rip fannie and freddie

[philcski]

Originally Posted by dalakhani

Why do you think this happened?

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.

Originally Posted by PSH

Unfortunately, the bailout was not a matter of if it was going to happen but when. Even though FNM had as of 6/30 more than enough capital on its books to at least get thru the year before another capital infusion may or may not have been necessary it became apparent that something had to be done like the Gov't announced this weekend to attempt to stop the huge markdowns being taken on the books of financial institutions. These financial institutions own billions and billions of $$$ of FNM and FRE bonds and were forced to take huge writedowns which affected their own capital on their books and hence the major equity infusions (many from sovereign wealth countries) to these institutions. The problem lies that many of these financial institutions have to continually mark down their paper as the prices of homes continue to decline and foreclosure rates increase. Everything seems to be connected in this financial world.... The hope and aim of the Gov't takeover is that it will reduce the costs to buyers of homes and that these financial institutions will once again feel confident to start making loans again. Our economy can not recover until these financial institutions get their own books in order and start to make loans. Housing prices have to stabilize in order for that to happen. Yes, it is sad that the equity holders are wiped out in FNM and FRE but unfortunately equity holders are the lowest on the totem pole in protection. We shall see if this action by the Government stabilizes the housing market and also stabilizes the spreads of mortgages and other financial fixed income instruments to Treasuries. One should remain skeptical on how this plays out.

PSH

Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

[dalakhani]

Originally Posted by philcski

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.



Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

I hear you Phil. But letting Wall St. take their lumps will only further exasperate an already skittish market. Lack of available lending products and higher rates are now the leading detriments to housing recovery. Ratios of price/income and mortgage payment/rent have come back to sane ,sustainable levels.

So say you let the GSE's fail which appeared fait accompli. What would that do? It would cause the housing market to completey tank as the ONLY source of money would be FHA (which will see huge troubles ahead...another subject) or private banks (which are charging crazy rates for non agency paper).

If the government was going to inject the massive amounts of capital necessary to prop up the GSE's, doesnt it only make sense that they can truly run and regulate them? And for the record, the government is going to make a nice profit when this all shakes out.

lastly, the bolded part needs a little clarification. Do you really think the banks and brokers that originated the loans even CARED about whether the homes would appreciate? Do you think the investment banks did? Or do you think that they thought they could continue to pass the paper off to some other poor sucker?

Originally Posted by dalakhani

I hear you Phil. But letting Wall St. take their lumps will only further exasperate an already skittish market. Lack of available lending products and higher rates are now the leading detriments to housing recovery. Ratios of price/income and mortgage payment/rent have come back to sane ,sustainable levels.

So say you let the GSE's fail which appeared fait accompli. What would that do? It would cause the housing market to completey tank as the ONLY source of money would be FHA (which will see huge troubles ahead...another subject) or private banks (which are charging crazy rates for non agency paper).

If the government was going to inject the massive amounts of capital necessary to prop up the GSE's, doesnt it only make sense that they can truly run and regulate them? And for the record, the government is going to make a nice profit when this all shakes out.

lastly, the bolded part needs a little clarification. Do you really think the banks and brokers that originated the loans even CARED about whether the homes would appreciate? Do you think the investment banks did? Or do you think that they thought they could continue to pass the paper off to some other poor sucker?

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

[philcski]

Originally Posted by pgardn

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

A little simpler than I would have written, but pretty much correct.

[dalakhani]

Originally Posted by pgardn

I will interject.
I can't help it.

imo they(Mortage companies) were pulling people off the street and giving them mortages that looked very attractive to 2ndary and on investors who did not do their homework (the majority of the people would not be able to pay these rising rate pile o crap loans). Basically a pyramid scheme destined to fail. And now we see who ends up holding the cleaning products that wont sell. Stupidity and greed are fantastic partners for the get rich quick.

Yes, fraud was ramapant. But you have to understand the climate of the industry during that period of time 2003-2007. Investment banks were creating products that all but screamed "we dont care if its fraud or not". Are you telling me its the mortgage broker's fault for originating a loan that required no income, no assets and no JOB with an LTV of 100%? These were wall st creations and their appetite was INSATIABLE. And why? Because they knew they could package it up in a CDO and have a ratings company slap triple A on it.

I think the notion that loan officers and consumers can get away with that level of fraud without Wall St. being compliant is totally naive. It was Indeed systemic.

Originally Posted by dalakhani

Yes, fraud was ramapant. But you have to understand the climate of the industry during that period of time 2003-2007. Investment banks were creating products that all but screamed "we dont care if its fraud or not". Are you telling me its the mortgage broker's fault for originating a loan that required no income, no assets and no JOB with an LTV of 100%? These were wall st creations and their appetite was INSATIABLE. And why? Because they knew they could package it up in a CDO and have a ratings company slap triple A on it.

I think the notion that loan officers and consumers can get away with that level of fraud without Wall St. being compliant is totally naive. It was Indeed systemic.

Sorry its passing it down. The loan officers that had been in the game a long time KNEW it was wrong. They questioned the outrageous loans and some got stiffed and fired by their employers, the Mortage companies. It was happening all over the country. So hell yes the people at the top(primary lenders) of the scheme knew it was wrong... imo. Now this might have been made easy by other entities but with loan officers smelling fish early on... the dadgumb loan officers with experience knew. Thats bad.

[skippy3481]

Very interesting thread

[PSH]

Originally Posted by philcski

I think people are still skeptical. The root of the issue is poor lending practices by banks who followed the thought process of "well, even if the homeowner can't pay the mortgage, we'll be able to recover the full loan value because housing prices ALWAYS rise" whereas in some parts of the country homes were already at a saturation point of cost versus income.



Therein lies the problem and why you are wrong. The lenders worked under false assumption that home prices would continue to rise at an unsustainable level, despite warning flags of the cost of housing spiraling out of control. The lenders should have been held accountable for their poor investments, and learned a lesson from it- not allow the government to step in and bail them out. Continued poor lending practices under the assumption that the "implied government backing" will only cause housing prices to further rise, putting additional pressure on the consumer and the American economy. It's a vicious cycle that must be stopped through painful lessons learned and this is NOT the answer.

I appreciate you telling me that i am wrong.
Obviously, the lenders got into trouble by writing questionable loans. Anyone can see that. My point is where we are today what was going to happen. Yes, the lenders should be accountable for their poor investments but the government made sure that was not going to happen because of the fear of the collapse of the whole financial system. See Bear Stearns and Countrywide - government engineered takeovers by JP Morgan and BofA.
I see Lehman, JP Morgan, and the other financial companies on a regular basis and the writedowns that you see are real with more to come. The takeover of FNM and FRE by the government may not solve this financial crises but it is a step in the right direction. As i said earlier we shall see. To let the whole financial system possibly unravel is what would be wrong.

Just my opinion and although i am wrong in your eyes, i am right in my eyes.

PSH

[philcski]

Originally Posted by PSH

I appreciate you telling me that i am wrong.
Obviously, the lenders got into trouble by writing questionable loans. Anyone can see that. My point is where we are today what was going to happen. Yes, the lenders should be accountable for their poor investments but the government made sure that was not going to happen because of the fear of the collapse of the whole financial system. See Bear Stearns and Countrywide - government engineered takeovers by JP Morgan and BofA.
I see Lehman, JP Morgan, and the other financial companies on a regular basis and the writedowns that you see are real with more to come. The takeover of FNM and FRE by the government may not solve this financial crises but it is a step in the right direction. As i said earlier we shall see. To let the whole financial system possibly unravel is what would be wrong.

Just my opinion and although i am wrong in your eyes, i am right in my eyes.

PSH

Sorry, I'm not trying to be mean here, apologies if it came off as such.

The whole financial system would not unravel if the government had allowed to FNM & FRE to continue. Both had plenty of capital and access to more. People and corporations have to learn from their mistakes, and if there's no ramafications to poor decision making where is the incentive to "do the right thing" - which in this case would be to recognize the fallacy of the assumptions in which these loans were underwritten?

So do you believe the next big Wall St sinking ship, whom will remain unnamed but with proper research can be deduced, should also be thrown a life raft as well? I don't.

[dalakhani]

Originally Posted by philcski

Sorry, I'm not trying to be mean here, apologies if it came off as such.

The whole financial system would not unravel if the government had allowed to FNM & FRE to continue. Both had plenty of capital and access to more. People and corporations have to learn from their mistakes, and if there's no ramafications to poor decision making where is the incentive to "do the right thing" - which in this case would be to recognize the fallacy of the assumptions in which these loans were underwritten?

So do you believe the next big Wall St sinking ship, whom will remain unnamed but with proper research can be deduced, should also be thrown a life raft as well? I don't.

I am going to take a stab at Lehman Brothers. And, no, they should be allowed to fail.

Phil, as far as fannie and freddie goes, dont you think they received the ULTIMATE punishment? In effect both were wiped out in one fell swoop. Management was replaced in both and it is just a matter of time before all the employees become government employees. I know they still have jobs but many will be offered a pittance compared to what they made when the GSE's were private. How was anyone "saved" here? The only thing that might have been saved was the mortgage market.

[PSH]

Phil:

We really are not that far apart. Yes, in theory i agree that corporations that make mistakes and in this case take on too much risk and leverage without thinking about the consequences should be allowed to go under...
However, as evidenced by the engineered takeovers of Bear Stearns and Countrywide Credit by the government there is a maze of connections within the financial system that is scaring many to allow them to go under. As was pointed out in the earlier post the equity holders are pretty much all wiped out as if the company went bankrupt. However, in the case of Bear Stearns and Lehman or Merrill Lynch or whomever there is too much counter-party risk to allow these investment banks/brokers to go under without someone coming in and swooping them up. Yes, i agree FNM had enough capital today to get to the end of the year and FRE was questionable. The ability to access additional capital in the markets has become questinable given their share price and risks. The government almost had to do what they did just to keep the financial system from taking a huge hit given the large amounts of paper outstanding. That is just my take and opinion. I understand your position....

PSH

[philcski]

Senator Bunning Says Paulson Acts Like Socialist, Should Resign
2008-09-09 17:44:34.60 GMT


By Matthew Benjamin
Sept. 9 (Bloomberg) -- Senator Jim Bunning said Treasury
Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac,
is acting like China's finance minister and both Paulson and
Federal Reserve Chairman Ben S. Bernanke should step down.
``I sincerely believe that Henry Paulson and Ben Bernanke
should resign,'' said Bunning, a Republican from Kentucky on the
Senate Banking Committee. ``They have taken the free market out
of the free market.''
Paulson and the federal regulator for Fannie and Freddie
placed the two largest U.S. mortgage-finance companies in a
government-operated conservatorship on Sept. 7, ousting their
chief executives and eliminating their dividends. Treasury also
may purchase up to $200 billion of stock in the firms to keep
them solvent.
``We no longer have a free market in the United States, we
have a government controlled free market,'' Bunning said in an
interview. Paulson, a former chief executive officer of Goldman
Sachs Group Inc., ``is acting like the minister of finance in
China.''
Bunning, 76, criticized Paulson's successful effort in July
to obtain congressional authority to pump unlimited amounts of
money into Fannie and Freddie to keep them afloat.
``When I picked up my newspaper yesterday, I thought I woke
up in France. But no, it turned out it was socialism here in the
United States,'' he told Paulson at a July 15 Senate Banking
Committee hearing.
Following Paulson's Sept. 7 announcement of the takeover of
Fannie and Freddie, Bunning said he now feels like a citizen of
China.

Former Phillies Pitcher

``No company fails in communist China, because they're all
partly owned by the government,'' said the former pitcher for the
Philadelphia Phillies.
Bunning accused Paulson of deception when he told Congress
in July that the Treasury's plan would instill such confidence
among investors that it would never have to be used.
Paulson ``saw and knew what was happening, and didn't tell
the truth to the banking committee,'' Bunning said yesterday.
Treasury spokeswoman Michele Davis didn't respond to
requests for comment.
Bunning, a critic of former Fed Chairman Alan Greenspan,
faults Bernanke for lax supervision of the mortgage market.
The Fed chief waited too long to require lenders to change
how they write mortgages, Bunning said. ``I mean he just did it
two months ago. Come on.''
When asked if he expects more multibillion dollar rescues by
Treasury, Bunning said, ``You bet I do.''
He said Paulson on Sept. 7 should have detailed an overhaul
in the business model of Fannie and Freddie.
Bunning predicted in July that, contrary to statements by
the Treasury, Paulson would provide capital to Fannie and
Freddie.
``Every time we propose and do something, it always gets
used,'' he told Paulson at the July banking committee hearing.

For Related News:
U.S. economy stories: TNI USECO ECO BN <GO>
Bloomberg's top government news: GTOP <GO>

--With reporting by Rebecca Christie in Washington. Editors:
James Tyson, Carlos Torres

To contact the reporters on this story:
Matthew Benjamin in Washington at +1-202-624-1971 or
mbenjamin2@bloomberg.net.

To contact the editor responsible for this story:
Chris Anstey at +1-202-624-1972 or canstey@bloomberg.net.

[Danzig]

Originally Posted by PSH

Phil:

We really are not that far apart. Yes, in theory i agree that corporations that make mistakes and in this case take on too much risk and leverage without thinking about the consequences should be allowed to go under...
However, as evidenced by the engineered takeovers of Bear Stearns and Countrywide Credit by the government there is a maze of connections within the financial system that is scaring many to allow them to go under. As was pointed out in the earlier post the equity holders are pretty much all wiped out as if the company went bankrupt. However, in the case of Bear Stearns and Lehman or Merrill Lynch or whomever there is too much counter-party risk to allow these investment banks/brokers to go under without someone coming in and swooping them up. Yes, i agree FNM had enough capital today to get to the end of the year and FRE was questionable. The ability to access additional capital in the markets has become questinable given their share price and risks. The government almost had to do what they did just to keep the financial system from taking a huge hit given the large amounts of paper outstanding. That is just my take and opinion. I understand your position....

PSH

i know in freddie and fannies cases the govt also said they have always assured people that bankers in general are insured by the govt-the whole full faith deal.
whether lehman qualifies is another story. guess it depends on whether the feds think lehman would affect more than just the national economy, as they mentioned global investing/economy regarding mac and mae.

[PSH]

Originally Posted by Danzig

i know in freddie and fannies cases the govt also said they have always assured people that bankers in general are insured by the govt-the whole full faith deal.
whether lehman qualifies is another story. guess it depends on whether the feds think lehman would affect more than just the national economy, as they mentioned global investing/economy regarding mac and mae.

With Lehman it definitely does not qualify affecting the national economy but the worry is all of the counter-party risk involved with Lehman on various financial instruments. I hear that the Feds aren't involved as of yet with Lehman and that there are 3 suitors: Barclays, B of A and HSBC. Expect the equity will go down to basically nothing (it is almost there) and then a firm or more than one firm will start to divvy up Lehman ......

WaMU, National City, Wachovia, Merrill, and hundreds of smaller financial institutions remain very questionable on their future outlook...

Its a mess.

[dalakhani]

Originally Posted by dalakhani

I am going to take a stab at Lehman Brothers. And, no, they should be allowed to fail.

Phil, as far as fannie and freddie goes, dont you think they received the ULTIMATE punishment? In effect both were wiped out in one fell swoop. Management was replaced in both and it is just a matter of time before all the employees become government employees. I know they still have jobs but many will be offered a pittance compared to what they made when the GSE's were private. How was anyone "saved" here? The only thing that might have been saved was the mortgage market.

Darn it Philly! Why didnt you send me a PM telling me to call my broker to short this TODAY?

Cr

[philcski]

Originally Posted by dalakhani

Darn it Philly! Why didnt you send me a PM telling me to call my broker to short this TODAY?

Cr

Idiot savant on my part...

and to be honest I can't. All my email and internet whatnot is monitored on here and I'd get fired if I did. Tough to watch that tank today, though.

[dalakhani]

Originally Posted by philcski

Idiot savant on my part...

and to be honest I can't. All my email and internet whatnot is monitored on here and I'd get fired if I did. Tough to watch that tank today, though.

I was talking to a guy at the bank last december and i told him back then lehman was going down because of their Alt-A book. He said that they had sold out of all of those bad loans. I told him that they would be buying them back.

Two months later, they close Aurora. Now this.

Which has to lead you next to...Merrill?

On the bank side, Wachovia is dead and stinkin.