Bailout Nation: Freddie, Fannie, and more

[TheNiche]

Seriously though, you take a lot of knocks here on the haif, but you are not the amoral that some people (and your own occasionaly poor choice of language) would have some people believe. Like you and most people in the all the businesses touched by this, my goal is to do the best job with fewest resources in the least amount of time. All t's crossed and i's dotted. I am tied at the hip with my compliance attorneys and I make the best of it. I really don't give a flip about the shareholders. I have a reputation to uphold. If I do my job, the value is there.

I do not tolerate behavior outside my personal ethics, which helps explain why I am not an SVP and tend to run only small teams. I think that is the same with all of us conscientous types---you too. I'd bet.

Yeah, I go to great lengths to limit personal liability, too. But I don't badmouth anybody even remotely associated with my firm on the internet. That would be...unwise.

I am amoral! I must insist on that. But I do conceed insanity. For instance, my greatest strength in an interview is a tremendous weakness in the workplace. I genuinely do care about the owners and their stakeholders, and it may as well be written on my forehead. I take personal ownership in the enterprise. I take a personal stake in enterprise, generally. I'll let you use your imagination as to the specific outcomes.

[TJones]

Niche, that is quite concise. I too care about my business owner and the money I make for him and his shareholders. The more money I make for him, the more money I make. I believe that was the problem the mortgage underwriters failed to take into consideration whether these people were going to actually pay, when they already are not coming out of pocket ANYTHING. They were looking at the short money and not the long money, but there was neither to be had.

AIG, one of the worst insurance policies I have ever seen or heard of: Credit Default Swaps ? Are you serious ?

[BryanS]

Niche, that is quite concise. I too care about my business owner and the money I make for him and his shareholders. The more money I make for him, the more money I make. I believe that was the problem the mortgage underwriters failed to take into consideration whether these people were going to actually pay, when they already are not coming out of pocket ANYTHING. They were looking at the short money and not the long money, but there was neither to be had.

AIG, one of the worst insurance policies I have ever seen or heard of: Credit Default Swaps ? Are you serious ?

Next shoe to drop... New York state is taking measures now to regulate them:

http://www.nytimes.com/2008/09/23/business...ml?ref=business

...and is asking the Feds to regulate them, as well...

[Subdude]

I got this email today. Do you think this is legit?

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

[Subdude]

Yesterday I read that Paulson wants our taxpayers to help bail out foreign banks.

That is correct. The program is being extended to allow payments to foreign banks doing business in America.

It's only fair. After all, foreign investors are picking up a huge part of the tab here.

[memebag]

That is correct. The program is being extended to allow payments to foreign banks doing business in America.

It's only fair. After all, foreign investors are picking up a huge part of the tab here.

Has the meaning of the word "investment" changed? I thought they were gambling that their investment would return a profit...

[Subdude]

Has the meaning of the word "investment" changed? I thought they were gambling that their investment would return a profit...

Private profit, socialized loss.

[crunchtastic]

My head is about to explode, I'm so pissed over this bailout and hearing. Here's the gist of it: A single person gets carte blanch for anywhere from 700 billion to 1 trillion dollars to repackage the same derivatives and attempt to sell them again through the same investment houses who created this mess! With no oversight! The very people who didn't see anything wrong a few months ago! The solution to the problem is letting Wall Street double-dip. Unbelievable! Let's not forget Paulson's Goldman now gets to belly on up to that trough as a commerical bank. Paulson just said that we shouldn't accept 'fire sale' prices! He's actually advocating paying par for crap! Unbelievable!

[TheNiche]

My head is about to explode, I'm so pissed over this bailout and hearing. Here's the gist of it: A single person gets carte blanch for anywhere from 700 billion to 1 trillion dollars to repackage the same derivatives and attempt to sell them again through the same investment houses who created this mess! With no oversight! The very people who didn't see anything wrong a few months ago! The solution to the problem is letting Wall Street double-dip. Unbelievable! Let's not forget Paulson's Goldman now gets to belly on up to that trough as a commerical bank. Paulson just said that we shouldn't accept 'fire sale' prices! He's actually advocating paying par for crap! Unbelievable!

PAR!!?

[TJones]

PAR!!?

Niche, wouldn't it make good business sense for the Govt. to buy all that bad paper at fire sale/wholesale cost, and let Fannie and Freddie and AIG, and whoever else start out at square one again. The advantage for the Govt. is to sell at just below loan value and recoup as much money as possible, as fast as possible from investors who still want to play the real estate market in order to payoff this bailout ?

[crunchtastic]

PAR!!?

He wants to use a pricing model that asssumes the debt is paid in full at maturity. Or close to it. Sounds like par to me. It also sounds like lunacy.

Paying above market rates for the bad mortgages will help "unfreeze the market". :

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[BryanS]

He wants to use a pricing model that asssumes the debt is paid in full at maturity. Or close to it. Sounds like par to me. It also sounds like lunacy.

Paying above market rates for the bad mortgages will help "unfreeze the market". :

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Yes. Because something valued at .40 on the dollar that cannot be sold by private investment can be sold at .50 on the dollar to the Fed - who can then resell it for .60 on the dollar. Putting this crap on the Fed's balance sheet has the effect of immediately raising the value of the crap - because the Fed can hold it longer. That's what Jim Cramer just said on CNBC. Problem is... the garbage may not be worth any more than .20 on the dollar, to begin with (a lot of it is overpriced... That's why it

[RedScare]

That is correct. The program is being extended to allow payments to foreign banks doing business in America.

It's only fair. After all, foreign investors are picking up a huge part of the tab here.

It is only fair. Phil Gramm is now VP of a foreign bank. He could not profit from this unless foreign banks were included.

[N Judah]

The fed should buy up anything it can for as cheap as it can get it. Then we can have our very own Sovereign Wealth Fund.

I think the real problem was in not being able to provide rich people with sufficient outlets to put their money back in 2001 or so after the dot-com bubble burst. So they threw it into real estate, which means they were really scraping the bottom of the barrel (well until they started plowing it into commodities as they have been recently).

We should have thought ahead and pumped up the alt-energy industry.

Also, I don't really blame the investment bankers for trying to make money. I blame the rich people (hedge funds) for buying this stuff, and hustlers for flipping houses and generally being greedy.

[crunchtastic]

It is only fair. Phil Gramm is now VP of a foreign bank. He could not profit from this unless foreign banks were included.

Phil Gramm: U and US! I get it now!

Because of language I can't spell it out, but there is a fantastic new website called

buymy****pile.com.

[TheNiche]

Also, I don't really blame the investment bankers for trying to make money. I blame the rich people (hedge funds) for buying this stuff, and hustlers for flipping houses and generally being greedy.

Pointing fingers won't do you any good. You can point them at developers, flippers, consumers, mortgage bankers, banks, investment banks, hedge funds, school boards in Kansas, and little towns in Norway. They all participated. And just about anyone with an insurance policy or a pension is an accomplice. Seriously. They're all links in a chain. You probably are too. I'm not afraid or even ashamed to admit that I am.

[Dan the Man]

Because of language I can't spell it out, but there is a fantastic new website called

buymy****pile.com.

That is hilarious. I hope the gov't buys that ugly child...

[N Judah]

Nah my hands are clean on this one.

I knew real estate would eventually correct itself, but that credit default swap thing really did fly under my radar.

[Subdude]

My head is about to explode, I'm so pissed over this bailout and hearing. Here's the gist of it: A single person gets carte blanch for anywhere from 700 billion to 1 trillion dollars to repackage the same derivatives and attempt to sell them again through the same investment houses who created this mess! With no oversight! The very people who didn't see anything wrong a few months ago! The solution to the problem is letting Wall Street double-dip. Unbelievable! Let's not forget Paulson's Goldman now gets to belly on up to that trough as a commerical bank. Paulson just said that we shouldn't accept 'fire sale' prices! He's actually advocating paying par for crap! Unbelievable!

Well strictly speaking par value isn't especially meaningful here. The idea is to buy the securities for at least greater than their current book value. The goal is not just to get bad securities off the books, but to recapitalize the banks or other holders. The way this will be done is to buy assets for more than book value, which creates a gain on sale for the bank that applies directly to their capital. In addition to profits from the sales, banks will gain by being able to mark up securities that they don't sell to the value that the Treasury pays for what it does buy. The net effect is that the banks gain a lot of cash but even more capital. The whole point is to spend more to create book value and mark-to-market profits, not to try to save money by spending less.

That is why the Treasury doesn't want to get anything in return like equity stakes in the bank. That will have the effect of diluting the capital injection and making it less effective. The banks that will benefit the most are those that have already taken the biggest mark-to-market losses: Merrill, Morgan, etc. If you want to get some of your money back I would suggest buying some stock in banks like these. When the market figures out how the recapitalization is designed to work they will go through the roof!

The more I think about the plan the more I am amazed at its audacity.

[N Judah]

That is why the Treasury doesn't want to get anything in return like equity stakes in the bank. [...] If you want to get some of your money back I would suggest buying some stock in banks like these. When the market figures out how the recapitalization is designed to work they will go through the roof!

The more I think about the plan the more I am amazed at its audacity.

I think buying stock in these banks would be similar to double-paying. The Treasury might not want anything in return but I am sure the taxpayers do. A Sovereign Wealth Fund is looking like a better and better idea.

[memebag]

My head is about to explode, I'm so pissed over this bailout and hearing. Here's the gist of it: A single person gets carte blanch for anywhere from 700 billion to 1 trillion dollars to repackage the same derivatives and attempt to sell them again through the same investment houses who created this mess! With no oversight! The very people who didn't see anything wrong a few months ago! The solution to the problem is letting Wall Street double-dip. Unbelievable! Let's not forget Paulson's Goldman now gets to belly on up to that trough as a commerical bank. Paulson just said that we shouldn't accept 'fire sale' prices! He's actually advocating paying par for crap! Unbelievable!

If we don't pay more for the bad debt than its worth, how would any of this help the financial industry? What would be the point of trading their worthless paper for more worthless paper?

[N Judah]

If we don't pay more for the bad debt than its worth, how would any of this help the financial industry? What would be the point of trading their worthless paper for more worthless paper?

Well then why not just take the mortgages off their hands and give them free money? Isn't that what we're essentially doing? But if that's the case then why the financial industry -- why not give the free money to a different industry and see what they can do with it? The financial industry would still benefit, but it would be ancillary rather than "finance for the sake of finance."

[TJones]

Here's an idea. I would like to see what you good folks think. Instead of giving the banks the $700 billion in bailout, why not give each American household an equal cut of the money. That would roughly breakdown into about $2billion a household. Make the money in the form of a bank account and any mortgages or car loans and other big ticket items MUST be paid for first, then whatever is leftover is your bonus. All your student loans MUST be paid off first out of the account also. All your medical bills MUST be paid off from the account first. That would make it a TRUE "Bailout Nation".

EDIT: Looks like I picked the wrong week to quit sniffin' glue.

[houstonmacbro]

Here's an idea. I would like to see what you good folks think. Instead of giving the banks the $700 billion in bailout, why not give each American household an equal cut of the money. That would roughly breakdown into about $2billion a household. Make the money in the form of a bank account and any mortgages or car loans and other big ticket items MUST be paid for first, then whatever is leftover is your bonus. All your student loans MUST be paid off first out of the account also. All your medical bills MUST be paid off from the account first. That would make it a TRUE "Bailout Nation".

Um, I think your math is a little wrong ($700b/350m = $2,000). But I like your idea!

Not sure $2k would settle my debts. But I'd take it.

[TJones]

Um, I think your math is a little wrong. But I like your idea!

I was drinkin' tequila and doin' speedballs at the time of post. I apologize.

I think my math is still off. looks like $2333. That ain't gonna do jack. I wonder how it woud work out if only those households with foreclosed or about to be foreclosed houses would help ?

[memebag]

Here's an idea. I would like to see what you good folks think. Instead of giving the banks the $700 billion in bailout, why not give each American household an equal cut of the money. That would roughly breakdown into about $2billion a household. Make the money in the form of a bank account and any mortgages or car loans and other big ticket items MUST be paid for first, then whatever is leftover is your bonus. All your student loans MUST be paid off first out of the account also. All your medical bills MUST be paid off from the account first. That would make it a TRUE "Bailout Nation".

EDIT: Looks like I picked the wrong week to quit sniffin' glue.

Huh? You're going to give me my money? I already have my money. I'm not bankrupt. I didn't bet more than I have on screwy financial instruments.

[BryanS]

Well strictly speaking par value isn't especially meaningful here. The idea is to buy the securities for at least greater than their current book value. The goal is not just to get bad securities off the books, but to recapitalize the banks or other holders. The way this will be done is to buy assets for more than book value, which creates a gain on sale for the bank that applies directly to their capital. In addition to profits from the sales, banks will gain by being able to mark up securities that they don't sell to the value that the Treasury pays for what it does buy. The net effect is that the banks gain a lot of cash but even more capital. The whole point is to spend more to create book value and mark-to-market profits, not to try to save money by spending less.

That is why the Treasury doesn't want to get anything in return like equity stakes in the bank. That will have the effect of diluting the capital injection and making it less effective. The banks that will benefit the most are those that have already taken the biggest mark-to-market losses: Merrill, Morgan, etc. If you want to get some of your money back I would suggest buying some stock in banks like these. When the market figures out how the recapitalization is designed to work they will go through the roof!

The more I think about the plan the more I am amazed at its audacity.

Excellent post.

But here is what I want to know...

1.) $700 billion. How are they arriving at this number? Why is it not 600 or 800? Where is Paulson's spreadsheet, where he calculates all of this? Who is in trouble? I want to know. That's the problem we have. Not enough transparency.

2.) What is the rush? It took Paulson and Bernake at least 3 weeks to a couple of months to draft up what was presented to Congress. Why is it, all of a sudden, so *urgent* that Congress blindly fork over the cost of at least two Iraq wars in less than 48 hours - or else we all die? Earlier this week we hear "the fundamentals of our economy are strong" - tonight we hear GBII say that "our economy is in danger." What?!

3.) These complex derivates/instruments are tied to real estate (most of them). A lot of that real estate is on the West Coast/California. 3-2-2 still going for 700K+, down from maybe 1M. Guess what? NOT ENOUGH CORRECTION. That 3-2-2 needs to get down to the high/mid 200's - to align with income. So... we're going to go through this reverse auction of sorts as a method of true "price discovery;" however, that discovery/discount may only reflect a 500K 3-2-2 vs. a 250K 3-2-2 (true market value). We could be paying DOUBLE, way over a more accurate valuation; and we're all screwed.

This plan works only if we buy right. Else, it's over.

[crunchtastic]

Bryan, it's got nothing to do with accurately valued real estate. It's an expensive hot potato game, and nothing more.

It has everything to do with a fat juicy capital injection so that the ibanks can re-invest in the same bad paper all over again. Houses will not become more affordable as a result of this. Credit might loosen, but values will stay artificially high.

It is the most jaw dropping swindle I have ever heard of, and I work for the apparatus, for pete's sake. The fact that The Administration is handling this the same way (cramming it through congress) that they did the Iraq War should give everyone pause.

[TheNiche]

Excellent post.

But here is what I want to know...

I'd like to know things too. Then I'd be a gazillionaire. And everyone would be indentured to me. It would be awesome. But that's not the way it works. You need to be willing to accept your own ignorance and theirs; to be more zen.

1.) $700 billion. How are they arriving at this number? Why is it not 600 or 800? Where is Paulson's spreadsheet, where he calculates all of this? Who is in trouble? I want to know. That's the problem we have. Not enough transparency.

They don't know. They can only estimate. And as I pointed out in an earlier post, their estimates may not really be very meaningful because they can be read several ways. Also, any unrecoverable investment by the government isn't really a social loss, but is just a transfer payment between entities.

2.) What is the rush? It took Paulson and Bernake at least 3 weeks to a couple of months to draft up what was presented to Congress. Why is it, all of a sudden, so *urgent* that Congress blindly fork over the cost of at least two Iraq wars in less than 48 hours - or else we all die? Earlier this week we hear "the fundamentals of our economy are strong" - tonight we hear GBII say that "our economy is in danger." What?!

Each passing day carries a risk of catastrophic panic. Sooner is better. If they can get it in on a Friday, all the better. Gives Wall Street an opportunity to digest the news, to see how international markets react before ours open up, and approach the new trading day with a clearer, less emotional mindset.

3.) These complex derivates/instruments are tied to real estate (most of them). A lot of that real estate is on the West Coast/California. 3-2-2 still going for 700K+, down from maybe 1M. Guess what? NOT ENOUGH CORRECTION. That 3-2-2 needs to get down to the high/mid 200's - to align with income. So... we're going to go through this reverse auction of sorts as a method of true "price discovery;" however, that discovery/discount may only reflect a 500K 3-2-2 vs. a 250K 3-2-2 (true market value). We could be paying DOUBLE, way over a more accurate valuation; and we're all screwed.

California has a higher replacement cost than Texas, and that's the true price floor. There really are supposed to be vast differences in housing prices. I don't know what the right number is, but it is lower than it is today...but still much higher than it is here.

This plan works only if we buy right. Else, it's over.

I'm not sure what you think will be over, exactly...but there really aren't any guarantees. If investors had confidence in price expectations, markets wouldn't be frozen and all this would be moot.

[crunchtastic]

OMG, Niche, the claim of 'catastrophic panic' is hyperbolic BS and you know it!

You know this means you are forever barred from marketing and PR in the business.