Barron’s Taiwan Dumps Fannie, Freddie And Uncle Sam?
Taiwan’s financial regulators reportedly have ordered that nation’s insurance companies to pare their holdings of the debt and mortgage-backed securities of Fannie Mae, Freddie Mac and Ginnie Mae securities, according to a report on the Internet site of Asian Investor magazine. Such an order would be a stunning rebuke to Washington, coming a little more than a month after the federal government effectively nationalized the mortgage giants. Fannie and Freddie last month were placed into conservatorships with the Treasury standing ready to inject up to $100 billion through purchases of preferred shares in the government sponsored enterprises….the Taiwanese action is a blow to the reeling U.S. mortgage market, which has been supported by the Republic of China’s purchases of agency securities. According to U.S. Treasury data, Taiwan owned a very substantial $55 billion of U.S. agencies along with $43 billion of Treasuries as of June 30, 2007, the most recent date for which these data are available. More
Source: Credit Writedowns
I have felt for sometime that dollar strength is a counter-trend that has a sell-by date written all over it. You see, the Federal Reserve is ballooning its balance sheet like nobody’s business as it tries to be the global lender of last resort. This is very inflationary. Apparently, the Fed wants to trash the Dollar. And, despite recent events, I believe it will eventually get its wish. The United States is the world’s biggest debtor nation, dependent upon foreign governments to buy treasury and agency debt in order to maintain itself. However, two articles I read today have convinced me that this situation is about to change in a nasty way and Asian countries are about to let the dollar go (very big hat tip Scott). The first article concerns Taiwan and their apparent desire to stop buying agency debt for fear of throwing good money after bad.
Taiwan Dumps Fannie, Freddie. And Uncle Sam?
Taiwan’s financial regulators reportedly have ordered that nation’s insurance companies to pare their holdings of the debt and mortgage-backed securities of Fannie Mae (ticker: FNM), Freddie Mac (FRE) and Ginnie Mae securities, according to a report on the Internet site of Asian Investor magazine.
Such an order would be a stunning rebuke to Washington, coming a little more than a month after the federal government effectively nationalized the mortgage giants. Fannie and Freddie last month were placed into conservatorships with the Treasury standing ready to inject up to $100 billion through purchases of preferred shares in the government sponsored enterprises. More
This certainly is bad news for U.S. interest rates, mortgage rates and the U.S. Dollar. However, more worrying that mainland China seems to be following its Taiwanese brothers in rejecting the U.S.
Reuters: The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies. A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said. More
China is the largest holder of U.S. government and agency debt. If they go on strike, the consequences for the U.S. would be catastrophic. It is hard to believe we are asking this, but events are pointing in an ominous direction: Is the U.S. Government even solvent?
Ron Paul on the Glenn Beck Show: “What Treasury did and what the FED did is UNconstitutional. The constitution role is for Congress to regulate the money and its value and they’re totally neglectful. They didn’t do anything about this; they’re just sitting on the sidelines, sitting on their hands.”
Source: The Big Picture
On Monday, we looked at Weekend Bailouts and Subsequent Market Reactions. CitiFX took a closer look at the data, and they confirm our prior position: Namely, that “Support levels were eventually breached and the market trended lower.”
CitiFX Technicals adds:
As the market falls aggressively, we find that there are further developments from authorities that act as ST supports for the Dow. But the real concern is that each crisis has been followed by a bigger crisis and this just does not feel like the “capitulation blow out” More
Check out Nouriel on CNBC this morning — he is guest hosting, and makes so much sense it makes the rest of the guest list look almost silly.
Daniel R. Amerman
Actual losses in the US real estate market are much higher than what you have been reading in the newspapers recently. Using a combination of official government statistics and the most widely used index of housing values, we will demonstrate that the US real estate market has lost a total of $6 trillion in value in the last two years. We will show that an average house that was worth about $226,000 in 2006 is, once you adjust for inflation, down to a real value of only about $160,000. To put what a $6 trillion loss is into perspective, we will show that when all factors are taken into account, the two year drop in US real estate values is equivalent to wiping out the entire retirement savings of all 78 million Baby Boomers, and annual housing losses are close to the annual GDP of China. We will close by talking about how this national disaster creates major personal profit opportunities for people who can learn to look beyond the false number of nominal dollars and into the reality of how wealth is rapidly redistributed during times of economic turmoil. More
The bailout involves total assets that would dwarf the savings and loan rescue in the 1980s that shook the banking sector to its core. Fannie and Freddie hold roughly $1.5 trillion in direct debt, guarantees on what could be as large as $5 trillion and possibly off-balance sheet obligations that could reach $3 trillion, according to recent estimates from Ladenburg Thalmann & Co. Word of the Treasury Department takeover first came out late Friday, and sent the shares of both companies plunging in after-hours trading, with Fannie Mae giving up 25% of its value and Freddie Mac falling by about 20%. Those losses only added to the misery that has already wiped out approximately 80% of the companies’ share values this year. And the proposed takeover plans, while leaving Fannie and Freddie able to continue operating, will reportedly leave the companies’ remaining shareholders with nearly nothing, diluting the companies’ common stock but not wiping it out. More
Posted by Karl Denninger
Well, just a bit ago, this came across:
“Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company’s common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.”
“The chief executives of the two companies were called into afternoon meetings today at the 17th Street NW offices of the Federal Housing Finance Administration, their direct regulator, according to sources familiar with the events.
Executives of the two companies were told to show up without being told of an agenda. Daniel Mudd, chief executive of Fannie Mae, was accompanied by outside lawyers. He showed up at around 3 p.m. for a two hour meeting. Richard Syron, chief executive of Freddie Mac, started his meeting at around 5 p.m., accompanied by several members of the Freddie Mac board.”
This is very different from what Bloomberg reported. This, in fact, is effectively an involuntary bankruptcy petition. Now think about this one folks. Under HR.3221 and the previous enabling legislation for OFHEO, in order for the government to step in they must first declare these firms critically undercapitalized. Now just a couple of weeks ago, we heard Fannie’s CEO Mudd tell us that the firm has more capital now than at any other time in its history, and that it is comfortable above minimum capital requirements. Freddie also stated they were well-capitalized. So what happened here, exactly? Three possibilities, all nightmares:
1. The firms both burned through all of their excess reserves and capital in the last few weeks.
2. There was some “event” that was about to happen - like over the weekend - that would have caused the firms to be unable to operate (e.g. someone, perhaps the Chinese, said they were going to intentionally tank GSE paper as an act of economic warfare?)
3. The audit being done by Morgan and Deloitte and Touche found critical misstatements in the firm’s capital structure, perhaps similar to what happened back in the early part of the decade when they were caught “cooking the books”, and as such what they claimed to have wasn’t really there!
There is no other explanation that makes sense. More
The Treasury Department is close to completing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. The plan is expected to involve a creative use of Treasury’s authority to intervene in the two companies, which it won earlier this year. One option under serious consideration would be to put the companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said two people familiar with the matter. That would amount to a government takeover. The plan also could involve a capital injection into Fannie and Freddie, people familiar with the matter said. This could happen gradually on a quarter-by-quarter basis, rather than in a single move, said one of these people. More
Moe Bedard
Fan & Fred: The Lies, the Cover Ups
Fannie Mae isn’t an ordinary company and this isn’t a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie’s implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That’s quite a confidence game — and it’s time to call it.
Moe- Fannie Mae and Freddie Mac have failed and you, the tax payer, ARE bailing them out. I just wanted to make that loud and clear.
Were there warning signs that Wall Street and our government knew more than they led us to believe? This October 4, 2004 article in the Wall Street Journal did a great job of pulling the covers off Fannie Mae’s questionable accounting practices and Enron style way of doing business. It also verifies that there were more than enough warning signs of the impending implosion 4 years later.
WSJ 10/4/2004: Fannie Mae Enron?
For years, mortgage giant Fannie Mae has produced smoothly growing earnings. And for years, observers have wondered how Fannie could manage its inherently risky portfolio without a whiff of volatility. Now, thanks to Fannie’s regulator, we know the answer.
The company was cooking the books. Big time.
We’ve looked closely at the 211-page report issued by the Office of Federal Housing Enterprise Oversight (Ofheo), and the details are more troubling than even the recent headlines. The magnitude of Fannie’s machinations is stunning, and in two key areas in particular they deserve to be better understood. By improperly delaying the recognition of income, it created a cookie jar of reserves. And by improperly classifying certain derivatives, it was able to spread out losses over many years instead of recognizing them immediately.
The facts are that Kenneth Lay and Enron were amateurs when compared to Fannie Mae and Freddie Mac. Enron was just politically connected. They weren’t pros like Fannie and Freddie who get a government implied “guarantee” to bail them out in case those cooked books FRY!
So, how did this all happen? How did we go 4 years with the writing clearly on the walls that these mortgage giants were BS’ing their shareholders, our government and the media? That’s easy to answer. MONEY! Fannie and Freddie have spent a combined total of $170 million in lobbying Washington since 1998 and 19.3 million in campaign contributions to well known Republicans and Democrats according to Politico. More
Standard & Poor’s on Monday slashed the preferred stock ratings of Fannie Mae and Freddie Mac, and said the U.S. mortgage funding giants presented a greater risk to the government. The rating company cut the ratings after the two Congressionally chartered companies reported increased credit losses for the second quarter, and also following creation of a new regulatory structure that places holders of subordinated debt and preferred stock at a disadvantage. Preferred stock and subordinated debt ratings for both companies were downgraded three notches to “A-minus” from “AA-minus.” More
Joseph Y. Calhoun, III
Over the last 50 years (at least) but especially the last 30, every economic problem has been buried under another layer of credit and government intervention. The Federal Reserve and Congress have worked together to promote an economic environment where failure is deemed a threat to the “system” and all economic ills are “solved” by reducing the cost of credit. The result is plain for all to see. The US has moved from creditor to debtor nation. Debtors are bailed out through the tax code while savers are consigned to a prison of low interest rates. It is no surprise that we must import capital to cover our debts when we encourage debt and discourage saving.
The long term problems facing our economy will not be solved painlessly. Nor will they be solved by providing more of the same policies that got us to this point. While the Federal Reserve sits at the center of our problems the institution itself is not at fault. They have been given an impossible dual mission to maintain economic growth and to limit inflation. Having control only over the money supply, it is beyond the capabilities of the Fed to create growth. Inflation and credit expansion do not add anything to the amount of resources available or the capital stock. The Fed cannot create universal prosperity by creating more money. Inflation consumes precious capital by misdirecting resources into non economic investments. If you have any doubts about that, think of all the empty houses sitting around the country which attracted so much investment over the last decade. The capital devoted to housing was diverted from more productive uses and is now being destroyed as banks are forced to write off the bad loans.
The villains in this story are the inhabitants of our political institutions. They seek to buy our votes with our own money and when they find that is not enough, they turn to the Federal Reserve and the banking system to create more. Rather than raise taxes to pay for the goodies they promise or the wars they deem necessary, they depend on debt and inflation. They do not create jobs, but destroy them. They do not create equality but exacerbate the divide between the haves and have nots and manipulate the divide to accrue more power. They do not create capital but rather destroy it. They are not special but mere mortals susceptible to the same failings as all men. They are self interested actors acting on a stage of their own design in a play written for their own benefit. More
Reggie Middleton
A few people have asked me my opinion about the various Fed actions, Paulson’s GSE bailout, the housing bailout package, and bailouts in general. I think I can voice my opinion in very simplistic terms. It’s Wall Street vs. Main Street. Two factions with opposing goals are at odds. Guess whose side your government is on??? The consistent imbibing of the intoxicating elixir of easy credit, excessive liquidity, surging risky asset prices and a preternatural tolerance for uncompensated risk is the result of lax regulation where it really matters. Sarbanes Oxley is not what we needed. We needed a curb on off-balance sheet vehicle abuse. We needed a curb on leverage of institutions that the government considers to be too big to fail. I am all for the free markets, but if the markets are free, I should not have to pay for them. Let whoever is failing fail! If they are truly too big to fail, they should have been regulated from the get go, period.
This brings me to the main topic. The government and the corporate finance crowd are searching for, and trying to manipulate, the stabilization of housing prices. This will drag much of their fat out of the fire. The problem with this mission is that inflated real asset prices, particularly residential housing, is what is hurting much of Main Street - the common man and woman. Real housing prices have outstripped real income by MUTLIPLES, thus home ownership has been pushed significantly out of the reach of many people. In addition, as long as homes are overpriced, they will stay out of the reach of the average man/woman, thus they will not be able to buy it - and common sense dictates that supply will continue to outstrip demand. This pricing is not necessarily transparent to the lay person. For instance, the tightening of credit qualification standards reduces the pool of eligible buyers. The requirement for larger downpayments effectively decreases the affordability of homes as well. As does the soaring commodity prices which increase the burden of heating and cooling homes, the recently past price increases which caused most property taxes to spike, and the cost of construction which increase renovation and repair costs. More
Michael Swanson
We are at a critical point in the economic history of the United States. I know of no other way to put it. The events of last week were of a character that we’ve never seen before. On Friday mortgage lender IndyMac Bancorp became the second largest federally insured financial company to fail after it got hit by a bank run. The Federal Deposit Insurance Corporation took it over. That news may be a big story, but is totally overshadowed right now by the teetering collapse of Fannie Mae and Freddie Mac. Both are in danger of going under and the Bush administration, Federal Reserve, and Treasury Department are now meeting on a daily basis to figure out what to do.
There is no news that would be worse than the collapse of these two institutions and such an event if it happens will have ramifications for the economy and stock market for years to come. Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Odds are that if you own a mutual fund or annuity that you indirectly own a security backed by one of these two institutions. The two of them combined own half of America’s twelve trillion in outstanding mortgages and their failure would be the implosion of the entire financial system. More
Washington Post
Shares of Fannie Mae and Freddie Mac, two pillars of the nation’s housing market, continued to plummet yesterday as investors and federal officials contemplated the possibility that the giants of the mortgage business could require a federal bailout. On Capitol Hill, the Treasury secretary offered reassurance that they are still on firm footing, and the Senate moved on a housing relief bill that would give a regulator more power over them. On the campaign trail, the presumptive Republican presidential nominee vowed to do whatever is necessary to keep the companies functioning. In the financial world, some people had concluded that a painfully expensive rescue was probable, while others said it was unlikely. More
Bloomberg—Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said. “Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in the interview yesterday. More
NEW YORK (Reuters) - A firestorm of anxiety hammered the debt and shares of U.S. mortgage giants Fannie Mae and Freddie Mac for a second day on Thursday as fears mounted over their ability to raise the capital they need to survive. The maelstrom raised angst in Washington and the White House pressed for regulatory reforms, which it said would buoy confidence in the companies that own or guarantee nearly half of all U.S. home loans. The two Congressionally chartered companies are considered the last bastions of support for the U.S. housing market, which is suffering its worst downturn since the Great Depression. More
Among the nightmares lurking around the corner for the already battered housing and credit markets would be a meltdown at mortgage financing giants Fannie Mae and Freddie Mac. Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.
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