%2D284A9A4D5C85%7Dthis bailout sucks.

anonymous • September 7th, 2008 at 6:30 pm

I think the right word, instead of “moral hazard”, is “theft”.Moral hazard is the possibility they will do it again later. Theft is the taking from the people and giving to them, right now for sure.With Morgan Stanley generously donating their services to help Paulson and his Goldman Sachs cronies to make sure that they and the similarly situated broker dealers are protected, what would one expect?

M L Khor • September 7th, 2008 at 6:31 pm

Prof. NR, it is enlightening to read your analysis pertaining the implications of the bail-out. I am wondering how extensively Americans in general know about the impacts of recent bailouts on their lives. I am sure very astonish why there has not been any public outcry on government bailouts and demand more information, explanation and accountability.By the way, who are the immediate beneficiary of the F&F bailout? Is there any reasons that two major bailouts were done on weekend?

RedCreek • September 7th, 2008 at 6:35 pm

@ anonymous on 2008-09-07 18:30:17″With Morgan Stanley generously donating their services to help Paulson”I am sure that they are not generously donating services. I would assume that they get paid an advisory fee of about USD 5 million for a couple of week’s work. Paid by your taxes…

Guest • September 7th, 2008 at 6:43 pm

Who will be the winners and losers in this?Win- Gross and PimcoLose, Taxpayers, FNM mgmt, FNM Common share holders. US dollar, The US economy for many years to come.

Guest • September 7th, 2008 at 6:50 pm

STOCK MARKET IS UP 216 POINTS AS I TYPE THIS–AND THIS IS JUST THE PREMARKET!!!Yeehaw! The tax payer will pay for all the stupid mistakes of the banking system and Wall Streeters–all the 6 trillion dollars of it. What a day to celebrate–our national debt essentially went up by 50% in just one day. This is Wall Street’s version of Boston Tea Party. Go Wall Street! Moral hazard is alive and well.

Anonymous • September 7th, 2008 at 6:59 pm

MS did donate their services on this, just like GS donated Paulson. What the hell, their dealmakers don’t have much else to do these days.The deal could have been worse. I hope the bondholders take a substantial haircut. I guess I can understand the principle of “least surprise” at work here, to minimize the further shocks to the financial system, but now we must double vigilance to ensure the banks (and especially broker-dealers) are unhappy and the government happy in what follows.Someone asked “why is there no outcry?” How much more outcry is possible? What can people do? Pitchforks would be ineffective these days.

kahunabear • September 7th, 2008 at 7:14 pm

Someone asked “why is there no outcry?” How much more outcry is possible? What can people do?Write in your vote for Ron Paul.

Guest • September 7th, 2008 at 7:25 pm

Please excuse my ignorance, but how many people were required to have this pass? Who made this decision and are they accountable to anyone? Are there any checks and balances that can stop or change it? Any why is the stock futures up so high?

Anonymous • September 7th, 2008 at 7:30 pm

We are all Socialists now. The USA has no free market. Just look at Friday’s market action. The S&P was down to 1220 and then closed UP? after unemployment came in at 6.1%??? The S&P closed up because the Financials rallied. After the market closed, we found out why the Financials rallied — the fix was in by the Treasury bailing out F&F. Hmmm… I wish I was a fat-cat Wall Street Trader that could get the tip the fix was in before the market closed. Unless you are connected on Wall Street, you are just a chump giving them money. I really despise our corrupt politicians.

Guest • September 7th, 2008 at 7:38 pm

Asian markets up 2%, futures up in US, maybe this is good news? Mr. Market’s collective knowledge speaking positively of all this news.

Average Jane • September 7th, 2008 at 7:45 pm

I repeat what I said on the last thread: I am INCENSED that we taxpayers (read: Middle Class, because the Masters of the Universe don’t pay any taxes since most of their wealth does not come from earned wages), once again are bailing out the fat cats. No consequences for their behavior.And BTW, @antiroubini, you are most probably right.

GM • September 7th, 2008 at 8:01 pm

Why would there be an outcry when the American is obese, happy and pacifiedwith ipods,iphones and ihomes?After a decade or two of 70′s style run down, we might see an outcry

PhilT • September 7th, 2008 at 8:10 pm

Was Lawrence Summers making the case for all that has ensued since his article in the FT in SEP 2007?

…prudent central banks will make judgments during financial crises not on the basis of “avoiding moral hazard” but rather by asking themselves three questions.First, are there substantial contagion effects? Second, is the problem a liquidity problem where a contribution to stability can be provided with high probability or does it involve problems of solvency? Third, is it reasonable to expect that the action in question will not impose costs on taxpayers? If the answers to all three questions are affirmative, there is a strong case for public action.

Entire article => Beware Moral Hazard Fundamentalists:http://www.ft.com/cms/s/0/5ffd2606-69e8-11dc-a571-0000779fd2ac.html?nclick_check=1

Kafka • September 7th, 2008 at 8:48 pm

There is nothing new here. Why should anyone show surprise. The Fed was created exactly for this purpose bailing out Wall Street. It has happened before and will happen again. No one really cares or understands. The politicians, the bag men like Paulson and the super rich will just continue to get richer. It does no good to complain about the lies after all the Government has been lying to you all your entire lives, no one really cares. You can profit from the lies though, the pound and euro have made some strong upward movements, it may not last but the ride is fun. Now, I gotta figure out whether to short LEH yet again or perhaps Merrill. What Paulson has really done here is saved his buddies on Wall Street who have large exposure to the $62 Trillion of CDS but will it last? Fractional reserve banking guaranteed by the Fed can only lead to these results, the hard part is picking the bottom if there is one.

Kafka • September 7th, 2008 at 8:53 pm

I am a disgusting pansy opportunist short seller. I am stupid. My short seller friends who told me to look at these companies several months ago are stupid (though not as stupid as me). How come a moron like me using simple math 3 months ago figured out in one day the odds were extremely high that not enough capital existed on their fraudulent balance sheets? Yet your brilliant rulers took months to make such a determination and now, your brilliant rulers are not only going to spend a few hundred billion propping these failed models up but run them. The projected annual national deficit for the U.S. has just hit $1 Trillion, remember every incremental $1 your rulers spend is borrowed form the Arabs or Asians who may soon be your children’s rulers. Where is that wake up America dude, I miss him.……………………………………………………………………………………………..Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

Kafka • September 7th, 2008 at 8:55 pm

Sorry, but this is it. Just wanted to point out a little accounting fraud Enron Style going on here. The Treasury has effectively taken over 100% ownership of these entities yet it limits its legal ownership to 79.9% knowing that the balance of common shares outstanding are likely worthless. Why do they do this you say, to avoid under GAS having to include these entities on the Government’s financial statements which would be necessary with an ownership stake of 80% or more and likely be drag on their ratios and cause the coming losses to be included. Interesting the Government would be concerned about future losses when all the documents issued by the Treasury promise the commoners profits. This is now an unconsolidated SIV using fraudulent ownership ratios to accomplish the very same thing Skilling got about 22 years for allegedly doing, Enron style accounting.………………………………………………………………………………………………FACT SHEET:TREASURY SENIOR PREFERRED STOCK PURCHASE AGREEMENTIn exchange for entering into these agreements with the GSEs, Treasury will immediately receivethe following compensation:o $1 billion of senior preferred stock in each GSEo Warrants for the purchase of common stock of each GSE representing 79.9% of thecommon stock of each GSE on a fully-diluted basis at a nominal price.

Cedric Regula • September 7th, 2008 at 9:02 pm

Actually, I’m bored with “moral hazard” discussions. And also of the Central Bankers and regulators crisis management approach to everything. It always results in “it’s to late the baby is here already”, then the taxpayer gets to adopt the baby.I’m bored because of Continental Illinois, junk bond financing, the S&L bailout, the Asian Crisis, LTCM, the stock market bubble, the housing bubble, structured financing, 100:1 leveraged hedge funds, off balance sheet book keeping, on balance sheet bookkeeping GM style, banking meltdowns in both investment banks and commercial banks at the same, and now the granddaddy of them all, Fannie and Freddie.The only thing that would get me excited again is if we decided to “Fight White Collar Crime Now!”.

Paulson just spanked your • September 7th, 2008 at 9:15 pm

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.That’s because small equity injections were tried and short sellers killed it as fast as it found footing. I wager that even the financials in bailout queue shorted GSEs hard. Why? Because it led to a forced and extorted bailout. They compelled Treasury to hold it nose and screw the little citizen, destroy the moral intent behind the constitution, and line the pockets of the plunderers.They crossed the Rubicon in this case; hereafter they will always tickle your ribs as they slide in the knife. Lie that this is for the general welfare, while offloading the bags of cash in the dark of night. Goodbye grand egalitarian experiment, goodbye human rights, goodbye every ethic that held together good governance, faithful accounting, certainty of weights & measures.

Tom D • September 7th, 2008 at 9:20 pm

PhilT:Summer’s short article in FT last year is exactly the point, and thanks to you for citing it here. The “moral hazard fundamentalists” are the same people who are always calling for a good old-fashioned depression to burn all the dead wood from the system. Fundamentalism is precisely their mantra because they don’t understand how financial systems interact with the panic of human nature in crowds.Fire engines don’t fail to show up and help put out a hotel fire because they suspect the owners of the burning hotel were negligent. The owners or operators may be prosecuted later, but the main job presently is to help put out the fire to keep it from spreading all over town.

sam • September 7th, 2008 at 9:35 pm

Yes, my friends today we have seen Financial Martial Law!!!Tell your kids and their kids you lived through it (so far)

Miss Italy • September 7th, 2008 at 10:06 pm

Miss America,now we really need your insight on where the big money is and where it is moving.Please post soon.

Guest • September 7th, 2008 at 10:07 pm

you are bored with “moral hazard”??? “moral hazard” doesn’t matter??? that is why these crisis comes up every time, because everyone will push risk and losses to taxpayer. you and your stupid comments.

AfA • September 7th, 2008 at 10:12 pm

OK, then call it “Adverse Selection”.The fact that the insured ones run higher risks/ potential loss than the uninsured. The insurance may include FDIC deposits, getting too fat to bait, too interconnected to tail or too foolish to nail.The adverse selection is a real business problem and is solved by charging different insurance rates depending on the risk profile. This administration seems to get it backward.@ Tom D,Tell me a real instance when the suspects were prosecuted after the facts (Even Enron’s Kenneth Lay was reported to die before his indictment by few weeks, I wonder why no conspiracy theory talks about this). But back to Summers 3 points:1 – Substantial contagion effects?2 – Liquidity vs Solvency?3 – Risk to taxpayers?My answers are 1-not proven, 2-mainly solvency, 3-high risks.On which grounds, then, such a bailout could be defended. More importantly, as I am in the camp of Professor, he and others, provided bailout plans that substantially reduces the losses to taxpayers, bring the 2 GSEs to manageable size, and reduces the moral haz.. whatever, people get bored of this one.It was not a black or white choice past some point in time. But well, now this is just talking, it is TOO LATE NOW.

Cedric Regula • September 7th, 2008 at 10:13 pm

Written by Anonymous on 2008-09-07 21:57:47″Dr. Roubini:would you call tomorrow’s rally sucker’s rally? Or is it real this time?”Believe what you want.The credit crunch is over and HEW is back. We just need Chinese and Arabs to by lots treasuries, so that we can continue to make interest payments on their GSE holdings. Don’t worry about the buck. OPEC this weekend made rumbling about cutting oil output.It’s all good !Or not.

AfA • September 7th, 2008 at 10:23 pm

Oh, yes, and Paulson is still talking about “Housing correction” and “as he expected in the past”.Do not worry people, it is just a correction.Correction like in “Punishment intended to rehabilitate” and “The treatment of offenders through a system of penal incarceration, rehabilitation, probation, and parole, or the administrative system by which these are effectuated.”Where is the department of Home & Land Securities?Amen,

Guest • September 7th, 2008 at 10:37 pm

wait a sec, gubmint take loads of liabilities, based on current spending projection, the gubmint might not be able to finance those future medicare, socser expenses, or pay that debt, BUT all that losses is on paper, well money is paper.. do they need to inflate it?? if they wanna pay up the foreign debt, but if they just put it there in the freezer.. they are only obliged to pay the interest like a very long long longest term loan,(hey even gubmint can reschedule their debt you know..)erh foreign countries are willing to finance us because we are the world consumers, but our consumers aint got the extra money now,unless paul babe finds a way, that wont change, monthly rebate will be good for a start, innfflllaattee that money supply baby!!!RE & CRE reviving??? are CDo’s gonna do Lazarus on us now??a lot of things im not sure of…but i thing is certainUS can not be trusted anymore, invest at your own peril

Tom D • September 7th, 2008 at 10:45 pm

AfA:If there is “moral hazard” in the Agency debacle it started in 1938 and 1970 when Fannie and Freddie were incorporated, not now. The question now is whether it is proper to intervene as a fire company does in an emergency, or do you wait for half the town to burn down due to roof-to-roof contagion?Enron doesn’t seem to be related in any way that I can see except that “bad things” happened in both cases. By the way, there were substantial postings everywhere by the usual subjects about Ken Lay’s death in any event, and many guilty were prosecuted and convicted and are in prison.As to summers’ three points:1 – Substantial contagion effects? Yes indeed there are!2 – Liquidity vs Solvency? Liquidity was exhausted months ago with contagion the next step.3 – Risk to taxpayers? Some risk, yes, as there was in the Chysler case and S&L crisis. In one case the taxpayers in the end lost nothing, in the other case quite a lot. The portfolios these current Agencies hold are only contaminated in several years of perhaps thirty years worth of active mortgages, so most of them will pay out. Brady bonds largely did so over time after the next to last Latin America implosion.If it’s run professionally, there could be very little overall loss in the long run of a workout of the Agencies. Workouts under bankrutpcy are very like what will be happening in this case. Instead of a single bankruptcy judge in a single city, this will be like the US Treasury acting as a bankruptcy judge in effect. The Treasury will be the primary, but not the only beneficiary, of the workout.

Mark • September 7th, 2008 at 10:55 pm

@PeterJBEnergy will not be the prime objective of this Time Zone: it will be infrastructure; global infrastructure; real infrastructure. This will be the engine of civilization building; it will be the preparation of the socio-economic build for colonizing space.Energy is a wild card.What? Just dismiss THE most important element- energy? Poof! Doesn’t matter?An engine does NO work if not fueled. Where is it going to get the energy from?Colonizing space will NOT happen for the same reason a one-world-government won’t happen- it takes too much energy!Is there some place that I can place my bet on all of this? No surer money could be had…Mark

Average Jane • September 7th, 2008 at 11:05 pm

@ those who seem to think it’s just fine to bail out Wall Street, et al. (ad nauseum)–riddle me this: what’s to happen to those prudent borrowers who may very well have swallowed the kool-aid, saved up their 20% down payment, still taken on more mortgage than they could handle due to overinflated housing prices, hoped their salary(ies) would come up to match their monthly payments eventually, and then they watch as their neighbors renegotiate their loans to much more favorable terms courtesy the guv’mint or your local friendly bankruptcy judge? How is that fair? How is it fair that savers will take the hit on savings accounts yet again for years and years while we watch our retirement accounts erode? And for what?–to “save” the “system”? For whom? And what about people like me who’ve stayed on the sidelines for several years, knowing the housing market was out of control, now to be punished with higher mortgage interest rates? How is any of this fair to the middle class? Do any of these Masters of the Universe really have any morals or integrity whatsoever? I think not. Moral hazard, indeed. This is all a bunch of sheep dip, folks.

AfA • September 7th, 2008 at 11:06 pm

@ Tom DExcuse me to reiterate again.Why did you pick up the fire fighters emergency as a hyperbole, why not a detoxification process?Then, what is your proof that there existed a substantial contagion effect, and even if there were one, what is the proof that Paulson’s plan will remedy any of the effects. And it was never a problem of liquidity, as if it were the treasury would only had to make equity infusion or tap its loan facility or go through the Fed facility without a need to overtake both firms (and if it was a liquidity problem, we wouldn’t have arrived here given all the liquidity thrown or possibly to be thrown on FF). Finally, Poole just said that the cost to taxpayers would be (as a minimum) around $300B and S&P around $1T.Then you should look beyond the bailout to what could happen to treasuries. Who could warrant what could be the reaction of the markets to treasuries tomorrow, next month, next year or 5 years from now? What will happen when more bailouts are needed (soon and sure enough I might add). That would be catastrophic to everybody. Don’t tell me it never happened in the past so it won’t happen. And don’t compare FF+BSC+ … to Chrysler and S&L crisis. They are not comparable in size and the state and shape of US finances are just not the same.”If it’s run professionally” … well that is one of the crux of the matter. Do Paulson, Bernanke et al inspire you any confidence? In a bankruptcy, the firms are stripped and sold immediately or loans are worked out with a probable haircut, none of these is included in the plan: intention to increase the size of FF over next year, and the senior tranches are guaranteed.I am sure that the spread of agencies over treasuries will be closed, the question is how.

Anonymous • September 7th, 2008 at 11:07 pm

The picture would be complete if Israel bombed Iranian nuclear installations before today’s market open and IKE pounded offshore refineries. I wonder how Hank and Ben would respond..Rate cut?

Guest • September 7th, 2008 at 11:20 pm

aaahh,look at China Stock Market, looks like theyre left behind todaywhat? u got bundles of green paper??why not recycle it into incense sticks..Got it? stick and save, incense sticks.. no??Definition: make very angry =Incense

Wolf in the Wilds • September 7th, 2008 at 11:28 pm

I woke up this morning to the FRE and FNM news and wondered to myself: What is next? Why the suddenness? What am I missing?Lets start from the last point. There must have been something really disastrous that Morgan Stanley discovered over the last 4 weeks which precipitated this action. According to NYT, it is probably fraudulent inflation of capital. If that is the case, what is the real picture behind the balance sheet of the GSEs? What are we missing? In order to keep the GSEs solvent, how much does the government have to pump in? Clearly USD1bil is not going to be enough to keep them in “positive net worth”. I suspect the losses are much higher than anticipated, and I am not talking about just mark-to-market losses. The deteriorating mortgage markets in the US in terms of delinquencies and defaults must be “crystallising” these “mark-to-markets”.On the second point, I suspect that some investors in the markets already know what Morgan Stanley discovered and in order to protect the interests of the likes of Pimco and the big GSE debt holders, the US government had to step in to forestall a further selloff. One wonders how big the hole really is in Freddie and Fannie to spark such an action. Also, the plan is typical Paulson. Large on headlines but short of specifics. What is the total amount the tax payer is liable for? How will the GSEs look like in the future? How will the capital structure look like in the event of a reorganisation? I think the specifics are not there because they just don’t know. This plan sticks of delaying tactics. Dump the whole pile of turd on the next Treasury Secretary and President to sort out. In the meantime, the US taxpayer or rather every American who will be paying taxes for the next 2 decades will be on the hook for whatever amount the bailout is going to cost. The numbers are huge and so are the implications for the US economy. The American tax payer has become America’s largest mortgage holder.I suspect the GSEs will no longer be allowed to be a private entity nor would they be as large. The existing equity capital holders are going to get nothing back. The extension of this will be that any future bailouts of financial institutions will see zero protection for equity and subdebt holders. No more Bear Sterns-style bailouts. I would be getting out of any subdebt/preference debt and equity of banks into ANY RALLY.What is next? I suspect a MAJOR US Bank failure. Also watch out for FHLB and FDIC liquidity. Remember that FHLB has lent close to US$100b to Countrywide and Wamu, and probably a whole lot of thrifts. And regional bank failure is going to catapult as a lot of these banks were “encouraged” to hold FRE and FNM preference shares/debt as assets. We are going to see massive UST issuance and USD weakness re-establish itself. The short term equity bounce will fade and the markets will reprice in a world where nationalisation means zero equity value. As for credit markets, nothing has changed. GSE bailout was already anticipated and the structure was highlighted weeks ago. However, questions will be raised on why the hurry and why the “half-arsed” measures. A thorough analysis of the medium term and long term implications is depressing and terrifying at the same time. Not just for the economic picture but also the geopolitical outlook. But that is for another thread…

Cedric Regula • September 7th, 2008 at 11:28 pm

AfA:Don’t forget a few short months ago congress passed the housing bill, which could cost another $300B-$400B targeting subprime.Then they dusted off FHA and gave it $750K loan limits. These are straight from the Treasury, far as I know.And someone told me there is still ginni mae around.When we add this potential spending to the already bloated deficit, it is getting difficult to locate enough foreign reserves in central banks around the world to borrow enough from.Really! We may well run the world out of money!Now there is plenty of private sector investment around the world, but my bet is they are not buying into the ponzi scam.

Cedric Regula • September 7th, 2008 at 11:40 pm

Wolf in the Wilds:I read a report stating F&F had to roll over $225 BILLION in corp bonds by the end of the month. That would certainly explain the timing. Like Worldcom on steroids.I just don’t see any mention of how that is addressed in the bailout plan.So as far as I can tell Paulson has a ton of treasuries to sell in a hurry, or we still see some sort of train wreck by the end of the month.Stay tuned. It should be exciting.

Anonymous • September 7th, 2008 at 11:42 pm

@WOLFWhy do you think No more Bear Sterns-style bailouts and there will be a major US bank failure next? If it is a major bank or brokerage, wouldn’t it fall in the category of ‘too big to fail’?Money is no problem my friend –US government can create as much money it needs. Never mind dollar becomes toilet tissue. F&F bailout has proved that.

Jason B • September 8th, 2008 at 2:49 am

The federal governmnet has become the largest mortgage lender in the coutry.Ryskamp was right. They nationalized housing.

Wolf in the Wilds • September 8th, 2008 at 3:04 am

One more interest point to note is the CDS market for FRE and FNM. I think a credit event has been called and therefore, a protocol will be set up to determine the cash settlement amount for the CDS as well as the delivery of bonds. At this point it is uncertain what will happen next but I can envisage a situation where bond holders get out of the cash position into CDS sellers. The liquidity in the agency market has been terrible. This gives the current holders of the bonds an out. There will be a lot of market jostling on the price of the agency paper, and what is worse, because the sellers of the cds were levered (CDS is a levered credit product), there will be a sudden demand for funding as these sellers get delivered bonds.Perhaps someone can enlighten me but how is this going to help the GSE refinancing? Will foreign central banks and investors buy after being caught in these assets for such a long period of time with exit opportunities? Or will we see liquidation into this credit event (ie get out when you can)?What say all of you?

Alessandro • September 8th, 2008 at 3:14 am

@Wolf in the Wildsthe hurry to announce the bailout this week-end is even more worrysome because it breaks the consolidated use by US government/FED/SEC of announcing “surprise” actions on option expiration week. Why did they dorp such a nuke a week earlyer? And with the market not yet retesting the july low?

Guest • September 8th, 2008 at 3:26 am

Alessandromaybe because people like you (& the rest of us) have figured out their moves + maybe some other events is taking placewell,im just wandering what kinda stick and save they have to offer next time round, this is mother of all stick and save, if they fail to prop up the market (on a longer basis), id say were finish, i expect paulson to announce some other plans to complement this bailout ( to revive the housing mkts+ consumer spending), if no other plans are announced, were screwed…anyway, ENJOY todays RALLYLOL

Anonymous • September 8th, 2008 at 4:28 am

Chris Martenson about F&F bailout:”This is the earliest stage of direct monetization of our financial woes, in a desperate attempt to sustain the unsustainable. Success here has such a razor-thin probability that I pretty much discount it to zero. On one side lies deflation and the destruction of our entire financial system, and on the other side lays monetary printing and an attendant loss of faith in the (fiat) dollar, leading to hyperinflation. The deflation side is an historically weak bet, as inflation has nearly always been the preferred route.”pleu

Wolf in the Wilds • September 8th, 2008 at 5:27 am

@GuestI was referring to the bailout of subordinated debt holders and equity holders in the case of Bear Sterns. That will no longer be the case going forward. Equity and subdebt holders of defaulting financial entities will get nothing back. Senior guys might even need to get a haircut behind the depositors. And there will be more bank failures for sure.Back to the GSE issues, I was wondering how the sellers of protection in GSE CDS are going to fund themselves when they have to take delivery of the bonds. Anyone has any idea?

Armchair • September 8th, 2008 at 7:46 am

This is the realization of the insanity of the Bush economy. Most of the juice in the economy came from borrowing against the remaining equity in the households of the U.S. Greenspan was probably forced to lower the rates. Don’t forget that Bush the Elder held Greenspan responsible for the loss of the `92 election. If there is one thing Bush the Younger can do, it is to carry a vendetta. No doubt, Greenspan had to lower interest rates for ‘patriotic reasons’. Bush the Younger had hit the trifecta. Greenspan was probably under undue pressure.The lowering of interest rates and the ensuing Bush-boom made all of the B.S. come true. Suddenly a war could be fought while people consumed with a voracious appetite. HEW and refis meant that even people who hadn’t bought a house could irresponsibly join in the disastrous economic policy. It meant that the `04 election could be secured. It meant guns and butter, and a silencing of prudent critics. It meant not losing independent voters in a weak economy.Admittedly, this is Kremlinology, and there is a lack of facts to back it up. Yet, sometimes one must start with the conclusion or the larger story will never reveal itself.

AfA • September 8th, 2008 at 9:08 am

@ Wolf in the WildsThat’s kinda complicated issue, who knows who will be left holding the bag after this:”Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the [ISDA] said”Then again if dealers have to take delivery of bonds, it may not be that catastrophic (for them I mean). Just swap them at the Fed against treasuries. What am I saying? Aren’t Treasuries and Agencies supposed to be the same thing now? So if the price of agencies was still a bit high when they unwind the positions they may even make some profits. Or not.Stay tuned

Little Saver • September 8th, 2008 at 9:54 am

Bloomberg heading: Paulson Says Fannie, Freddie Plan Puts Taxpayers First??? I think the plan puts mortgage debt holders, investors, business first while tax payers are holding the bill.Why never straight talk? This is so depressing….

Cedric Regula • September 8th, 2008 at 9:56 am

AjA and WolfI have the same wonders and concerns. But complicated high finance confuses me, so I’d sell anything whether it was a bond or CDS snake oil.But that’s just because I don’t know what I’m doing.But AjA has a point here:”Aren’t Treasuries and Agencies supposed to be the same thing now? So if the price of agencies was still a bit high when they unwind the positions they may even make some profits. Or not.”And I’ll add that Fed member banks, commercial banks, and investment banks are all the same too now in the eyes of the Fed.They open the discount window to all now and I think even subprime is allowed as collateral for borrowing from the Fed.So there may be reserves to tap into yet at the Fed. But this would be “borrowing”, not selling, per se. Of course the Fed would have trouble collecting if any of these people go belly up.So maybe we are back to a slow motion train wreak, but who knows.

Guest • September 8th, 2008 at 10:09 am

The force is strongER on the DOWNside..after a huge bailout the US$ continues it rally.. what gives?..Usual explanation :- its already priced in or something more fundamental?..mrskeptical

Guest • September 8th, 2008 at 10:09 am

We are on a crash alert – next 30 days yield a real possibility of a major market sell-off, imo .Regulator attempts to prop up market (redux Japan 1990 banking/real estate central bank debacle) only EXASPERATING the problem.Major turbulence dead ahead.

2cents • September 8th, 2008 at 10:46 am

Does anyone remember $800 hammers purchased by the Pentagon?Just as the $800 hammers were essentialy money conduits to various contractors, so too will the F&F conservatorship help! Those Pentagon money conduits were eventually moved off book (err Black Budget), still they’re just not easily seen. So too will we have money conduits to various entities through this F&F setup.First, the F&F plan is efacto off book by limiting the gov. owenership to 79.9% (Don’t worry about prying eyes). Second, just become a loan originator and see how quickly you can shove $800,000 double-wides down F&F’s throat (you’d be stimmulating the housing market, got to do that pronto). Never mind that’s a big reason we’re here in the first place.Do you need money for your uber yacht, artwork, etc.? Just grab some high quality ghetto properties and turn these diamonds in the rough into trendy SoHo scapes and you get a loan (err funding) through F&F. If it doesn’t pan out, well not to worry Joe6Pak will be there to cover your butt!The next time you pay a Federal tax just remember you are investing in these ulta safe investments for the benefit of your friendly scheme artists..

2cents • September 8th, 2008 at 10:52 am

Sorry for the errors above.(err Black Budget), still they’re just not easily seen –> (err Black Budget), still there just not easily seenefacto –> defacto

Guest • September 8th, 2008 at 11:05 am

September 8, 2008Dear Members,As you may be aware from news reports over the weekend, the United States Treasury and the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac have been put into conservatorship. This means that the FHFA, the new regulator of the Federal Home Loan Banks, will manage Fannie Mae and Freddie Mac as their conservator in an attempt to stabilize their financial condition and their ability to support the secondary mortgage market and the housing recovery.The announcement on Sunday was focused entirely on addressing concerns about Fannie Mae and Freddie Mac. However, mentioned in the announcements was the establishment by Treasury of a backstop credit facility for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. This arrangement, described in the attached documents, is intended to assure investors in agency debt that liquidity will be provided by the Treasury as and if needed. Our Board of Directors, along with the boards of the other FHLBanks, will be asked on Tuesday at a previously announced special meeting to approve participation in this backstop credit facility in the unlikely event that it will be needed.The inclusion of the FHLBanks in this credit facility is not an indication of weakness – rather it is intended to provide assurance to investors in our debt, our members and other constituents that the FHLBanks have the same level of financial support from Treasury as the other GSE’s as provided in the Housing and Economic Recovery Act of 2008. In that regard, please note the following brief statement that was included in the remarks made by the director of FHFA, James Lockhart:…

Alessandro • September 8th, 2008 at 11:16 am

Looks like Hank bazooka might backfire and shot stocks. Did anybody anticipate the possibility of a sell-off after the biggest bail-out in the history of the human species? We are not there yet, but the big rally is showing cracks. Let’s see.

mammon • September 8th, 2008 at 11:20 am

@average jane and @the professor:Average Jane has zeroed in on the root of the professor’s disgust with bailing out the shareholders.They knew the risk! The American Middle Class will now have an unsustainable deficit, and the Financial Elite don’t pay taxes. The American Middle Class better wake up and become a Participant in Class Warfare Democracy again. They will now be told that Universal Health Care, Student Loans, and any Egalitarian Programs are impossible. The money for these initiatives have been given to the Financial Elite. The next Secretary of Treasury will be another Robert Rubin. Bernanke and the Secretary will talk about “Fiscal Austerity”. The “bondholders” will resurface to dictate policy. They only resurface when the middle class seeks relief. Does not everybody see this is Class Warfare by the Financial Elite? Fiscal Austerity for the Middle Class and Fiscal Debauchery for the “Masters of the Universe”. Get active. Be intelligent in promoting good democratic solutions.Their end game is to reverse the policies of the New Deal and bring us back to a “Dodge City Economy” where there are no rules but Brute Force and Money.The middle class will make subsistence wages in harmony with the Laotians and the Vietnamese. This is a counterinsurgency revanchist purposeful strategy. They will raise the payroll taxes like in 1982 and they will brainwash you into allowing the Bush tax cuts to survive! You have been conned!!!!

Fanni-Mae • September 8th, 2008 at 11:27 am

US government takes on big role in mortgage markethttp://news.yahoo.com/s/ap/20080908/ap_on_bi_ge/mortgage_giants_crisis

Uncle Sam has just become the 800 pound gorilla in the U.S. mortgage market.

So now you know who will soon 0wn you. Sieg Heil to your new master, you little slaves.

Guest • September 8th, 2008 at 11:29 am

The problem we now face as a nation is that US citizens, in combination with the powers that be, have sufficiently dummied-up 70% of the population so they just can’t understand how they are being duped! All US citizens have officially become labor slaves to the State and they don’t even know it! What a sad time that is unfolding in US history…

Guest • September 8th, 2008 at 11:33 am

VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae and Freddie Mac – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.

economicminor • September 8th, 2008 at 12:15 pm

The US is living on borrowed money. The debt has become so large that servicing this amount of debt is no longer possible. The collapse of this debt started on the fringes and has accelerated towards the center causing the eventual failures of BS FNM and FRE with more to come. Adding more debt is like eating next years’ seed.The entire system is at the point of insolvency. Adding more debt to an already over leveraged system should have an extremely temporary positive effect, and in the end it just increases the burden and makes recovery further down the road.I understand why the manner of this bail out was necessary, but it is also ridiculous. So many of the bonds are carried by the BRIC countries and much of the remainder is carried on the books of large US pension funds, banks and large insurance companies. This was suppose to be readily available cash for use. Sort of like extremely large money market accounts. To collapse Fannie and Freddie would have effectively collapsed much of our system of financial support. The BRIC countries would have? But not good. Many banks, insurance companies and pension funds would have then been technically insolvent… The US government had no choice. Well they did but they chose not to.To support the unsupportable with either inflation or additional debt will only be a stop gap and a desperate measure but it was the only easy answer… Except bringing home most of our troops and putting them to work rebuilding American factories and infrastructure but that isn’t what those in charge want. They still dream of world domination and refuse to admit that they truly have broken the back of a once proud and strong country by their stupid expansion of the US Empire on credit supplied by our advisories. Bringing home much of our military would be admitting they were wrong and no one at the top levels of government or corporate life admits failure.The US will just continue to spiral down the drain while the Bushies (neo-cons or New Con Artists) continue to deny the obvious and party on like they are sitting on top of the world on a silver cloud not knowing that the cloud is highly acidic and toxic and crumbling the infrastructure that supports them.And We the People are given the choice of Barack or John and no person in their right mind, knowing what is coming, would want the job… Which means that they either don’t have a clue or….. neither a good choice for a leader under any circumstance.

Guest • September 8th, 2008 at 12:28 pm

I guess there would have been quite a few folks in UK who wanted to get rid of their Fannie Mae / Freddie Mac shares, but alas, a computer glitch! An unexplained one, at that.Seven-hour outage creates City chaoshttp://www.guardian.co.uk/business/2008/sep/08/freddiemacandfanniemae.creditcrunch

A computer fault at the London Stock Exchange wiped out share trading for seven hours today, thwarting City traders as they tried to respond to the US government’s bailout of mortgage companies Freddie Mac and Fannie Mae.The unexplained glitch hit around 9am, shortly after the FTSE 100 index roared back almost 200 points in early trading, and left traders unable to buy or sell shares for most of the day.

I am so glad I do not own shares. At least not in the US:-P

GLOOMY • September 8th, 2008 at 12:48 pm

ARMAGEDDON BEGINSSept. 8 (Bloomberg) — Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.“This is a big deal,” said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. “The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.”http://www.nakedcapitalism.com/2008/09/14-trillion-of-gse-credit-default-swaps.html

Guest • September 8th, 2008 at 12:48 pm

In fact when the U.S. government says that they had to bail out Fannie and Freddy, it shows one thing. What it shows is that even the largest institutions in the U.S. are not too big to fail in a way that threatens the stability of the United States. By extension this means that the United States itself is not “too big to fail”. It can fail.The U.S. economy can very well come to a point where the government has “no choice but to” [do something else drastic]. In fact the U.S. government (Bush administration in particular) has run their policies with a good amount of arrogance in aspects that concern international law (lack of respect toward agreements such as the Geneva Convention), domestic economy (we all know that), environmental health (unwillingness to agree to Kyoto). It would not surprise if we in the end also have to deal with the problems from the ecosystem too.

turchin • September 8th, 2008 at 12:48 pm

Fannie, Freddie bailout triggers credit default swapsMore than $1 trillion of derivative contracts will need to be settledSAN FRANCISCO (MarketWatch) – The U.S. government’s seizure of Fannie Mae and Freddie Mac has triggered more than $1 trillion of credit default swaps tied to the mortgage giants.The International Swaps and Derivatives Association said in a memo on Monday that 13 major credit default swap dealers unanimously agreed that a credit event had occurred.After a conference call this morning, the ISDA said it will launch a protocol to help traders settle these derivatives contracts. The protocol will contain details of an auction that will take place to determine the value of the agreements to be settled.Credit default swaps are a common type of derivative contract that pay out in the event of default. Fannie (FNM:) are major counterparties in the derivatives market, with roughly $2.3 trillion of notional exposure built up by efforts to hedge the interest-rate risk of their mortgage operations.

AfA • September 8th, 2008 at 1:08 pm

I still have problems comprehending how all this mess would unravel. Now that agencies are effectively treasuries and FF issued or insured MBS are backed by the government, what would that do to the Fed’s balance sheet? This will save the Fed, partly and momentarily, from monetizing all the MBS’s and the like. And what will this do to all alphabet soups and relationships PM-Fed? I guess the answer would depend on the percentage of all collaterals the FF backed MBS’s represent. On the other hand, there is the issue that the Treasury will be guaranteeing and buying only new issuances.Don’t you have that feeling when you were still a teenager in College in love with that snob girl when she takes you to a high priced restaurant and orders a $100 dollar dinner, then she goes away, leaving you alone, with a 5 bucks note in your wallet? No? My left eye is still aching.And then, for some fun, there is Cramer version of things:”The Treasury’s takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions’ share of the troubled homeowners in the country who have not already defaulted.”The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.”Put simply, there will be no reason to foreclose, and no reason to walk away. That will DRAMATICALLY reduce the amount of foreclosed homes coming to the market. It will dramatically reduce the amount of money people owe on their mortgages.”… and then, the government can sell you two Sin-forgiveness bonds for the price of one. And for only 10% per year you get a direct dial-up line to God Himself and you can enter to win a 3 week trip to Heaven for two, all charges included – FREE.Don’t you want to put his picture on one of those depression/anxiety-relief computer games where you punch the guy until all his morphology becomes unrecognizable?Afalou

Guest • September 8th, 2008 at 1:19 pm

Looks like stocks put in double bottom for the day and are going to be PPT’d much higher into the close. Can’t have wall street tanking on all this great bailout news now can we!

iNnOsInZ • September 8th, 2008 at 1:32 pm

Written by economicminor on 2008-09-08 12:15:21″And We the People are given the choice of Barack or John and no person in their right mind, knowing what is coming, would want the job… Which means that they either don’t have a clue or….. neither a good choice for a leader under any circumstance.”You got that right! You need a huge middle class to have democracy, and with middle class being wiped out….we’re in helleva ride!

Guest • September 8th, 2008 at 1:34 pm

The US financial markets have turned into one big fantasy world where only a few get extremely rich and the rest of us, well, lets just say, make sure your greased up!

Cedric Regula • September 8th, 2008 at 1:51 pm

AfAHAHAHAH!Cramer sounds like a really retarded nutcase. I’ll never listen to him about something complicated like a company stock.I think it all depends on whether the treasury can borrow upwards of say, $750 billion next year to cover all the federal spending shortfalls, and still roll over the existing national debt as it comes due.The banks can empty out Fed reserves, but I think that’s still a bit light.Then we will see if they can get a reluctant consumer to jump back into the housing game, or legislate mortgage payments in half.There’s still car loans and credit card debt too, so the gov might have to make paying those loans illegal as well.But we’ll have to see how far it can go.

Guest • September 8th, 2008 at 1:59 pm

RE: Wamu, google “option arms”. Wamu has tons of them. Great loans. Just pay $1k even though your interest this month is $4k. Your balance has gone way up and your value is sinking.Any guess on where mortgage rates are headed? They are down about .375% just today on rate. I read on cnn money that they could go down another .5%.

PhilT • September 8th, 2008 at 2:00 pm

@SWK, Tom DYou are both welcome, but I am not sure where it has taken us.Yes, the article is interesting, but not well written/edited. Perhaps that serves Mr. Summers’s point that there is confusion abound concerning the concept of Moral Hazard in policy decisions.The main reasons that I cited the article in this thread:1) I think that we are beyond Moral Hazard (it is irrelevant now) and to include it in an attempt to explain current matters merely distracts/dilutes/pollutes the critical assessments of what has been/still is happening with bailouts, etc.. I echo the sentiment of Average Jane that what has been /continues to be done has nothing to do with morality/morals, but IMHO is a reflection of (at best) an amoral environment with amoral players (or perhaps more realistically) an immoral environment with immoral players.2) Therefore, at the close of his article, Summers gives a nice, neat tidy framework (avoiding Moral Hazard) that he thinks prudent Central Bankers would follow in attempts to resolve financial crises. Mind you, the article was published one year ago, in the midst of Bernanke being crucified for his 180 degree policy shift in the July/August timeframe and many of esteem were questioning his abilities/judgement. Perhaps Summers was using this article as an advisory to Bernanke et al ?3) Furthermore, the article of one year ago demonstrates that at that time the gravity of the situation was well known among those in charge although it was publicly downplayed and misrepresented, which goes to PeterJB’s continual allusion to a crisis in leadership, etc. I would observe that the leadership crisis is only a crisis for the rest of us and not those in the leadership.The only assumption that I make is that I/we have not been told the whole story regarding any of these events. From my perspective there is not adequate information available to have answered the 3-questions that Summers deems necessary. But those in charge are in a position to have that information.Nothing has been adequately delivered, verbally or otherwise, from the policy/decision makers about the true impact of letting these creatures fail. I heard virtually the same hollow explanation from Paulson yesterday about the need to take this action towards F/F as was given by the FED and Paulson after they intervened in the failure of Bear Stearns (not even comparable to F/F). The only slight difference being the minor handslap issued to the F/F management teams that are scheduled to remain in place for quite a while. Still Wall Street remains immune from blame/accountability for its large, primary and continuing role in this debacle .Also IMHO, for this segment of Financial History, it seems the floodgate of Moral Hazard was fully opened at the repeal of the Glass-Steagall Act. We are drowning in that flood now. Perhaps we should be pondering AfA’s suggestion to,

look beyond the bailout to what could happen to treasuries. Who could warrant what could be the reaction of the markets to treasuries tomorrow, next month, next year or 5 years from now? What will happen when more bailouts are needed…

In searching for an appropriate word/phrase that those, including Prof/Dr Roubini, might consider using when they absolutely feel the overwhelming urge to type Moral Hazard when assessing current/future events, the only concept that comes to mind at this juncture that may spawn such a word/phrase is that of Social Benefit / Social Harm. So is it legitimate to ask Mr. Summers, Mr. Paulson, Mr. Bernanke, the Congress, the President if they considered , even marginally, Social Benefit/Harm in their policy decision process or are we to assume that they did consider it by their making statements of apparent concern regarding “cost to Taxpayers.?”Thank you for indulging this lengthy post…

Cedric Regula • September 8th, 2008 at 2:04 pm

2centsI don’t don’t think matters, unless you believe the US government will file for chapter 7 bankruptcy protection and liquidate itself.Governments don’t do it that way.

Guest • September 8th, 2008 at 2:09 pm

3:01 p.m.U.S. consumer credit growth slows in July to 2.1%3:00 p.m.U.S. July consumer credit slowest growth since Dec.

Guest • September 8th, 2008 at 2:18 pm

stocks just launched verticle! US fraud machine is in full force today. What the Treasury did has no implications on the horrible economic situation and thus this will not stop foreclosures nor home price declines! The economy will continue to plummet and things will get much worse…

Softwarengineer • September 8th, 2008 at 2:23 pm

PETER IS BORROWING FROM PAUL?As we increase the federal deficit to hideous levels for this welfare to the rich; doesn’t that make the dollar tank? Doesn’t that make oil/food and other related commodities sky-rocket in prices?Yeah, stocks get like a 6 month respite, until the next horrifying collapse, but isn’t this making it all much worse in the end?GOOD NEWS: American products sell better with a lower dollar…

Guest • September 8th, 2008 at 2:36 pm

classic PPT protection today! If they had not stepped in at today’s low and held that low, technical selling would have overwhelmed today’s gains and probably erased them…not good! However, by putting in support their, it gave the buyers/waiters the confidence to step in beofre the close, thus ramping up stocks over 100 points just like that! Ya gotta love socialism!

AfA • September 8th, 2008 at 2:42 pm

Anyone has an explanation of the USD/ Treasuries reactions today? Miss America? Anyone?I am not sure about this, but I think that, contrarily to the overnight movements that were mainly “reactive”, the reversal of the trends today (in USD/UST) are tied to huge position liquidations.

Guest • September 8th, 2008 at 2:47 pm

The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is “more communist than China right now” but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.”America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said.

2cents • September 8th, 2008 at 2:59 pm

@ Cedric Regula on 2008-09-08 14:04:05I agree, governments don’t do it that way. My question was asked in trying to determine how agencies will be priced and marketed in the future. In the past they traded with a higher spread to Treasuries because of the unknown position of government backing, while at the same time they traded with a lower spread to other bonds because of their implicit government guarantee. That essentially was the entire marketing and pricing campaign behind agencies.Now we know that agencies are backed by the full ‘faith’ of the government. What risk spread is there anymore? How should they be priced relative to Treasuries? Are they essentially two peas in a pod, or is there still a difference?

GLOOMY • September 8th, 2008 at 3:00 pm

INFAMYYesterday, September 7th, 2008—a date which will live in infamy—the people of the United States of America were suddenly and deliberately attacked by financial forces of the Empire of Wall Street…

Guest • September 8th, 2008 at 3:21 pm

UH-OH! Fed better lend them a hand!4:18 p.m. [FUL] H.B. Fuller cuts 2008 adjusted EPS outlook to $1.55-$1.60

Guest • September 8th, 2008 at 3:34 pm

I guess this is why stock rallied so much today…more losses are a good thing…right?4:31 p.m. [WFC] Wells Fargo sees Q3 non-cash charge on Freddie, Fannie Mae

Cedric Regula • September 8th, 2008 at 3:56 pm

2cents:Don’t know really. Guess same as treasuries, if you can get it :) Maybe better…they are mortgage backed.Yo get a house, bank account and a toaster??????

Guest • September 8th, 2008 at 4:40 pm

@ Guest “classic PPT protection today! If they had not stepped in at today’s low and held that low, technical selling would have overwhelmed today’s gains and probably erased them… Ya gotta love socialism!”Guess who the voting members are of the President’s Working Group (PWG) on Financial Markets, colloquially known as the PPT?As established by Executive Order 12631, the Working Group consists of:· The Secretary of the Treasury, or his designee, i.e. HANK PAULSON — CHAIRMAN of the PWG· The Chairman of the Board of Governors of the Federal Reserve System, or his designee, i.e. BEN BERNANKE· The Chairman of the Securities and Exchange Commission, or his designee, i.e. CHRIS COX, and· The Chairman of the Commodity Futures Trading Commission, or his designee, i.e. BART CHILTON.Chilton is a former lobbyist for the National Farmers Union who was Deputy Chief of Staff for Secretary Dan Glickman of the U.S. Dept. of Agriculture under the Clinton Administration.Ex-USDA Chief Dan Glickman, joined Akin, Gump, Strauss Hauer & Feld, one of the major lobbying and law firms in Washington. He advises clients on food and food safety, health, biotechnology and international trade. The firm has a total lobbying income of $11,800,000. They invest in technologies such as agbiotech, typically giving between $50,000 and $250,000. Their list of clients is a who’s-who of agbiotech, bankers, cigarettes, construction, communication, food, fossil fuels, media, pharmaceuticals, and sweat shops.http://www.mindfully.org/GE/Revolving-Door.htmHenry Paulson, former CEO of Goldman Sachs, is also the man who as president of Nature Conservancy turned that once environmental group into a series of cattle ranches around the world for Goldman Sachs fast food. (Goldman Sachs White House: Capitalism and Slaughterhouses):[url]http://www.legitgov.org/#breaking_news[/url]

Guest • September 8th, 2008 at 4:42 pm

“Thank you for indulging this lengthy post…”@ PhilT on 2008-09-08 14:00:34Very interesting post: particularly, “Nothing has been adequately delivered, verbally or otherwise, from the policy/decision makers about the true impact of letting these creatures fail. I heard virtually the same hollow explanation from Paulson yesterday…”Now, watching what is called ‘body language’ which in physics are called ‘temporal signatures’ I glean deception, stealth, unease… This gives more meaning to your term “Nothing” implying a need to posit the question from:”3) Furthermore, the article of one year ago demonstrates that at that time the gravity of the situation was well known among those in charge although it was publicly downplayed and misrepresented, which goes to PeterJB’s continual allusion to a crisis in leadership, etc. I would observe that the leadership crisis is only a crisis for the rest of us and not those in the leadership.” where that question is:Yes, they knew… or No, they didn’t know; which is it? And, explain their actions since the time of their realization. (Even Volker knew well before this stated time and Greenspan alluded to same as well in reference to the Baby-Boomer”.A crisis in leadership suggests “only a crisis for the rest of us” if there is no overall strategy in play (where strategy is a qualitative term) for the future well being of the socio-economic organizations (and its structure) in play and that it is being competently administrated and managed. There are a lot of questions here. If this is the case then we will experience and are experiencing only change; this would be good if one has faith in “leaderships” intentions, intellect and eptitude.Obviously, I have no faith in “leadership” today and believe that they are lost and beyond all elements of the skills and fundamental intelligence basically required to even survive in such times. But you may think otherwise, which I respect. However, even school children have no faith anymore.The markets show high volatility – everywhere and yesterdays DOW was not a show of confidence at all. All that happened was the bifurcation between the wealthy and the grassroots became far wider. Is this not a strong indication of a system that will not return to its former glory? Has not the USA changed beyond return?To me, not seeing any capability at “leadership” in the USA (apart from perhaps Ron Paul) today, this crisis will continue unabated while the current “leadership” crowd continue to do that which they feel benefits their mindset and their priorities where that / those is / are not necessarily in the best interests of the WHOLE NATION that is the USA.Its an opinion, mine, which suggests that the USA is in the midst of a fatal (Perfect) systemic collapse brought about by “leadership” and all that hangs off them:-)I also think that it is good news for the grassroots.Ho humPeterJB

Gloomy • September 8th, 2008 at 5:03 pm

POISON PILLSJP Morgan swallowed one (Bear Stearns). Bank of America swallowed one (Countrywide). Now the US government has swallowed two (Fan and Fred). Each of these will kill the sick patient which ingested them.Economist Gary Schilling has predicted housing will drop another 20% (42% total drop). Using this figure as a base,likely in excess of 100 billion in capital will be needed to fund the GSE debacle by the end of the year and something in excess of that amount PER QUARTER in 2009. The dollar will not withstand this kind of draw down. This is the beginning of the end.

Guest • September 8th, 2008 at 6:05 pm

Great one gloomy!But remember housing doesn’t fall in a vacuum. After a certain tipping point an exponential snowball effect will take place. Credit destruction destroys borrowing ability, destroys product and service demand, destroys employment, destroys any remaining demand, spurs unrest and violence, destroys TPTB and social fabric and the rich and presumed rich. We are seriously closing in upon that point. “It can’t happen here” was the mantra of the Spanish, Romans, French, Russians, Eastern blockers, Cambodians, Vietnamese, Philippinos, Africans, etc. And then reprised in WWII. We are in a retest of the ultimate reset. God help us if we are not more astute at navigating the treachery than our forebearers!

Anonymous • September 8th, 2008 at 6:13 pm

Buffett: Treasury ‘Did Exactly the Right Thing’”I wouldn’t change anything in the plan myself,” Buffett said in an interview on CNBC. He said he expects this step will go a long way in calming the market and resolving the ambiguity surrounding the two companies.”It’s best deal and the most sensible deal available now,” he said. “Now, you can argue that there should have been some different rules put in decades ago, and it wouldn’t have come to this.”I wonder why NR is so concerned about moral hazard while people like Buffet are not.

Cedric Regula • September 8th, 2008 at 6:29 pm

In case you haven’t heard, Buffet has the majority of Berkshire in insurance and banking.And he wouldn’t want to say anything that would end up collapsing the US economy and we wouldn’t be able to afford Dairy Queen anymore.

Average Jane • September 8th, 2008 at 6:49 pm

It wrings my heart to see the fraud being perpetrated on such a massive scale as this, in Plain Sight I might add, upon We the People of our beloved United States. On the one hand, I stand in awe of the sheer chutzpah, and the patience, of these Masters of the Universe. This fraud has been decades in the making. And as I’ve said before, just when one thinks, “they can’t possibly do THAT,” sure enough, they do it.I keep seeing and hearing the word “unprecedented” in nearly every sound bite of financial news that I hear and read. I also keep seeing the words “stabilize” and “calming.” None of this gives me a sense of relief or that Things Are In Good Hands. People of this Blog, we are the victims of financial and governmental cronyism and shenanigans of the highest order. The Project for a New American Century, indeed. (And BTW, that site is now gone and has been for several months. Mission accomplished?)Dr. Roubini is a strong voice for the voiceless, but we need more of his caliber. I am terribly afraid it is too late to save us, though. As a card-carrying member of the Middle Class, I feel like the student standing in the middle of Tiananmen Square. While I can go ahead and make my stand, I fear I will die doing so. Crushed into a heap in the middle of Main Street. Gawd help us all.

Gloomy • September 8th, 2008 at 7:01 pm

@Average JaneYou so eloquently state what most of us feel. Even close family members to whom I explain the situation and who intelectually comprehend it and have taken approprite action don’t really seem to get it as we have. I find it very frustrating as you appear to also. Jim Grant wrote an editorial for the NY Times a while back entitled, “Where is the Outrage?”. Where indeed!

economicminor • September 8th, 2008 at 7:07 pm

@Paulson Pukes!He thinks this is a housing issue. A decline in the housing markets that can be fixed, propped up. Supporting FRE & FNM will make everything all better… He doesn’t understand that it is a solvency issue. Credit has been extended way beyond the ability to repay. This has gone on for years. On top of that the building industry over built.. Residential and commercial… Now people can’t pay and the equity values are declining and he thinks that the system can be stabilized.How can an insolvent system be supported with more debt? Not more income but more responsibility to service more debts…. Safety and soundness? What a joke!He either doesn’t understand the underlying issues or he is a disingenuous Con Artist!

Guest • September 8th, 2008 at 7:09 pm

someone said the bailout will give them a breather (6 months)lets make that 6 weeks (6 days???)and owh, OZ stock mkt is -0.5% red already:D

Guest • September 8th, 2008 at 7:11 pm

@Jason B: “This is not a poison pill in the classic sense. This is self destruction. But why? Qui bene?”This move by America’s financial politburo is proof of the failure of the nation’s centralized banking system. It is the largest, most extreme bailout in America’s history – it is not a bailout of homeowners, it is a bailout of parasitic international investment bankers. I — an American taxpayer and alleged homeowner — now am obligated by my representative (?) government to personally guarantee to these bankers that they will get their money.If these so-called bankers had been on America’s shores at her beginnings there would not have been an America. And there won’t be one now if we don’t get rid of them. The same people who orchestrated the Freddie-Fannie bailout are the same Kuhn Loeb people who set up the Fed and who orchestrated Bretton Woods. Bailout is their plunder.These select investment bankers have taken away the full faith, credit and value of the United States economy in order to buy trading arrangements with India, China and Japan and to bleed taxpayers for their risky losses. The U.S. economy won’t support it. The Democrat immigration types and the Republican corporate types are in an immigration bind. If they want Freddie and Fannie to finance bringing in more and more immigrants as votes for the Dems and as cheap labor for the GOP’s multi-national corporations, they will destroy, absolutely, the living-wage livelihoods and buying power of the American people – the engine of the U.S. economy. Americans are hurting deeply – case in point, lower gas prices did not spur consumerism — and adding Freddie and Fannie to their financial burdens will weight them down even more.America’s wages have not gone up with Fed-induced inflation because of immigration. Using low-wage immigrants for sub-prime loans in a giant Fred and Fan investment bankers’ ponzied mortgage scheme has backfired, totally changing America’s economic landscape. It is central planning gone amok. Paulson is not using the U.S. Treasury to salvage a company that protects America; he is salvaging government-selected bankers.This is financial dictatorship, not socialism.

GSM • September 8th, 2008 at 7:21 pm

The die is cast now.Sometime in the not so distant future, the markets will need to decide on the fundamental creditworthiness of the US. The enormous obligations now taken on by the US people/US Govt with this bailout will put to the test the belief US paper holders have in the US to honour its debts – in a currency that will be of worth.The US Govt debt markets will be under enormous scrutiny now that over 5 TRILLION in obligations have been added to the Debt mountain courtesy of Hank and Co.The US population, without being consulted, has just signed up to what looks like almost certain and imminent bankrupcy.What will be the response from Treasury and Fed should the economy continue its precipitous slide as credit remains locked up, unemployment rises, local govts collapse and Treasury yields climb – adding still more to the already enormous obligations of the US. Treasury/Fed will be severely tempted to monetize those obligations- and I’m sure they will succumb preferring inflation to fight rather than certain Depression.Watch treasuries. The US bond market is the last bastion of Govt viability, to be protected at all costs (read buying up oustanding debt with newly printed money).

PhilT • September 8th, 2008 at 7:24 pm

@PeterJB…Yes, they knew… or No, they didn’t know; which is it? And, explain their actions since the time of their realization…As I stated, Sir, in the section you cited, YES, the article demonstrates that those in charge knew of the gravity of the situation at that time.They took no (public) policy actions at that time. Whether that be due to incompetency or wishful thinking that by doing nothing the situation would hold together until after the next election cycle, is beyond me.IMHO Everything since that time has been – reactionary – of a bad crisis management sort, that appears to add up to a systematic/systemic looting of the US financial system.Nothing Moral about it, thus the time to move past the usage of Moral Hazard when interpreting and assessing current/future reactions that manifest in policy decisions.Be well, Sir …

ptm • September 8th, 2008 at 7:49 pm

Anonymous on 2008-09-08 18:13:46

Buffett: Treasury ‘Did Exactly the Right Thing’”I wouldn’t change anything in the plan myself,” Buffett said in an interview on CNBC. He said he expects this step will go a long way in calming the market and resolving the ambiguity surrounding the two companies.”It’s best deal and the most sensible deal available now,” he said. “Now, you can argue that there should have been some different rules put in decades ago, and it wouldn’t have come to this.”I wonder why NR is so concerned about moral hazard while people like Buffet are not.

Cedric Regula on 2008-09-08 18:29:39

In case you haven’t heard, Buffet has the majority of Berkshire in insurance and banking. And he wouldn’t want to say anything that would end up collapsing the US economy and we wouldn’t be able to afford Dairy Queen anymore.

The stone has been cast. From now until the bitter end it is not in the interest of the wealthy to advocate financial responsibility and take losses as we spiral into a depression. Rather, Warren Buffett, Bill Gross, George Soros, Jim Rogers, and all the other financial “experts” will gladly loose a relatively small amount of their wealth through inflation rather than loose a majority of it through a deflationary depression. Trust no wealthy man’s advice when their interests are in the mix!

J. • September 8th, 2008 at 7:54 pm

@AfA on 2008-09-07 17:26:02neoclassical economics had to assume equilibrium and individuals’ utility maximization.’They reciprocally and quasi-axiomatically support one another, constituting thereby the real armour of the theory. … This impregnable circular reasoning provides the theoretical framework in which assumptions can run riot, enabling the economists concerned to derive the desired conclusions from the earlier enunciated ‘assumptions’ and ‘suppositions’, without any need to subject them to the test of actuality.’This whole set of (actually subjectivist) theories developed out of the mid-later 19th c bases itself on itself not on and in the real capital system.

fedwatcher • September 8th, 2008 at 10:01 pm

An interesting pattern has emerged.- recognition of an inevitable event- a recognized talking head ‘freaking out’- timing that does not p**s off either the Republicans or the Democrats- a massive ‘suckers rally’ following the Saturday fixFreddie and Fannie have long been recognized as insolvent.Bill Gross did his ‘freak out’.The political conventions delayed the Freddie and Fannie take down.Today was the beginning of the ‘suckers rally’.Now market action clearly indicates that either Lehman Brothers or WaMu could be taken down, while other players are safe for now.Now everyone is talking about the housing bottom to be in late 2009.This will be a false bottom igniting a brief suckers rally.fedwacher

Anonymous • September 8th, 2008 at 10:04 pm

Bernanke and Pearson–”Los Dos Cuates”It is difficult to translate into English the Mexican phrase “los dos cuates”. Literally (the dictionary definition), “cuates” means “twins”, but probably the closest you could come to “los dos cuetes” in English is “the two kindred spirits”.So what is it that joins them together? It is their passionate desires to make, within the economic sphere, the worst seem like the better, or perferably, like the best. Of course, the immediate question that arises is “seem like the best to whom?”. Certainly not to the American taxpayer; to the taxpayer, these two jokers are walking disasters.There are three aspects of their activity. The first aspect is retorical–always walk on the sunny side of the street, and admit to the negative only when it becomes painfully obvious to everyone. They have, in effect, created a virtual or mythical economy based on lies, munipulation of data, and special pleadings. Of course, there is some synchronization between the virtual economy and the real economy. Now that the virtual economy is in deep trouble, how bad a shape is the real economy in? You don’t really want to know!The second aspect is proceedural. For example, the Fed, which is responsible for regulation of financial institutions, aids and abets some of their clients in preparing their financial statements to hide the fact that they are insolvent (they start with the profit and loss statement, and then work backwards). The Treasury Department has a group of shills whose only function is to manipulate the US stock markets. And I wonder how much of the F & F deal is in effect “TOP SECRET”.The third aspect is charitable. When it hits the fan, they both give money to those unfortunate wealthy executives who, for no fault of their own, were responsible for the catastrophic situation in which the financial institution that they manage now finds itself. (Bernanke makes “loans” based on worthless colateral, and Pearson, much more honorably, with outright gifts). And we’re talking big money here–very likely, if the cuates have their way, as much as one trillion dollars!So what will be the inevitable consequences of the actions of these cuates. The inexorable crash will be somewhat delayed, but it will be deeper, of longer duration, and much more pervasive.And then, of course, there is the $64 question (or is it the 64 trillion dollar question?). How much longer will the suckers of the world continue to pay good money for US bonds when there is little or no hope that these bonds will ever be paid off (except possibly with worthless paper dollars)? Perhaps soon the US government will have a big bond sale, and nobody will come to the party!

Mark • September 8th, 2008 at 11:40 pm

Not in any way to be construed as defending TPTB, but the secrecy aspect needs to be scrutinized more closely…I suspect that all of this has been brewing for much longer than we might think. I think that there was a contingency plan, a hedging plan (outline) in place for some time now. When it appeared that things were going to go totally bust they decided to roll this one out (adjusting the basic outline); anything to slow down the full impact is seen as a good strategy to dampen the impact (whether we’ll ever know if this route does in fact do a better job of slowing down the full impact we’ll never be able to know).Now then, in order for any plan to work one has to have as much control over things as possible. This doesn’t mean that one has to control Everything.Consider… what if everyone knew what TPTB were going to do vis a vis the GSEs? Would there be ANY chance of having anything proceeding in any sense of order? I doubt it. There’d most likely be utter chaos (not like it’s not that way now).What I’m trying to get at is that perhaps TPTB really are trying to make all of this work. The problem is that they likely think that it’s possible (which I don’t believe it is), and that they are the anointed ones (all others are inferior).When things look like they’re undertaken with real nuttiness one has to wonder whether it’s really done out of pure desperation, as in it’s known that anything else is a sure path to catastrophe and that _something_, _anything_ should be done. Kind of like the Iraq war: failure to control more oil would mean certain death to an oil-dependent country like the US- or as Dick Cheney said, “the American way of life isn’t negotiable.”I’m certain that the writing is on the wall and that it reads “OIL (energy). The inability to put more fuel on the economic fire means that growth is no longer possible and that in turn means the Ponzi scheme will no longer be there to prop up the elite. All that’s going on now is a shuffling of the chairs on the deck. No plan B. The ship sinks.Mark

Anonymous • September 9th, 2008 at 10:12 am

You know something is wrong when a London cabbies sarcastically says to me, “I see your government has solved its recession problem the same way we solved ours with Northern Rock.” It doesn’t play in London, and it probably won’t play in Peoria when all is said and done.

Guest • September 12th, 2008 at 1:52 pm

Why is there no discussion of the violations made by the lenders including,Usury,Security Violation,Common Law Fraud and Inducement in to Fraud,State Unfair & Deceptive Practices, TILA,RESPA and RICO. The money for mortgages where supplied by “Wall Street” and simply used the lenders as conduits to commit fraud.The issues of REMIC securities and the various tranches such as PAC and TAC shows there is no clear owners of the defaulting mortgages. Many people are losing their homes without the knowledge of a defense which would save their homes. Understanding these provision would lead to the mortgage liens being extinguished.The government lacked proper supervision of the banking industry and banks should be allowed to fail and not bailed out so we can begin to pick up the pieces and move forward.

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