Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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

© 2005-2014 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.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014