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Fed to Rescue Fannie Mae, Freddie MacUser Forum Topic
Submitted by HiggyBaby on July 13, 2008 - 5:17pm
Fed will make money available at 2.25 % interest to FM/FM. Also, Fed would be involved in setting capital reserve requirements going forward. (Even though Ben says they are adequately capitalized...But, wait, didn't Greespan say something to the contrary about that some time ago....)Treasury could take an equity stake if needed, upon crongressional approval. Fed to Rescue Fannie Mae, Freddie Mac WASHINGTON (July 13) - The Federal Reserve and the U.S. Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac , whose shares have plunged as losses from their mortgage holdings threatened their financial survival. The Federal Reserve said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." If the companies did borrow directly from the Fed, they would pay 2.25 percent - the same rate given to commercial banks and Big Wall Street firms. Secretary Henry Paulson said the Treasury is seeking authority to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies - if needed. Such moves will require congressional approval. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owner companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction." The Treasury's plan also seek a "consultative role" for the Federal Reserve in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies. Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States. The department, the Fed and other regulators worked in close consultation throughout the weekend after investor fears about the companies' finances sent their shares plummeting in trading last week. Paulson is working closely with congressional leaders to advance his plan as soon as possible as one complete package. The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities. Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loans customers. A senior Treasury official said any increase in the line of credit - now at $2.25 billion for each company- would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government. The official, who spoke on condition of animosity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday." If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too. Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover. Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, D-Conn., told CNN on Sunday that Fannie and Freddie are financially sound. "What's important here are facts," Dodd said. "And the facts are that Fannie and Freddie are in sound situation. They have more than adequate capital - in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury as said as much." Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.
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Any bets on which way the stock market will go on Monday? I'm betting ==> up! We'll see....
I think the Market is going to be down.
I'm going with Raybyrnes on this one. Look at the major news headlines:
CBS
Shoring Up Fannie Mae And Freddie Mac
Mortgage Giants Falter, Fed Plans For The Worst
CNN
Feds plan to rescue Fanny/Freddie
I'm not sure if Fanny and Freddie will be up or down. The fact that they need a bailout should bring them down. But part of the bailout plan is the fed buying up their shares, which would drive them up... So I'm not touching those two.
Any bets on which way the stock market will go on Monday?
My bet is that it goes up AND down.
I got a bad feeling. The next two weeks is going to be nuts. Latest news interprets the plan as the gov't will help fredie and fannie, but that's it. The rest of the financials are on their own. Getting a mortgage will likely get tougher and rates may rise, see you in the emergency room.
http://biz.yahoo.com/ap/080714/credit_cr...
Something wicked this way comes.
It doesnt really matter, cause itll do the exact opposit the next day. Up Monday by 150, down Tuesday by 149, or down Monday 150, then down Tuesday by 149. Big whoop. The overall bias will be down till we solve this bank implosion buisness.
I think it will go up. The announcement is basically that they will bail out Fannie/Freddie if such a need arises, but at the same time they deny that there are any major problems with two companies.
Of course I'm biased (I'm long FNM, entered at $10) but we'll see. If it drops to 5, I'll double down.
P.S. Asian markets are sideways, European markets are up. DAX and FTSE are generally well correlated with Dow, they are up 1.1% - 1.3% right now.
Here's a picture of U.S. Treas Sec Henry Paulson...
Caption this.
I'll start....
"Dear Lord, please make this plan work...Amen"
So...why the difference in reaction on this board? When Congress was trying to assist the homeowner, everyone was up in arms and had smoke coming out their ears.
But when the Treasury Secretary outlines steps to prop up Fannie and Freddie or the Fed steps in to take over Indymac, not a peep out of the Hogs and Hogville - only guesses as to who is next.
Quite a difference in reactions. Somebody explain that to me.
TG - this is a nice lead-in to the "HSD" period, scheduled to start in Sept.
Svelte,
Couple of thoughts for you.
First of all - bailing out the homeowner = bailing out the lending institutions. It's pretty much the same thing. In fact, it kind of screws the homeowner into continuing to pay into a depreciating asset, while continuing the cash-flow into the banks' coffers.
Second - Bear Sterns is not Freddie and Fannie. Backing F&F makes some sense to avoid panic. Not so sure about Sterns.
It would be great to let F&F fail but I don't think anyone realistically believes that the Fed/SEC/Congress will allow it to happen.
svelte - here is an article that explains a bit more about F&F.
http://calculatedrisk.blogspot.com/2008/...
correct me if I am wrong but a failure of Freddie or Fannie and a consequent bailout by the government will first require liquidation of shareholder equity. This means shareholders get nothing! So any talk of a possible bailout plan should send shares down not up because it confirms that the situation is precarious.
FLU, my take on that pic.
"Please Mr Tax Payer Sir; May I have another 5 Trillion dollars?"
Caption this.
I'll start....
"Dear Lord, please make this plan work...Amen"
Here's mine:
"Gentlemen, I have a plan inside my hands. It's a magical plan. Proprietary, if you will. But mainly magical. That's why I have to keep it hidden from view - inside my hands where bad people - evil naysayers - can't view it. Unlike previous plans, which have failed woefully thus far, this magical proprietary plan will work. And work really really well. But before I can open my hands and unveil this magical plan, I need a promise from you. Hey, what sort of magical plan would come without some strings attached, right? But I digress. What I need is access to, say, about $500 billion of our money. I say "our" because as a U.S. taxpayer I own a teeny tiny part of that $500 billion. So, it really is "our" money. Anyhow, once you promise to give me access to the $500 billion, then and only then will I open my hands and unveil the magical plan. Which, again, is going to work really really well. Hey, if you can't trust Big Hank - the Treasury Secretary - then who can you trust, right? So, about that promise... and no finger crossing either."
LOL! you guys are too funny! :D
I guessed wrongly. Even though it went up early on today to nearly 11,250, we flirted with 11,000 and ended up about 50 points lower overall today.
FLU and all, the photo's were great.
My caption: I pray that the Treasury doesn't have to bail out FM/FM.
But when the Treasury Secretary outlines steps to prop up Fannie and Freddie or the Fed steps in to take over Indymac, not a peep out of the Hogs and Hogville - only guesses as to who is next.
Quite a difference in reactions. Somebody explain that to me.
svelte,
I think most Piggs are resigned to a massive bailout. That's why you are seeing these reactions.
As for me, I'm not sure what the U.S. Government should do. Paulson said in his statement that a lot of foreign governments hold agency debt and he seemed to imply that stiffing these foreign governments would not be a good for the U.S. over the long term. I don't know if that's a real concern or if Paulson is just trying to scare the U.S. taxpayer into accepting a bailout. This administration has told so many lies that it's tough to believe in anything they say.
It would make me feel a lot better if our government officials would admit that the GSEs have not made housing cheaper, but instead they have done the exact opposite and driven house prices to a level which most people can't afford. I think most politicians are too beholden to campaign contributions from the GSEs to tell the truth.
Hopefully the next administration will bring in some people who aren't afraid to tell the truth and the GSEs can either be broken up or gotten rid of all together (the best solution in my opinion).
It really sucks to see all this U.S. taxpayer money go to bailout so many crooks who got rich basically through fraud. Hopefully the next administration will hold some of these crooks (Mozillo, et al.) accountable, but I'm not holding my breath.
Looks like it's a done deal:
http://www.bloomberg.com/apps/news?pid=2...