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The Power of the Wave Principle

Operation "Rescue Fannie Mae " Underway- Paulson a Blatant Liar

Companies / Credit Crisis 2008 Jul 13, 2008 - 02:43 PM GMT

By: Mike_Shedlock

Companies

Best Financial Markets Analysis ArticleOn Friday Treasury Secretary Paulson Said Keep Fannie and Freddie in Current Form .

U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder-owned companies with federal charters.


"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Paulson said in a statement in Washington.

Paulson's remarks indicate he wants to reassure shareholders they won't be wiped out by any government efforts to ensure the stability of the firms that own or guarantee almost half the $12 trillion in U.S. mortgages.

Yes, No, Yes, Maybe

The game playing charade was in full swing heading into the weekend. Watch the ping-pong ball.

Hedge Fund Model At Fannie, Freddie

John Snow stepped into the fray with a statement Fannie Mae, Freddie Mac Followed 'Hedge Fund' Model .

Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

"Congress ought to be embarrassed" for years of delays in passing legislation aimed at strengthening regulation of the two companies, Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, said in a telephone interview. He said he suggested when in office that "the business model they were using was really the model of a hedge fund."

The government-chartered companies, which grew to account for almost half of the $12 trillion in U.S. mortgages, were able to borrow at cheap rates because of an implicit federal guarantee, Snow said. His opposition to a full government takeover echoes the signal sent today by his successor, Treasury Secretary Henry Paulson.

"Congress ought to be embarrassed"

Yes, congress out to be embarrassed, but Snow has the wrong idea. Fannie Mae and Freddie Mac should be set adrift. There should be no government backing of either.

As I said in Nature of the Fannie Mae Bailout , "Fannie Mae exists to expand affordable housing . Clearly Fannie Mae has failed its core mission. All government sponsored corporations fail their mission. The very nature of promoting housing makes prices go up, until the final blowoff top which we are now on the backside of, having reached Peak Credit ."

Operation "Rescue Fannie" Underway

The TimesOnline is reporting US Treasury rescue for Fannie Mae and Freddie Mac .

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.

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.

The potential rescue comes as investors are braced for more bad news from the financial sector. 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.

The capital injection would also see both lenders granted permission to use the Federal Reserve's discount window - a short-term emergency funding source. Freddie Mac has a $3 billion short-term funding line that comes up for renewal tomorrow. The short-term debt is one of the hundreds of funding lines that the two agencies use.

Discount Window Pops Up Again

That last paragraph shows why the discount window keeps popping up. Putting two and two together it appears the Fed has been caught in a lie.

Freddie Mac's Next Hurdle: Raise Cash

The Washington Post is reporting Freddie Mac's Next Hurdle: Raise Cash .

Treasury Department officials were working the telephones yesterday to make sure that Freddie Mac, one of the nation's two troubled mortgage giants, will be able to sell $3 billion of its securities tomorrow in a previously scheduled sale that has now become a crucial test of investor confidence.

Since when in a supposedly capitalistic system should it necessary for the Fed and Treasury intervene in the markets on a day to day basis?

The Post article continues...

It would be only the latest in a series of unusual interventions. In March, the Fed extended a $30 billion credit line to orchestrate JP Morgan Chase's purchase of troubled investment bank Bear Stearns. The Fed then let other investment banks borrow directly from the Fed at favorable rates. And Friday the Federal Deposit Insurance Corp. seized control of California-based IndyMac Bank with plans to liquidate its assets at a cost that could wipe out more than 10 percent of the FDIC's funds.

"Someday this capitalistic economy, or what we used to call the capitalistic system, needs to get back on track and that means failure," said Lee Hoskins, former president of the Federal Reserve Bank of Cleveland. "You can't have risk-taking without failure."

To What Extent Did Paulson Lie?

Now we get to debate the meaning of the following

  • "Keeping Fannie and Freddie in Current Form"
  • "There will be no nationalization of Fannie and Freddie"
  • "A government takeover will not be necessary"

It seems to me that and injection of $15 billion capital into Fannie Mae and Freddie Mac and creating a new class of Government Owned Securities is most emphatically NOT in agreement with the above ideas.

Paulson Is The Great Pretender

Hell there is so much pretending going on it's hard to keep track. For starters everyone is pretending Fannie and Freddie are solvent. If they were solvent there would be no need for a $15 billion injection. Secondly, the government directly owning a new class of shares is not keeping Fannie in its current form.

The big concern is "Where does it stop?" Opening up a $15 billion dollar window will be the first of 10 such operations. This is likely the start of a U.S. Taxpayer Bailout of China . Disgustingly it is a U.S. Taxpayer bailout of PIMCO as well. Flashback May 23, 2008.

Bill Gross Triples Bet On Mortgages

The Financial Times reported Pimco's Bill Gross triples bet on mortgages.

Bill Gross, whose Pimco Total Return fund (PTTRX) is the world's largest bond mutual fund, has tripled his bet on mortgage debt, which now comprises about 61 percent of the fund's assets, the Financial Times said on Friday.

The chief investment officer of Pacific Investment Management Co said his decision to raise exposure in recent months stemmed from the U.S. government's implicit guarantee of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE), the government-sponsored mortgage financiers.

"Government policy is moving to sanctify the status of the government-sponsored agencies," Gross said, according to the newspaper. "It became a question of which institutions would be sheltered by the government umbrella."

"Operation Rescue Fannie" has now morphed into a taxpayer bailout of Bill Gross, China, and anyone else that levered into buying Fannie Mae garbage. It is a moral hazard to the highest degree, for bondholders to be made whole in this mess.

Paulson Is A Blatant Liar

It's now time to point blank call Paulson what he is: A blatant liar.

Flashback July 10th 2008 Paulson: Financial Institutions Must Be Allowed To Fail .

For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available," Paulson said. "For market discipline to effectively constrain risk, financial institutions must be allowed to fail."

Even though I called for it, this is extremely disgusting to see. I am hoping that bondholders participate at least partially over this, but I'm not holding my breath.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

anton
13 Jul 08, 15:31
walking the walk

While its easy to Blame Paulson and the rest for bailing out these companies, there is something to be said for saving the financial system. If FRE or FNM were allowed to fail it would certainly be a great lesson to future risk takers and a re-affirmation of the free market system, but it would also lead to a meltdown of the system, even the big 5 would have trouble staying solvent if the meltdown happened. Finally, there is the issue of the US government and the trust other governments and international banks place in the US system. Until now the presumption was that FRE and FNM were backed by a federal guarantee, if this proves false then US treasuries may be effected significantly, and this would increase borrowing costs to the US government causing a severe recession.

Modern life is based on credit, we cant let that credit system fall apart, even if it means bailing out undeserving risk takers.


Dave
16 Jul 08, 08:49
Freddie and Fannie Poole had it right all along

When Poole told congress years ago that they should rescind the federal Charters, that guarantees all private loses to Freddy and Fanny customers .Congress did not act.

Now Americans will be saddled with the bill

Mark my words IT won't be gas lines we will see in 2010 it will be bread lines.

The stage is set for the complete collapse of America.

Then we will seethe North American Union come to pass with

not even a sigh !


Rick Cain
17 Jul 08, 20:39
Welcome to Corporate Socialism

Privatize the profits, socialize the risk.

Thanks to private industry and the whore that is the GOP that loves them, in 2010 China will be driving the cars, and we will be riding the bicycles.


Mark
18 Jul 08, 05:23
U.S. Government to Bailout Freddie Mac and Fannie Mae

So now Treasury Secretary Hank Paulson and the Bush Administration are pushing Congress to approve a bailout of the mortgage intermediaries Freddie Mac and Fannie Mae.

This is surreal.

The largest bondholder of both organisations is the Chinese Government, which is a sophisticated investor employing the best of High Street and Wall Street advisers, and which purchased the bonds of the two agencies pursuant to a prospectus which explicitly disavows any obligation of the United States Government to back the bonds.

The Bush Administration wants to use American taxpayers' monies to bailout the two agencies on behalf of a government (China) which refuses to repay its own government bonds held by American citizens!

This is nothing but socialism for the rich, whereby profits are privatised and losses are socialised. The terms "high treason" and "impeachment" come to mind. Nothing will change until the corrupt elected officials are removed from office and a corrupt financial system is finally overhauled.

See article below -

FreedomWorks

July 11, 2008

Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds

$376 billion in Chinese agency bond holdings subject to taxpayer bailout proposals.

Contact: Adam Brandon

Phone: 202-942-7612

Email: abrandon@freedomworks.org

Washington, DC - As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government. That's why investors holding agency bonds already receive a significant risk premium over Treasuries."

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors. It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors."

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics."

U.S. Treasury Report on Foreign Portfolio Holdings of U.S. Securities Page 28

Regarding China's refusal to repay its sovereign debt, see:

http://www.globalsecuritieswatch.org/PRC_Sovereign_Risk_Review.pdf


Jeff W
24 Jul 08, 12:31
Freddie Mac Fannie Mae Bailout.

This so called bailout of Fannie Mae and Freddie Mac is going to cost all of us tax payers. I see some here believe this was pushed by the current administration. I recommend you look to see who voted for it from your congressional district. This was pushed by the democratic party and bush was forced to sign it to not stir up a debate during an election year. I have news for the democratic party, the debate is on. The bill is going to further hurt the slow housing market by not allowing people with good credit but lack a down payment from getting a loan.

Many very good people that are very responsible at paying their bills but can't afford to put aside a 3% downpayment are now not going to be allowed to be homeowners and that is a shame.

Those same people spend money on new furniture and household goods when they move which stimultes the economy. This will further raise unemployment at the same time as raising taxes, and rising interest rates.

Buckle in because the border line recession is going to become a border line depression.

I am curious to see the responses to this.


Vigdor
14 Oct 08, 13:27
Stock Injection Plan

I think the stock Injection Plan is a good plan - and there's quite a bit of content out there to look at regarding the stock injection. Of course the NPR shows are tremendous - they should be required listening for every American. They are so well done. There’s another site out there that’s really informative - http://www.StockInjectionPlan.org. The site is really informative and well done. It’s not This American Life - but it’s really, really good & informative.


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