Federal Government to Seize Freddie, Fannie?

NY Times just has a breaking news item. Fed preparing plan to seize Freddie Mac and Fannie Mae. It is on like Donkey Kong.

How is this connected to Sarah Palin?

Are you sure you’re in the right sub-forum?

A government takeover would leave their stock without value, right?

Regular stockholders would be the low man on the totem pole for getting repayment, so essentially you are correct.

Right thing to do. Since the government made the guarantee of Freddie and Fannie’s debt explicit, they should be running the show explicitly, rather than allowing management and owners to profit unduly from risk free Federal underwriting. In other words, the tax payers are the ones with their nuts in the grip, so the tax payers should be the ones reaping the reward.

Freddie and Fannie have been using that Federal guarantee to do cheeky stuff for years, so I for one don’t mind. Hopefully they’ll be broken up and sold after the worst is over.

Conservatorship Diluted, but not wiped out. Probably a lot diluted, but we’ll see.

I’ll also say this: Bill Gross gets bailed out.

Most likely the federal government buys some sort of senior preferred stock. If common stockholders aren’t totally wiped out, they will be severely diluted (i.e., their stock won’t be worth much). Senior debt of the company will be effectively government guaranteed. Subordinated debt and preferred stock are a question marks at this point as to how much they’re protected. A big issue is that banks own a lot of that stuff, so if they wipe out the subordinated debt holders and preferred stock holders, there will be a lot of bank failures as a result and a broad weakening of the balance sheets of a lot of other banks that don’t fail necessarily but are made that much more shaky in an already pretty severe banking crisis. Probably subordinated debt and preferred stock get some protection compared to common stock holders as a result. The senior management of both companies will be fired and replaced by people chosen by Paulson and Bernanke, as will the boards of directors. Reportedly, the CEO’s of both companies were called to meetings this afternoon with Paulson and Bernanke, which probably just amounted to them being given a letter of resignation to sign.

A major problem for the economy has been that Fannie and Freddie have been capital short, so they haven’t been buyers of mortgage-backed securities (groups of individual mortgages bunched together, guaranteed by Fannie, Freddie, or Ginnie Mae and then sold to investors). Asian investors have been spooked by Fannie and Freddie’s financial problems, so they haven’t been buying either. That basically means the key investor buying base for this stuff has been missing and the market has traded terribly. Yields on mortgage-backed securities directly flow through to mortgage rates being offered homebuyers in very short order. The turmoil in the MBS market has sent mortgage rates a lot higher. So if Fannie and Freddie get big capital injections from the government, they can step in big time and start buying MBS and bring mortgage rates down in a hurry along with the Asian investor base who will come back with the federal government assuring them that the guarantee Fannie and Freddie put on this paper is iron clad.


Goddamit! I just felt my taxes going up again!

Bailout? Called it! (and with me many others but still).

Even so, I feel not wiping out the shareholders while seeming a better short term solution is actually worse for the long term. Everyone who would fail with a wipe would deserve to fail. Keeping all these bad apples afloat just extends the doom counter some more.

Why are you categorizing the shareholders as the guilty parties that deserve to be wiped out?

He probably means major shareholders more specifically. It makes sense. Shareholders do make decisions, after all. Minority shareholders not so much.

Of course the minority shareholders are going to get the shortest end of the stick.

Let’s see… the government now owns 3/4s of all mortgages in the US and has the ability to claim eminent domain. I’m sure nothing bad will come of this.

Let’s see… the government now owns 3/4s of all mortgages in the US and has the ability to claim eminent domain. I’m sure nothing bad will come of this.

All the more incentive to not have a mortgage.

Paid off yours already?

Paid off yours already?

At the beginning of this year. We had more in the stock market than we owed on the house and figured it was a better trade. It’s worked well for us so far!

And I’m not trying to brag here or show off or whatever. I’m just commenting that this sort of situation with the associated scare above adds fuel to the argument that paying off your house, if you have the means, is a pretty solid investment both in terms of safety and money.

Renting is often a good move in a housing slump.

I’m renting right now. The Vancouver housing market is ridiculous, being the most expensive in Canada. I don’t plan on buying a place until I get married, and at the rate I date I won’t be be getting married any time soon…

The average price of a detached bungalow home in metro Vancouver is around $857,500, where as a similiar home in in Calgary and Toronto are $438,122 and $436,782, respectively, in Q2 2008. It costs more if you’re looking for a detached two-storey home in Vancouver, as it would go for on average $953,250, compared to $437,744 and $564,228 in Calgary and Toronto, respectively.

Even condos are getting out of my price range, as a non-married guy. The average price of a condo apartment is around $455,750, despite the constant construction of new condo buildings. I blame people from outside of Vancouver (particularly from Asia) buying up the real estate as an investment instead of homes (a good number of the condo apartments are rented out). This makes it harder and harder for Vancouverites to afford to buy a home, especially when land is so scarce in the Lower Mainland.