Felix Salmon
About this author:
It's easy to get caught up in the minutiae -- should shareholders be wiped out, or merely massively diluted? What should happen to preferred shareholders? Can the government create a new class of senior subordinate debt, and if so, should it? But for me everything finally clicked into place just when I saw the headline above on Bloomberg.
Of course Frannie should be under government control; of course the CEOs should depart. The government is bearing all the risk; the CEOs have done nothing but destroy billions of dollars in value over the past year, and have proven themselves incapable of raising vital new equity capital.
This is all happening, Bear Stearns style, over the course of a weekend -- a fact which makes it seem as though there's some kind of emergency here. There isn't. If Fannie and Freddie aren't taken into conservatorship on Sunday, they'll still be able to operate on Monday just like they did on Friday. They have enough liquidity to keep on going more or less indefinitely, unless and until the government finally decides to intervene.
But they've failed as private companies, and Paulson's attempt to bring their spreads down by making the government guarantee explicit didn't work. Let's just do this thing, people, and get the companies run by technocrats in the public service rather than CEOs beholden to a small group of shareholders. The shareholders shouldn't be calling the shots right now: their equity is worthless, certainly when placed next to Frannie's mountains of debt.
The spreads still won't come down to zero, but they will come down. And I'd welcome a full delisting: if FNM and FRE still trade on the stock market, analysts and reporters will continue to unhelpfully obsess over the share price to the exclusion of much more important bond classes.
It would be nice, too, if the preferred shareholders were forced to take a substantial haircut. Yes, I know that they're largely regional US banks, and I know that the last thing regional US banks need right now is extra losses imposed by the US Treasury. But if those banks are going to get a Treasury bailout, it should be done explicitly, and not implicitly via a failure to let equity holders (and preferred shares are equity) take any losses. Otherwise, it's not fair to those regional banks who were smart enough not to invest in Frannie.
In times like these, bailouts are often, sadly, necessary. And if you are going to do one, it's always better to do it sooner rather than later. Let's inject some government money into Frannie now, and maybe a bit more into the regional banking system, if that's necessary as well. The shareholders will take their lumps, and the credit crisis will continue: this is no panacea. But at least the last vestige of a possibility of a trillion-dollar agency debt implosion will have been taken off the table.
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This article has 26 comments:
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HARM
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130 Comments
My Website
Sep 06 04:37 AM"In times like these, bailouts are often, sadly, necessary."
Says who? In a *real* capitalist econoomy, badly run companies would be allowed to fail, shareholders would be allowed lose money, and the rest of the world could move on. It's called "creative destruction" --you know, the section they don't teach at B-school anymore (along with that quaint relic of yesteryear, "risk").
If Phony & Fraudie were to cease to exist tomorrow (in my dreams!), private-sector mortgage lending would continue to occur --just at a much more cautious and sane level. NINJAs, option-ARMs and $0-dows would probably cease to exist, prices would come down to levels in line with actual incomes (*gasp* --the horror!), and mortgage rates would reflect actual risk --all a damned GOOD thing from my perspective.
"...and the credit crisis will continue: this is no panacea. But at least the last vestige of a possibility of a trillion-dollar agency debt implosion will have been taken off the table."
God forbid Phony & Fraudie implode! Without them --and their now *explicit* taxpayer backstop-- lending would cease to exist (even though it amazingly existed *before* GSEs were invented), the world would cease to revolve around the sun, and we'd all die poor, unloved and lonely!
Why not just come right out and admit the truth, Felix?:
"I, Felix Salmon, am all in favor of making other people pay for the reckless financial decisions of myself and my well connected Wall Street buddies. I love the idea of privatized profits and socialized losses."
A little blunt honesty would be a lot more refreshing than the usual "the world will end if reckless lenders & derivative peddlers go out of business" FUD crap.
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yourdeadmeat69
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10 Comments
Sep 06 07:18 AMSaving Japan and Chinese investments in swollen mortgage paper built on liar loans is the goal. Saving American shareholders? That's nickel and dime, but they get to be scapegoats dumb for investing in America, while the Chinese and Japanese pay for Republican wars that pop leadership's personal interests, like Cheney's 500% gain in Haliburton stock, waiting for him end of January 09. And the Fed has backed shorting commodities like gold and silver, to keep this from becoming a total rout...who knows if that will stem the tide, there isn't any physical silver and gold left to buy! Google Ted Butler who discovered that fiasco...designed to counter the Monday morning bloodbath.
We sure finally got around those pesky freedoms granted in the Constitution, financial slavery brought to you by the current administration, people more worried about oral sex in the Presidential palace than moral leadership in personal finance.
Look in the mirror if you want to blame anyone while you're driving your 10MPG SUV wondering why gas is priced so high.
Welcome to moron central.
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Jayagopi
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4 Comments
Sep 06 08:06 AM-
LikeItIs
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7 Comments
Sep 06 09:36 AM-
J Snow
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1 Comment
Sep 06 09:42 AMI must wholeheartedly agree with Harm a.k.a. Patrick Killelea's comments above.
[comment edited for abusive language-SA editors]
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LTI
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6 Comments
Sep 06 10:21 AMIf these companies are in fact really owned by the government, then buy out the equity holders at the full value they held before the housing bubble collapsed along with the debt holders.
It appears that the way that this is happening, there will be little market discipline to the "bond investors", therefore they will be willing to try again soon with some other creative financial products that the government will have to bail out.
I need to have Gross teach me how to game the system.
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Yeno
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2 Comments
Sep 06 11:28 AMMORAL HAZARD abounds.
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stock picks
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5 Comments
My Website
Sep 06 12:11 PMthem out. In reality the company is going bankrupt, therefore, common stock shareholders should get zeo.
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bearfund
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546 Comments
Sep 06 12:17 PMFor the sake of your wealth, I sincerely hope you're short Treasuries. The past week gave you an entry point near 50-year highs. Other than a brief time in 2003, the last time yields were this low was during the Eisenhower administration - I think it's safe to say that the market and the fundamental health of the borrower looked rather different then. Yields have fallen more or less continuously for 26 years despite progressively worsening fundamentals. As more Fannies and Freddies make clear just how rotten those fundamentals are, and short-term rates resume their fall to remind investors just how little they're getting and how rapidly the currency in which these securities are priced is being debased, we will be increasingly set up for a huge spike in long-term yields. Perhaps that spike will begin Monday with a GSE bailout, or perhaps the rumours are just that. Matters little to me; the big picture is clear.
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rmendales
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8 Comments
Sep 06 03:02 PM-
BxCapricorn
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152 Comments
Sep 06 03:19 PMIt's been a fascinating two years. Can wait for the book that give me the missing details. Of course, bookstores will have to re-shelve Greenspan's book to the fiction section, but no one will be looking for it anyway.
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Brahm
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57 Comments
Sep 06 03:57 PM-
Realsit
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75 Comments
Sep 06 04:23 PM-
BxCapricorn
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152 Comments
Sep 06 05:24 PMMarketwatch believes it is good for the market but did not say anything about the common, preferred stockholders or bondholders...
www.marketwatch.com/m/...
CNBC put out that common stockholders are going to see zero...
www.cnbc.com//id/26576...|headline|quote|text|&...
Cramer is hard to decipher, as is Jeff Macke and Guy Adami. After hours action had both stocks down 20%, and the message boards are filling up with the same kind of fare I read when Bear Stearns went down the tubes (suicide threats, woe, ridicule, political banter, gold buggery, etc.) I was hoping someone knowledgeable would spell all of this out. As Tom Petty once said, "the waiting is the hardest part (umph)"....
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TheRabble
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8 Comments
Sep 06 05:37 PMIn the words of the late, great George Carlin: "When you're born, you get a ticket to the freak show... When you're born in America, you get a front row seat."
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TheRabble
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8 Comments
Sep 06 05:43 PM"When you're born, you get a ticket to the freak show. When you're born in America, you get a front row seat" -George Carlin
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A819
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10 Comments
Sep 06 06:02 PM-
madasiwannabe
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98 Comments
Sep 06 06:05 PMRecently GS and MS both said the GSE's were well capitalized and had enough funds to continue to function for at least 6 quarters. If the GSE's have 80 Billion worth of liquidity, why would the government have to inject capital? Why would the shareholders be wiped out? This is nothing more than Hank and Ben using their power to eject the CEO's to try to appease Wallstreet.
This also looks like a plan to save the investment banks instead of the GSE's. Once Hank has his guys in place, I'm betting the GSE's will quietly start buying the bad paper from the big boys so they can clean their books and the tax payers will be the ones writing down the losses. All of us will be told the problems were much worse than they thought and good thing they stepped in... Total BS!!!
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buyitcheap
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435 Comments
Sep 06 07:10 PMI want to see perp walks in this whole boondoggle - lots of them. Unfortunately, this appears to be a case of so many crooks involved that there may not be enough handcuffs to go around, they're all covering their collective arses.
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Dividend Growth Investor
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157 Comments
My Website
Sep 06 08:58 PM-
oregonrain
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42 Comments
Sep 06 09:11 PMMy question is how can one make money off of this? I was kind of thinking this would trigger a "pop" in the markets like the Bear deal did. You know..."Great the government is here to help all of us" kind of crap.
Dividend says that people will sell sell sell. Again, my thought was that they would buy buy buy. If you look at the SH fund...looks like people are betting off hours that it will be an up trend.
Any thoughts here?
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green_cheeks
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45 Comments
Sep 06 10:51 PMFannie and Freddie will both be diluted to basically Zero and forgotten. Someone has to lose at some point. If they are theoretically bankrupt, why would they be worth anything to anyone? They are basically stocks with negative equity. Maybe we could just default on all the debts that we have accrued throughout the years. Then we could tear our homes down to the studs and ship the materials back to the source of origin. Or we maybe someone could invent a magical machine that creates oil from air, so we could replenish the foreign oil fields we deleted using other people's money.
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MarketWatcher
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2 Comments
Sep 07 01:42 AMSo even though we might think that the problem is in Fannie and Freddie themselves, of course it isn't even after discounting for their poor management decisions. The problem is that after a period of easy credit, we are now going into a period of tight credit. This because risk was low previously and now risk is by all accounts higher...
Freddie and Fanny have suffered because markets have assessed that the American consumer will not be able to repay all the money it has borrowed. Of course this has been known for a time... But it was not a problem till the world could no longer continue to inflate the US debt bubble.
Yet for the very same reasons (a weak consumer) and for other perhaps deeper reasons (a government with absolutely no fiscal discipline, a trade and capital defict) markets will assess as well that lending to the US in general, government included, is riskier... Fannie or no Fannie...
Certainly, the cost hundreds of billions if not a trillion or so of past, current, and future bailouts (Bear, Federal Reserve Window, 1st Stimulus Package, Housing Bill, Fannie & Freddie Rescue, Big 3 bailout disguised as loan guarantees, 2nd future Stimulus Package, and so forth) will indicate to markets that the US both as a country and as a government can only meet its obligations by printing dollars and by borrowing some more!
This will certainly meet higher inflation, sky-high Treasuries, and quite a painful period for all of us but the very wealthy. Of course, the alternative would perhaps be worse... that is, a collapsed financial market a-la 1929...
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blondino
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61 Comments
Sep 07 02:40 AM"Any government action must help to strengthen our economy, which is suffering a crisis brought on by the administration's failure to stop predatory lending," said Sen. Chris Dodd, D-Conn., who chairs the Senate Committee on Banking, Housing, and Urban Affairs. "
The planned intervention reflects concerns among U.S. officials that financial markets had begun to lose confidence in the companies, after they suffered combined losses of nearly $14 billion in the last four quarters.
A government bailout could cost taxpayers around $25 billion, according to the Congressional Budget Office.
- Hey, that's injecting 25bn for a combined frannie loss of 14bn over the last year, niiiiice, someone's gonna get rich :)))
Analysts at Citigroup, Merrill Lynch, and Goldman Sachs have issued reports since mid-August saying the companies had plenty of capital to operate for the near term, and both have successfully rolled over debt in the meantime.
- so why now???
+ the attractive severance packages for all those nasty prudent CEOs, hahahah
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Russian Bull
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16 Comments
My Website
Sep 07 07:38 AMThese companies should have been allowed to fail. So much for capitalism. I agree also that what these two 'companies' do can be done better by a pure market-based company and that the market would find its even keel faster and more effectively.
But overall, my impression is, "Svine! When did the US become a centrally planned economy? I thought that period of history was kaput!"
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Realsit
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75 Comments
Sep 07 11:27 AMFOOD for THOUGHT:
"What if our exponentially based economic and monetary systems are just an artifact of oil? What if all of our rich societal complexity and trillions of dollars of wealth and debt are simply an expression of surplus energy pumped from the ground?" - Chris Martenson.
The Collapse of Complex Societies by Joseph Tainter(Author)
Review by Chris Stolz May 29, 2004
Tainter's project here is to articulate his grand unifying theory to explain the strange and disturbing fact that every complex civilization the world has ever seen has collapsed. Tainter first elegantly disposes of the usual theories of social decline (disappearance of natural resources, invasions of barbarians, etc). He then lays out his theory of decline: as societies become more complex, the costs of meeting new challenges increase, until there comes a point where extra resources devoted to meeting new challenges produce diminishing and then negative returns. At this point, societies become less complex (they collapse into smaller societies). For Tainter, social problems are always (ultimately) a problem of recruiting enough energy to "fuel" the increasing social complexity which is necessary to solve ever-newer problems. Complexity, writes Tainter, describes a variety of characteristics in a number of societies...."