Sunday, July 13, 2008

Fannie and Freddie Bailout in the Works. Shareholders to Get Screwed.

From The Times of London:
US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.

The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world.

Together, the two stockholder-owned, government-sponsored companies own or guarantee almost half of America’s $12 trillion home-loan market and are vital to the functioning of the housing market.

The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.

Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders. ...

Paulson killed off speculation that the government would renationalise the two agencies, a move that would have pitched the US public accounts into a new state of crisis.

However, Paulson pledged to support the two companies “in their current form”. He is said to have been concerned about the prospect of a rescue plan benefiting shareholders. ...

Some in Wall Street believe a rescue plan may be announced ahead of tomorrow’s US market opening to calm nerves and support the debt auction.
According to Yahoo! Finance, Fannie Mae and Freddie Mac combined are currently worth $15 billion. So, if the U.S. government injects another $15 billion, current shareholders will instantly lose huge stakes in the companies. However, that's the risk you take for owning stocks.

Also in the article:
Citigroup is expected to reveal further writedowns of at least $8 billion with its second-quarter results, and Merrill Lynch is forecast to reveal writedowns of some $4 billion.

Both banks are expected to post sizeable losses for the second quarter, and reveal plans to sell off billions of pounds worth of assets.
In other news this weekend, IndyMac Bank, a former unit of Countrywide Financial—and unrelated to Freddie Mac and Bernie Mac—was seized by the FDIC on Friday.

May you live in interesting times. Comments from readers?


  1. In general our financial leadership cannot be trusted.

    Irresponsible lending.

  2. I think the numbers in the post are microscopic!
    The giants of the secondary market are in big trouble. FNMA, FHLMC, the two largest private (but in reality quasi-governmental) buyers of bundled mortgage loan paper are no longer solvent. That ought to scare you!

    It doesn’t matter what business or industry you are in; it doesn’t matter what your age is or where you live (even out of the country) you should be concerned.

    The potential if these two iconic corporations failed could be as high as $5,000,000,000,000.00. This is not what you would call insignifican’t. The government will not let this happen, they can’t, chaos would reign. So they will litterally print up whatever the two need to survive, or worse they will take them over completely.

    If they opt for the “Bailout”, and simply create the needed money, then the value of everyone else’s money is diminished (the US Dollar will be worth even less on the Global Market. If they take them over, it will be even more complicated as they have to still fix the shortage and then they would have to run the two giants. Given their (the Government) record for managing operations large or small I believe this fix to be even more damaging than just a straight bailout.

    The solution is yet to be determined; but one thing is sure, this bears watching! Learn more about real esate and finance online.

  3. Watching markets on Friday was interesting because positive comments from government officials helped shares of Fannie and Freddie stay out of penny stock range, but they also drove oil to record highs. The government is opting to stoke inflation in order to stretch the length of time it takes for house prices to fall to reasonable levels.

  4. In a way, I hope it goes under. You can't guarantee anything in this life, and in a free market, nobody should be immune.

  5. David, it is time for you to take another photo of 1256 NJ Ave. NW.

    Tons of renovation work taking place right now.

  6. Bailing out an insolvent company is hardly "screwing" its shareholers, despite the dilution of share value. Something is better than nothing. BTW, Fannie & Freddie's shares were up on the DAX today. The real question is why Treas is willing to risk the dollar to keep these zombie GSEs afloat.

  7. Equity screwed? If equity messed up and did not have proper controls in place, that is what is supposed to happen, but if they are screwed, its because they screwed themselves.

    I say "if" because I don't have a good view on whether Fannie's and Freddie's are real or imagined. Aren't their loans based on 20% down, good credit history, verified assets and income? If so, how much have they really lost since prices have not yet fallen by 20%, and what has happened to the reserves they built up over the years, including the many, many good years?

  8. That's the thing Anon, a lot of housing prices HAVE dropped 20% or more around the country. California averaged something like a $210,000 drop on *average.*