fanny mae and freddie mac

If they have positive net worth, so that is possible, I think it a reasonable approach. {Later by edit: They do not. They have at least $150 million debt more than capital, and that only counts te debt maturing in less than 3 months (or was due 31Aug08?)! - See my next post.}

In fact somewhere recently I suggested that a division very similar to the 12 districts of the FED might be a good Idea - easier for the local branches of the FED to keep an eye on them. I think the FED should do more in the way of regulation and control. Let the Treasury mainly worry about how to keep the nation from default and the SEC take charge of ALL securities offered to the public -that would include the repackaged blocks of home mortgages so the FED and SEC would need to define this boundary between them well, but I think that could be done.

 

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Freddy & Fanny status on Saturday afternoon, 6Sept08, Billy T extracts from:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aeBCZUDSozyM&refer=home

Treasury Secretary Henry Paulson plans to bring Fannie Mae and Freddie Mac under government control and both CEOs will lose their jobs. Paulson is meeting with Obama & McCain staffs now to give more details. Their $5.2 trillion of debt outstanding and preferred shares are typically owned by banks and insurance companies, some foreign, and they will be fully protected. Treasury's main concern is the debt markets. It will do whatever is necessary to keep Fannie and Freddie running.

Billy T comment: $5.2 trillion default in bank’s assets would immediately collapse the US dollar and US economy. – Treasury has no choice even if bail-out makes more inflation but in truth the US government is “bankrupt” also, so, to quote Bloomberg:

“The government has been leaning on the companies to help pull the economy out of a housing slump as other buyers retreat from the market, burned by more than $500 billion of losses since the collapse of the subprime-mortgage market last year. Fannie and Freddie need to sell billions of dollars of bonds each month to pay off maturing debt. As of mid-August the companies had $223 billion of debt to refinance by the end of the quarter.* … Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion”

{Billy T comment: With 233e6 to pay and 47+37.1 = 84.1e6 obviously, unless you can print money as US does, you are soon bankrupt without injection of US funds of approximately 150e6. Actually much more as cannot sell more debt (No buyers now but US) or make any loans or do anything to help housing recover.}

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*I think they are essentially, but not technically, already in default as of 1Sept08 as 31 Aug 08 was "end of quarter," but for default to be technically declared, at least one debt holder must go to court, I think. - Tyically, that would accellerate the entire debt's due date. Even the US does not want to try to raise 5.2 trillion just before an election, so the banks etc. will give a few weeks before forcing default. This is why Pauson and others probably did not go home last night. - Had food cattered in etc.

 

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Not to worry. They are probably getting taken over by the USGOV.

The United States has a vested interest in keeping millions of citizens in their houses, and on their jobs. It's called political survival.

~String

 

However the shareholders will probably lose all their money.

The important thing is that regulations are brought in to stop high risk mortgages from being approved.

 

No. The government buyout will probably mean purchasing it at a price that is comfortable for everybody (except tax payers).

~String

 

http://gata.org/node/6556

"The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt..."

 

That is not thought very likely, because:

(1) (from my prior Bloomberg link): "Fannie's market capitalization is now $7.6 billion, down from $38.9 billion at the end of last year. Freddie's has fallen to $3.3 billion, from $22 billion over the same period."
I.e. expectation of huge losses for the share holder are already reflected in the depressed stock prices. If investors though as you do the stock price would be rising, not continuing to drop.

(2) The the US government does not want to pump out more money than it must to avoid immediate collapse - the Bail out will not be a "lump sum" but funds supplied only as needed to avoid outright default on the senior debt / bonds which banks hold to avoid more banks from failing. (11 have already gone under in 2008 alone. See: http://www.bloomberg.com/apps/news?pid=20601087&sid=aF2bgP7BYQuU&refer=home for details.)

(3) The US is hard pressed to sell bonds to cover it own debts. Traditional buyers have mostly stopped buying. - They have set up "sovern Funds" to buy real assets instead of Treasury's paper promisses. (Personnally I think the FED is buy much the debt, which is a form of "printing press money, already. It will be interesting to see if inflaction decreases with the recent pull back in oil price - I bet not much if any as I think FED is creating money to buy these otherwise unsellable Treasury paper faster than oil is falling.)

(4) Inflation has recently become a strong concern - Why the FED cannot cut rates to stimulate the pre-election economy. Making the share holders of Fanny and Freddy hole again (restoring the market cap lost to even just 1/1/08) would cost ~60 billion dollars - money the US doesn not have and if placed into circulation would make inflation more difficult to control.

I bet the shares become "wall paper" and obviously most investors agree with me.

 

How would the public know if it did?

CPI doesnt include energy prices.

And the feds stopped publishing M3 data in 2006.

 

Indirectly, in price of other goods, but you make a good point: It will show up post election due to this delay.

 

Near final details at: http://www.bloomberg.com/apps/news?pid=20601087&sid=a7K.6dQfXS_E&refer=home

also some comments by Sarah Palin about grown too big / big governement etc as if It was not the Republicans who were "asleep and the switch" when it happend or when awake were only relaxing the regulations they inherited from Clinton at:

http://news.yahoo.com/s/ap/20080907/ap_on_bi_ge/mortgage_giants_crisis

where you also find:

"The Treasury Department said it will immediately be issued $1 billion in senior preferred stock, paying 10 percent interest, from each company, but eventually could be required to put up as much as $100 billion for EACH over time if the funds are needed to keep the companies afloat as losses mount. The government also will receive warrants representing ownership stakes of 79.9 percent in each."

 

The banks are saved!
BUT NOT THE us TREASURY or Joe American:

Asian market are now open. Here is the early reaction:

"...Treasuries tumbled, causing the biggest increase in 10-year yields in two months, as the U.S. government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets. Notes slid for a second day after the government seized control of Fannie and Freddie, the two biggest mortgage finance companies, following the biggest surge in home-loan defaults in at least three decades.

'U.S. debt has gotten crushed in Asia,' said Kenny Borowicz, bond-futures broker at MF Global Singapore Ltd., part of the world's largest broker of exchange-traded futures and options contracts. The yield on the benchmark 10-year note rose 12 basis points to 3.83 percent at 9:05 a.m. in Tokyo, according to bond broker BGCantor Market Data. The 4 percent security due in August 2018 fell 31/32, or $9.69 per $1,000 face amount, to 101 13/32. ..." {that is a 1% drop in a few hours - unheard of for US treasury paper.}

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aan2qwx6A.0E&refer=home

Get ready for more stagflation, with more inflation than stag.

 

The USA has a vested interest in trying to stop the collapse in housing prices in certain markets from getting worse. Fanny and Freddie will have to give out the loans to new buyers that the banks are hesitating to give because otherwise there will not be buyers for the homes being put up for sale because people could not make their mortgage payments. If Freddie and Fanny don't lend FDIC will end up having to pay the depositors at many banks that would fail.

This is just the bad home loans. The sea of bad credit card debt is yet to be acknowledged. People have been relying getting cash out of refinancing their homes to make mortgage payments, to make car payments, and to pay off their credit cards. That game is over for the next few years.

 

What's M3 data, why isn't it published now? Doesn't that piss off anyone?

Surely there must be some figures out on this? I'm just curious...

 

This is effectively true but not exactly correct. They buy up the loans that banks and others have granted to supply these grantors with more cash to make more loans. Fanny and Freddy get the money to buy up loans by selling bonds (some from sale of stock, especially now with the US government buying it as the "buyer of last resort" - no one else would until it was clear that the government would not let them go under.)

It is ironic that the Republican Party that always tries to call the Democrats the party of big government / big spenders has just made government 5.2 trillion dollar bigger and will be printing and spending at least 200 billion more during the next year. Fact is that the expansion of government and its debt under Republicans has be at least twice as much as under Democrats and this is partially related to their being the ones who build up the Military and start most of the wars. (Wars are good for business, assuming you do not lose.)

It certainly was necessary to have Fanny and Freddy be taken over by the FHA, but the fundamental cause of this necessity was the "Republican "Trickle down" theory. I.e. give tax breaks to big corporations and new businesses etc. and Joe American would also benefit by more jobs higher wages etc. It is a nice theory, but like many nice theories, it has been killed by "ugly facts." Never before in history has Joe America lost as many jobs or watched the purchasing power of his salary fall so much as he has under GWB. All this hand out to the very rich has done is increase the debt Joe's children are supposed to pay. But they cannot pay this enormous burden, so the US will economically collapse, and drag down the EU with it into depression.

The fact that the regulatory authorities "looked the other way" under GWB and some of the laws were actually relaxed also helped make the mess that necessitated this week ends actions. If Freddy and Fanny had been allowed to go belly up, then the banks holding their bonds (that is all of the big ones) would also as they write these assets down to their true (nearly worthless) values. With all of the main US banks failed, Americans would try to get their money out before the failed banks shut their doors for good. This would cause the FDIC to step in and the treasury to print money by the truck loads every hour. - I.e. a total collapse of the US financial system would have been over by this Friday.

Three years ago, I did predict that could not happen for one month yet. I.e. I predicted that the run on the dollar would occur between October08 and October 2014. There is still a month to go before my "total collapse window" opens but it does seem to be coming faster than I initially expected.

I will make a very short term (happen later today) prediction:

The DOW will climb more than 100 points today. Now that the collapse of the US banks has been delayed until the start of my predicted window money will flow into the stock market especially the financials – Some of them like Citi may climb more than 10% in one day.

 

Paulson fired his "Bazooka" one month after predicting it would not be needed.

I predicted it (and a few financial A-bombs) would be needed three years ago!

Thanks, but no thanks. ---- I do not want to be Secretary of the US Treasury

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but I will comment on the Republican “Trickle Down" theory GWB has operated on for 8 years:

Basically the idea is that if the government takes more taxes from Joe American, who would just do something foolish with the money like spend it and instead gives it the already rich who know how to (bells and whistles now please) INVEST IT TO GROW at least 10 fold immediately and produce more jobs, more income, more taxes at a lower rate, possibly even "manna from heaven" as God is on the side of the Republicans. (Did he not send Gustav so the embarrassment of GWB speaking at the RNC could be gracefully avoided?)

Anyway here is how it works:

The rich have trouble spending the wealth they already have and are very greedy. - How and why they are rich if they did not do it the easy way: just inherit the money. So they INVEST if given $100,000 of Joe American's tax money in rebate or via lower capital gains taxes. GWB used both methods to transfer Joe's money to them, including a lot of others also, like 9.8 billion in subsidies to corn growers and then $0.51 on every gallon* of alcohol they made from it;
but look on the bright side of all this:
Joe was overweight and now, with higher food costs, is eating less.

Now back to discussion of the mechanism:

That $100K could for example, build a new factory and the salaries paid by the new factory would be around 1 million dollars EVERY year. Whoopee - a 10 fold return EVERY year. AND this does not even mention the "Multiplier Effect" - I.e. the maker of concrete and steel for building the new factory expand their production and pay more in salaries also. Then new factory will need all sorts of new equipment, especially computers and automatic production machinery. Now this multiplier effect does not act again and again every year but means the first year the $100,000 will grow directly in salaries by 10 fold to be $1,000,000 benefit which by the multiplier effect will inject about 20 times more into the economy - I.e. take only $100,000 from Joe and get back 20 million dollars of growth IN THE FIRST YEAR!

The Democrats would be stupid to not like this, except for one "small detail." The rich are not dumb (as a general rule, but the "inheriting ones" may be an exception).
The rich can foresee coming financial events better than Joe, who never has had to worry about what to do with his "excess money." They foresaw several years ago, about when I did, that Joe's children would not be able to pay the debt which GWB was doubling. So, like me, they began to get their money out of the US. To make the story short: They took Joe's $100,000 and built a factory in China (Or Brazil etc or a high rise luxury hotel in Dubai - the world's ONLY sever star hotel with room rents starting at $1000/ per night)

Yes trickle down theory certainly works. - It makes lots of new jobs, generates a many fold greater incomes. Creates real "Boom Times," with Double Digit GDP growth, such as never before seen in the history of finance!

Why can't Joe and the Democrats understand this?

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P.S As stated in another thread: Since deep depression in US and EU is now unavoidable, I plan to have fun while posting until the tears start.
Also, I believe in giving credit to whom it is due.
----------------
*You get ~2.7 gallons from each bushel, so that is a bonus of $1.38 for each bushel making alcohol, not food, from corn; but of course this has nothing to do with the price increase of Joe's food. Corn is now $6 / bushel up $4 per bushel from ~$2 in the fall of 2006.

 

M3 is the total amount of US dollars in existence, and its one of the most important and fundamental economic indicators. The feds decided to stop publishing this number in 2006 because they dont want the public to know how much fake money the federal reserve system is actually printing.

By 'fake' money I mean money that does not represent REAL value, and which debases the buying power of everyone's money.

http://www.youtube.com/watch?v=kRCiA-gy4ds

 

The trickle down theory certainly does work...just no better than any other targeted tax cut does. You can't just look at the effect of the tax cut, see the growth, and declare voctory, you have to consider alternative sets of tax policy.

Let's imagine that you cut taxes deeply, on the very rich. The tax benefit accrues to the people who pay the most in taxes. Some of them buy stock and yachts and mansions with it, and the companies which sold stock use the cash to produce, hire more workers, pay dividends to their shareholders, buy yachts (the penultimate of which may or may not be good for growth depending on what is done with the distributions). The tax benfits first flow to the beople with the highest tax burden, then to the goods and investments that those people are interested in, then from there to employees, suppliers of the companies, etc., etc. There's going to be economic growth in there.

That's old fashioned, 1930's-era Keynesian economics. (One minor snag, because the government no longer has the cash, it is either borrowing or not providing some service, which is a drag on the amount of economic growth toi the extent the service added value, buut we can presume the net growth is still positive.)

Suppose you cut taxes on the poor? They, of course, set fire to the cash. Just kidding. More likely, because they are poor, they go buy things they want, goods and services. They are less likely to invest it, but so what? The tax benefits here fllow first to the poor and then to the companies that produce the goods and services the poor like, then those companies use it to pay employees and suppliers, and so on down the line.

The only difference between the tax cut for the rich ("trickle down" or "TD") and the tax cuts for the poor ("trickle up" or "TU") is how the cash is distributed. In TD, it goes to the sorts of companies that the highly taxed tend to like and to the empolyees of those companies, then the employees spend the cash on things they like, and the cycle continues until those dollars are removed from circulation. In TU, the big difference is who gets in in the first few rounds, but after it goes through a few transactions.

There is a theory that this results in greater economic growth in TD than TU because the welathy are more likely to research stocks and allocate the money to companies that will use it to grow, but there's a counter theory that dollars flowing from the TD side are more likely to wind up passing overseas earlier and not coming back quickly. When that happens, the impact of that dollar on domestic growth tends to become negligible.

So far as I have seen, there is no good data on whether the net effect of trickle down is greater or lesser than trickle up.

Better than both would likely be an untargeted tax cut, with everyone receiving the same percentage relief, as then the money would go to all taxpayers and then be passed on to the things "all taxpayers" like, which one would expect to be more representative of the economy as a whole. Assuming that and assuming some level of efficiency in the economy as a whole, the money would in effect go to the most economically efficient locations earlier since the subsequent spending would not be skewed by a particular socio-economic demographic. That said, given the generally low transaction costs in the U.S. (and the Coase theorem), the effect may not be all that great, as the money will find its way yo the highest valued use (or at least something of reasonably comparable value within the limits set by the transaction costs) reasonably quickly.

 

Good link and explanation plus comments.

Just by chance I saw Milton Freeman a couple of days ago. He looked terrible. (As well he should having been buried so long.) He told me that God had resurrected him as he has been so wise and good for the US economy with his "excessive money supply causes inflation" theory that got him the Noble Prize in Economics (and founded the "Chicago school" of economic theory.) I asked him where he was going now.

He said: "To hell. It is soon going to be worse back in Chicago, so I don't want to go there." I told him to come to Brazil but the replied that he was too old to learn Portuguese or to keep up with the hot chicks of Brazil. "Hell would soon be better than Chicago." he again said and vanished.

 

The theory that the increases in the money supply causes inflation is centuries old. John Stuart Mill formulated the equation of exchange. Friedman's contribution in that regard was to re-emphasize the relationship after Keynesians discovered the Phillips Curve. he also realized and wrote about the naive Phillips Curve being wrong and needing an "expectations augmented" Phillips Curve to properly explain the relationship between inflation and unemployment.

It was the expectations augmented Phillips curve, more than anything, that got him the Nobel. That said, the Nobel Prize in economics is not typically awarded for any one piece of work, they tend to fudge and give it for an entire corpus of work. In Friedman's case it was "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy." The "complexity of stabilization policy" in this case is the code for his work on the Phillips Curve.

Also interesting to see that even the conservatives are neo-Keynesians these days, as tax cuts are to spur growth are decided not a monetarist strategy. Friedman opposed economic interventionism simply to jump start growth. He wanted a stable, low-growth (just slightly ahead of the natural growth rate of the economy), money supply and felt that was enough.

To the extent Friedman favored interventionism, the only thing I recall was his support of using negative income taxes to give money to the poor (as a replacement for welfare), on which I happen to agree with him.