The end of Fannie and Freddie?

glad you didn't (unless you were planning on getting out today) because i don't think you really understand how a "bailout" would work. you could have also lost all your money if the govt immediately moved towards nationalization. if the companies are going to continue to be publicly traded then it would be massively dilutive. the 2 are worth $15b combined and they need to raise a combined $75b. raising that much capital would be insanely dilutive to the common stock. that action today on the common seems a bit puzzling considering this isn't a bailout of the common stock or subordinated debt. it is to save the institutions, the economy, and the senior debt (china is the largest holder of that).

just because it would have worked doesn't necessarily mean that is a great trade to hold overnight. very very risky stuff.

http://online.barrons.com/article/SB121601256890050373.html?mod=yahoobarrons&ru=yahoo

Uncle Sam Adopts Fannie and Freddie
By RANDALL W. FORSYTH | MORE ARTICLES BY AUTHOR

Socialism takes hold in U.S. finance. Get over it.

FANNIE MAE AND FREDDIE MAC shed the word "federal" from their names several years ago, but rescue package put forth Sunday evening puts the federal government squarely in the role of guarantor for the mortgage giants.

Under the package announced by Treasury Secretary Hank Paulson Sunday evening, the credit line from the Treasury to Fannie and Freddie would be increased from the current $2.25 billion temporarily. The Treasury would have the power, also temporarily, to purchase equity in Fannie (ticker: FNM) and Freddie (FRE.) Finally, the Federal Reserve would get a "consultative role" in the new regulator for the government sponsored enterprises. These steps would require Congressional action.

In addition, the Fed said it would give Fannie and Freddie access to borrow from the central bank on the same terms as banks, should it be needed.

The bottom line: the Fed and the Treasury would get the power to provide whatever Fannie and Freddie the money they need to stay afloat -- even if that means the federal government owns equity in what are now stockholder-owned entities.

The moves confirm what the markets assumed all along: that the federal government would stand behind the obligations of Fannie and Freddie.

"The access to credit via the Treasury and Fed means the implicit guarantee on the GSEs' debt is now explicit," writes Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Their ability to borrow from the Fed "was essential before markets opened Monday to prevent any possibility of a 'run on the bank'," add economists and strategists at Barclay Capital.

Fannie and Freddie are highly dependent on unsecured debt markets for fund, observes Kathleen Shanley of Gimme Credit. As of March 31, Fannie had $216 billion of short-term debt and $544 billion of long-term obligations, while Freddie had $291 billion of short-term debt and $544 billion of long-term debt.

Indeed, the credit derivatives market strongly expected some sort of rescue package would emerge over the weekend following the debacle in the common shares of Fannie and Freddie, which both lost nearly half their value last week. Friday, the cost of insuring Fannie and Freddie senior debt shrank by a roughly one-fourth, to about $58,000 per $10 million, according to CMA Datavision.

Treasury Secretary Hank Paulson made clear why the federal government needs to keep Fannie and Freddie afloat. The GSEs have a central role in mortgage financing, accounting for $5 trillion in direct and indirect guarantees out of the $12 trillion U.S. mortgage market.

Moreover, Fannie and Freddie have accounted for nearly two-thirds of new mortgages made this year as private lenders have sharply curtailed their lending -- or have gone out of business following the subprime collapse. Washington is looking to the GSEs to help sustain the mortgage market and help cushion the slide in housing activity. So it had to save to supposed saviors of mortgage finance.

That was driven home by the seizure of IndyMac Bank by Federal Deposit Insurance Corp. in the biggest bank failure in nearly two decades, which was announced just 48 hours before the GSE rescue scheme was unveiled. The collapse of the aggressive mortgage lender with $32 billion in assets could cost the FDIC between $4 billion and $8 billion -- a hefty chunk of its insurance reserves of $53 billion.

Meanwhile, Paulson also noted the billions of Fannie and Freddie debt owned by financial institutions around the world. "Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets."

Most importantly, much of that paper is held by foreigners, including central banks. Many of them have been burned by the collapse in supposedly triple-A mortgage derivatives backed by dodgy subprime loans. Fool me twice.

All of which has led to another big government rescue (none dare call it a bailout) of major financial institutions whose failure could have dire consequences for the rest of the system. After the Fed helped broker and fund the acquisition of Bear Stearns by JPMorgan Chase (JPM), it seems inconceivable the central bank and the federal government would not support the GSEs it helped create.

But it doesn't mean that the present shareholders of Fannie and Freddie will be bailed out. An equity infusion by the government would likely seriously dilute the present stockholders -- perhaps to the point that their stake is worth little, as with Bear shareholders, who received a fraction of what their stock was worth just before the collapse.

Even so, the descent down the slippery slope of socialization of the financial system is gathering speed.

"Capitalism without failure is like religion without sin," Allan Meltzer, the distinguished economic theorist and historian once wrote.

Yet, like it or not, we don't want to deal with such harsh verities, either in religion or the marketplace. Traditional churches are losing out to TV evangelists who promise material rewards now rather than later.

For the markets, pushing the limits with ever greater risk brings enormous rewards -- until the bust comes. Nobody has to give back bull-market bonuses when the bear arrives, so why worry about the downside?

It's too late to worry about high-minded concepts of moral hazard. The price of these bailouts will be borne by the taxpayers. And the financial markets will be subject to greater supervision and regulation, reversing the tide toward deregulation.

Ideologues of the right and the left can argue whether this is a good thing. Investors should just deal with it.

 

like who?

 

glad you didn't!

http://www.reuters.com/article/marketsNews/idINN1747783620080817?rpc=44

US likely to recapitalize Fannie, Freddie-Barron's
Sun Aug 17, 2008 2:27pm EDT

NEW YORK, Aug 17 (Reuters) - The U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) in the months ahead on the taxpayer's dime, Barron's reported in its Aug. 18 edition.

The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.

An insider in the Bush administration told Barron's that Fannie and Freddie "are being jawboned" by the Treasury Department and their new regulator, the Federal Housing Finance Agency (FHFA), to raise more equity.

But government officials don't expect the agencies to succeed, Barron's reported.

If the government-sponsored enterprises fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the agencies, according to the Barron's source.

The paper reported the infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares "effectively would be wiped out, and their preferred shares left bereft of dividends."

The report called an equity injection by the government a quasi-nationalization -- without having to put the agencies' liabilities on the U.S. balance sheet, and thus doubling the U.S. debt.

After accounting for deferred tax assets and generous asset marks, Fannie and Freddie each may have a negative $50 billion in asset value, and little prospect of digging themselves out of the hole, Barron's reported. (Reporting by Ed Tobin, editing by Richard Chang)

 

I put this attention grabbing title up here to get attention to the issue and hopefully provoke discussion. they were never likely to fail outright but you never know when debt is allowed to spiral out of control. so now the scenario barron's and others expected will happen with fnm and fre ceasing to be public and their equity holders getting nothing.