Interest Rate Roundup

Saturday, September 06, 2008

Fannie and Freddie getting "MOAB" -- plus, another bank failure

It's official -- Fannie Mae and Freddie Mac are getting the MOAB ... or Mother Of All Bailouts. Some details below from the New York Times and the Wall Street Journal:

The Times:

"Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

"The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

"It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

"The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

"Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

"A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

"The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said."

Who wins? Who loses? The Times tried to answer that question as well:

"Even so, it is almost certain that some of the biggest losers will be shareholders who own more than $10 billion worth of Fannie Mae and Freddie Mac common stock. At the end of last year, those shares, which are widely held by individuals, pension funds and mutual funds, were worth nearly $100 billion. Now those investments could be virtually wiped out. Fannie Mae shares fell nearly 22 percent, to $5.50 in after-hours trading; Freddie Mac was down nearly 21 percent, to $4.04.

"Investors who own some $36 billion of the preferred shares could also take a big hit. Preferred shares of Fannie Mae and Freddie Mac were little changed in after-hours trading on Friday evening. The shares are down more than 45 percent since the end of last year. JPMorgan Chase, for example, has already slashed by half the value of its $1.2 billion holdings of the preferred shares.

"Another bank, Sovereign Bancorp, a regional lender based near Philadelphia, holds about $588 million of the securities, about 13 percent of its tangible capital, according to a research report by a Keefe, Bruyette & Woods.

"Among the winners are the holders of trillions of dollars of the companies’ senior debt and mortgage-backed securities, which are owned by big financial institutions and central banks around the world. On Friday, the premium investors demand to hold debt issued by Fannie Mae and Freddie Mac rather than comparable Treasury notes and bonds began to fall as word of the government plan spread."

And from the WSJ:

"The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac, according to people familiar with the matter, a move that would essentially result in a government takeover of the mortgage giants.

"The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

"It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said.

"In addition, Treasury's plan includes a top-level management shakeup at both companies, according to people familiar with the plans. Daniel H. Mudd, chief executive of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are expected to step down from their posts eventually.

"An announcement could come as early as this weekend. Some details are still being worked out, and terms of the arrangement could change."

Meanwhile, on the banking front, we had another medium-sized failure. Silver State Bank of Henderson, Nevada was closed, with Nevada State Bank of Las Vegas assuming its insured deposits. Silver State Bank had total assets of $2 billion. Uninsured deposits were estimated at $20 million. The FDIC said the failure will cost somewhere on the order of $450 million to $550 million. This is the 11th failure so far in 2008.


  • what does it all mean? Are we out of the woods now? Will this break the back of the housing and credit crisis? Can you offer a view on the recent history? My understanding (loosely speaking) is the bulk of the wave of defaults has been redirected by the government from the private sector to Freddie and Fannie for months - i.e., Freddie and Fannie have been forced to buy up bad mortgages from Wall Street. And now taxpayers are going to be hit by an even bigger wave than they would have. Was this a crafty strategy to offload this mess onto the taxpayers AND ease the weight on rich bank executives and traders? "No alternative" I'm sure. But has this MOAB been dressed to look cleaner than it is? And is this just a big downpayment forced upon taxpayers for Wall Street's crumbling house of cards and there are many more years of payments to look forward to? Or are they buying the whole mess in cash from our pockets? I guess the bright side is this makes us all homeowners...kind of. No wonder I've been working so hard. How about an opinion? I aleady read the WSJ and NYT.

    By Anonymous Anonymous, at September 6, 2008 at 10:57 PM  

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