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Offline JohnMatrix

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US Government takes over mortgage giants
« on: September 08, 2008, 12:23:12 PM »
US Government takes over mortgage giants
http://biz.yahoo.com/ap/080907/mortgage_giants_crisis.html
Sunday September 7, 9:51 pm ET
By Martin Crutsinger and Alan Zibel, AP Business Writers
US Government seizes control of mortgage giants Fannie Mae and Freddie Mac

WASHINGTON (AP) -- The Bush administration's seizure of troubled mortgage giants Fannie Mae and Freddie Mac is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.

The historic move announced Sunday won support from both presidential campaigns, but private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.

Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would "create great turmoil in our financial markets here at home and around the globe."

Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie -- and at lower rates -- since the federal government is now explicitly standing behind that debt.

"Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."

Futures on all major stock indexes rose about 2 percent in electronic trading Sunday night, another sign of investor relief about the takeover plan

The companies, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies' capital cushion is below prudent standards.

The government, which will receive warrants representing ownership stakes of 79.9 percent in each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies.

In a statement, President Bush said, "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."

Democratic presidential nominee Barack Obama issued a statement agreeing that some form of intervention was necessary, and promised, "I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis."

Republican presidential nominee John McCain also voiced support while his running mate, Alaska Gov. Sarah Palin, said that Fannie and Freddie "have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

The conservatorship will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, a move taken at the same time that Congress greatly expanded the power of the Treasury Department to make loans to the two companies and purchase their stock.

The executives and board of directors of both institutions are being replaced. Herb Allison, the former head of the TIAA-CREF retirement investment fund, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

Paulson was careful not to blame Daniel Mudd, the outgoing CEO of Fannie Mae, or Freddie Mac's departing CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.

Fannie and Freddie both purchase home loans from banks and then repackage those loans as mortgage-backed securities which they either hold on their own books or sell to investors around the globe. This process provides banks with more money to make more home loans, greatly expanding home ownership.

The impact of the government takeover on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson's assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year.

After the Treasury Department's announcement, credit rating agency Standard & Poor's downgraded Fannie and Freddie's preferred stock to junk-bond status, but reaffirmed the U.S. government's triple-A rating.

The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

The Fed released a letter from Fed Chairman Ben Bernanke to James Lockhart, the director of the Federal Housing Finance Agency, in which the Fed chief said he concurred in Lockhart's decision to take control of Fannie and Freddie saying the action "will help ensure the safe and sound operation of the enterprises."

Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.

However, if the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie should rise in value and the government should be able to sell off the companies and recoup its investments.

But it could take a long time to work through that process given all the headwinds facing housing at the moment from the plunge in home prices to soaring defaults on mortgages which are dumping more homes on an already glutted market. The weak economy has pushed unemployment to a five-year high of 6.1 percent, further reducing demand for homes.

"I think the government will end up having to put in far more money then they are planning right now (given all the problems facing housing) but the important thing is the agencies have been taken over by the government," said Sung Won Sohn, an economics professor at California State University Channel Islands. "That means there will be less panic in financial markets."

Under government control, the companies will be allowed to expand their support for the mortgage market over the next year by boosting their holdings of mortgage securities they hold on their books from a combined $1.5 trillion to $1.7 trillion. Starting in 2010, though, they are required to drop their holdings by 10 percent annually until they reach a combined $500 billion.

In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed securities issued by the two companies later this month, the first of a series of purchases planned by the government in an effort to bolster for these securities, which was badly shaken a year ago when the credit crisis first erupted with soaring defaults on subprime mortgages.

Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure and the conflicting goals they operated under -- maximizing returns for shareholders while also being required to facilitate home buying for low- and moderate-income Americans.

"There is a consensus today ... that they cannot continue in their current form," he said.

Members of Congress will be watching in the coming months to see how the takeover works, but more housing legislation appears unlikely until next year given the few weeks remaining both Congress quits to hit the campaign trail.

Sen. Charles Schumer, D-N.Y. said the intervention was sparked by worries within the Bush administration that foreign governments would stop holding Fannie and Freddie's debt. "This was the prudent course to take," he said.

Senate Banking Committee Chairman Chris Dodd, D-Conn., announced his committee would hold hearings on the takeover to address a number of unanswered questions so that the American people will know "if this unprecedented proposal will help keep mortgages affordable, stabilize the markets and protect taxpayer interests."

Lockhart said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.

Sunday's actions followed a series of meetings Paulson had with Bush and other top administration economic officials with Bush relying heavily on the judgment of Paulson, who was the head of investment giant Goldman Sachs before he joined the Cabinet in 2006.

"It is really an assent to Hank's direction, guidance and judgment," said a senior administration official, who spoke on condition of anonymity to discuss behind-the-scenes deliberations.
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Offline Chris_

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Re: US Government takes over mortgage giants
« Reply #1 on: September 08, 2008, 01:39:16 PM »
And so under the "compassionate hand" of President Bush, this country lurches one step closer to full blown communism.

(When the GOVERNMENT controls Fannie Mae/Freddie Mac, the GOVERNMENT is holding the note on millions of mortgages. GOVERNMENT holding the note on all that - PRIVATE - property, meaning that until and unless that note is paid off - including interest - the GOVERNMENT OWNS that - formerly - private property.)
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Offline Bondai

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Re: US Government takes over mortgage giants
« Reply #2 on: September 20, 2008, 04:08:26 PM »
How can you take control of something you already own?


"It's mercy, compassion, and forgiveness I lack; not rationality".

Offline docstew

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Re: US Government takes over mortgage giants
« Reply #3 on: September 21, 2008, 07:09:52 AM »
How can you take control of something you already own?

better question:  how do you let the need to take control of something you already own develop?  is it cuz someone giving you large sums of cash?

Offline formerlurker

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Re: US Government takes over mortgage giants
« Reply #4 on: September 21, 2008, 07:24:53 AM »
Quote
With the government already deeply implicated in financial markets -- and a substantial cause of the mistakes leading to the panic -- Treasury and the Federal Reserve had to act to prevent a crash. Libertarians will cry no-havoc, and the left will hail the (false) dawn of a new socialist era, but a financial meltdown would have been far worse for the economy and the cause of capitalism.

Whether this intervention is wise, however, will be determined by how the specific policies are implemented in the days and months ahead. One blunder is the SEC's short-selling ban, which will apply to 799 financial stocks. The "temporary" ban looks like a piece of political theater designed to appease CEOs -- such as John Mack at Morgan Stanley -- who don't want anyone betting their stock will fall. The first temptation of politicians in a crisis is to shoot the messenger, and short sellers are often messengers of bad news. But banning information in a market is always a mistake.

The Treasury-Fed tag team insuring money-market funds is a harder call. Investors were rushing out of these funds -- $105 billion out of $1.8 trillion on Thursday alone -- which in turn caused the funds to redeem their commercial paper investments.

Issuers of that paper then had to find new funders, which in a pinch are banks. But jittery banks were refusing to accept paper from even worthy companies amid the panic, creating a larger credit breakdown. In response, Treasury will now insure nonbank money-market fund deposits for the next year, to slow money-fund redemptions. That seemed to be working yesterday as redemptions declined.

Meanwhile, the Fed has in essence agreed to open its discount window for commercial paper owned by the money-market funds, which should help unfreeze that vital part of the credit markets. This may have been needed in the emergency, but it doesn't come without hazard. A federal commercial paper backstop is essentially a diktat to ban all risks in corporate borrowing. Why hasn't anyone else thought of that before? The Fed says its authority here will last through January 30, 2009, but the sooner this ends the better.

As for insuring money-fund deposits, this too carries substantial taxpayer risk. The Treasury money-fund protection is unlimited, while insurance on bank deposits stops at $100,000. As word of this disparity spreads, millions of Americans will figure out that they should drop their bank savings account and get into a higher-yielding (and now also protected) money fund. Even if Treasury levels this played field, money funds will have the advantage because of their higher return. Fund managers may also be encouraged to take greater risk, knowing that they have Uncle Sam's guarantee.

We also think, on legal and policy grounds, that deposits have no business being insured by Treasury's $50 billion Exchange Stabilization Fund. The ESF was designed to protect the dollar in foreign-exchange markets, and Republicans howled when the Clinton Administration used it to bail out Mexico in 1995. Money-fund insurance, if it is going to continue, belongs at the Federal Deposit Insurance Corp., where Congress is responsible for the appropriations.

By far the biggest political gamble is Treasury Secretary Hank Paulson's request to buy the distressed mortgage securities that are at the heart of the panic. Having suggested something like this mechanism in recent weeks, we aren't about to disavow it -- especially as it seems to have stopped the panic.

The challenge going forward will be protecting taxpayers. Above all, that means not allowing Goldman Sachs or Morgan Stanley to back a truck up to the Treasury and dump their toxic paper at too high a price. A new Resolution Trust Corp. should seek to create a market for these securities, perhaps through an auction that would allow multiple bids. Private investors might well bid more than the feds, which would reduce taxpayer exposure. The key principle is to establish a market that is transparent.

Also vital is political insulation. We're told that Mr. Paulson wants the new entity to start at Treasury, which may make sense to get it up and running fast. But soon it needs to be a separate operation, led by someone with both financial expertise and market stature. One choice would be John Thain, who just sold Merrill Lynch and who before that sold his toxic securities for 22-cents on the dollar. He's not likely to give his former competitors a free ride, and he'd also be able to resist the pleas of the Chuck Schumers who will lobby on behalf of their Wall Street donors.

More broadly, there is the issue of accountability for the banks that bought these securities. Americans will be relieved in the short term, but their anger will grow in coming days as they discover how much they have been put at risk. They will want to see both that they are protected and that bankers pay a price for their mistakes. What form that price takes -- as a fee or as warrants or something else -- can be debated. But some cost needs to be exacted in return for taxpayers taking on this risk.

The good news, for the moment, is that the panic appears to have abated. Congress now needs to act quickly, albeit without its usual habit of adding more taxpayer liabilities or picking business favorites. The point of this intervention is to stop a global panic caused both by government mistakes and private excess. The goal isn't to control markets but to revive them.

http://online.wsj.com/article/SB122186424594658611.html




Offline Ptarmigan

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Re: US Government takes over mortgage giants
« Reply #5 on: September 27, 2008, 04:09:07 PM »
Let'em crash.
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