Fannie, Freddie send Dow below 11,000 for first time in two years

[Trinity]

Dow drops below 11,000 for 1st time in 2 years: Financial News - Yahoo! Finance

Stocks tumble on worries about Fannie, Freddie; Dow falls below 11,000 for first time in 2 yrs

NEW YORK (AP) -- Stocks tumbled Friday as investors focused on troubles at mortgage companies Fannie Mae and Freddie Mac and watched oil prices climb further into record territory. The Dow Jones industrials fell more than 200 points and slid below the 11,000 mark for the first time in two years.

Investors seemed unimpressed by a statement from Treasury Secretary Henry Paulson, who said the government's focus is ensuring that Fannie Mae and Freddie Mac remain as presently constituted to carry out their mission.

The government-chartered companies at times each lost more than 40 percent on growing speculation that a government bailout is needed. A collapse of the two financiers would cause further shock to the financial system, and trigger more losses to banks and brokerages with significant holdings of mortgage-backed securities.

The troubles at Fannie Mae and Freddie Mac are just the latest depressing turn in a year-old credit crisis that shows no sign of ending, disappointing stock traders who just months ago who thought the worst was perhaps over.

Global banks and brokerages have scrambled to sell assets and raise capital in an effort to offset nearly $300 billion of write-downs linked to the credit crisis. Citigroup Inc. announced Friday it will sell its German retail banking operation to France's Credit Mutuel for $7.7 billion.

Meanwhile, oil continued its ascent on supply concerns. A barrel of oil vaulted to a record above $147, raising more concerns about the impact of higher prices on inflation and in turn, the overall economy.

Another 2 bite the dust as Fannie Mae and Freddie Mac follow in Bear Steans' footsteps. Shd the Feds bail them out as a lot of analysts r calling out for it to do so? What will be the implication of this on the economy and housing market? Is this a long term solution? What can be done to stop this worrying trend as more and more banks and financial institutions 'bite the dust'?

 

[PeteEU]

I cant see how the government can NOT bail them out. These 2 going down, will bring down a very large number of lenders and in the end hurt ordinary Americans on a huge scale.

But considering that the White House hates both companies, I bet the usual lazzie-fair attitude will win the day and the next president (who ever that will be) will have to pick up the pieces.

 

[donsutherland1]

Shd the Feds bail them out as a lot of analysts r calling out for it to do so?

If federal assistance becomes necessary, it will be provided. There really would be no choice.

Failure to do so would create a high probability of a systemic collapse of the nation's financial system. Such failure would have grave adverse implications for the nation's economy and standard of living. It would also have substantial adverse global implications.

Whether or not the need will arise still remains to be seen. It could wind up being a fairly close call.​

 

[Trinity]

Analysts r calling for the Feds to bail them out b4 it is GAME OVER. They say pull the same stunt as Bear Stearns and restore public confidence b4 more erodes away from the economy as well as the housing market ... the worse it gets, it basically becomes a self-fulfilling prophecy as ppl believe in it being as bad as they perceive it and investors stay away and ppl stop buying in the housing market. This simply lends to a vicious cycle of the economy slumping even more. They have to do something about it now and not procrastinate any longer.

 

[donsutherland1]

Analysts r calling for the Feds to bail them out b4 it is GAME OVER. They say pull the same stunt as Bear Stearns and restore public confidence b4 more erodes away from the economy as well as the housing market ... the worse it gets, it basically becomes a self-fulfilling prophecy as ppl believe in it being as bad as they perceive it and investors stay away and ppl stop buying in the housing market. This simply lends to a vicious cycle of the economy slumping even more. They have to do something about it now and not procrastinate any longer.

In my view, the federal government should make explicit a contingency plan under which it would lend money to both GSEs should they need it. The benefits would be as follows:

1) By avoiding an explicit guarantee of assuming Fannie Mae's and Freddie Mac's obligations, the federal government would avoid, in effect, substantially increasing the national debt and putting its AAA rating in jeopardy, developments that would likely raise its financing costs.

2) The measure would address the liquidity issues confronting both GSEs.

3) The measure would demonstrate a degree of confidence in the long-run prospects of the nation's housing, as it would indicate that the federal government expects the loans held by the two GSEs to eventually recover some of their value.

4) The measure would avoid the collapse of one or both GSEs and thereby mitigate the systemic risk involved with such event(s).​

 

[donsutherland1]

Speaking of the possibility of allowing Fannie Mae and Freddie Mac to borrow public funds, Reuters reported this afternoon:

Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, said a source familiar with a conversation between Bernanke and Freddie Mac chief Richard Syron.

Bernanke and Syron spoke by telephone Thursday afternoon and in that call the central bank chief said he intended the discount window to be open to the two companies, said a source familiar with the phone conversation.

 

[donsutherland1]

Following the close of trading, a Fed spokeswoman said that the Fed had not held discussions with either Fannie Mae or Freddie Mac about giving them access to its discount window. Bloomberg.com reported:

After the close of regular trading, Fed spokeswoman Michelle Smith said that there have been no talks with Fannie and Freddie about borrowing from its so-called discount window.

The discount window offers direct loans to commercial banks at an interest rate a quarter point above the Fed's benchmark rate. Chairman Ben S. Bernanke and his colleagues opened the discount window to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

It should be noted that Ms. Smith could have been stating that the Fed had held no talks about either Fannie Mae's or Freddie Mac's immediately borrowing from the Fed's discount window. Her language might well be sufficiently flexible to leave open the idea that should either GSE need to borrow, the window would be available. Instead, there were no discussions about either GSE's actually using the window at this time.

This will be an interesting story to follow. Hopefully, neither GSE will be put to the proverbial test due to a continuation of a sharp sell-off in their stocks and rising costs of borrowing.​

 

[Trinity]

Economic storm brews as Fannie, Freddie pushed to brink - Yahoo! News

Economic storm brews as Fannie, Freddie pushed to brink

WASHINGTON (AFP) - As panicked investors pushed US mortgage finance giants Fannie Mae and Freddie Mac to the brink, debate swirled on whether the meltdown was a crisis of confidence or the onset of wider economic woes.

The two government-chartered, shareholder-owned giants underpin some five trillion dollars in home loans, and the meltdown in shares this week raised fears of a government bailout, or a possible worsening of the credit crunch.

In highly volatile trade Friday, shares plunged some 50 percent for both firms before a partial recovery. Freddie Mac ended with a loss of three percent and Fannie was down 22 percent, but both have lost around 75 percent since the start of the year.

Brad Sorenson, analyst at Charles Schwab & Co. said the companies "affect a much wider swath of the economy than just a typical financial institution, such as Bear Stearns," and that any hint of failure would be "devastating to the US, and indeed the global, financial markets."

The troubles intensified as the New York Times reported the administration of President George W. Bush was weighing placing one or both companies in a conservatorship to protect them from the snowballing US housing market crisis.

Under a 1992 law, if either is seen as being severely undercapitalized, it may be placed into government conservatorship.

The two firms said in separate statements they were "adequately capitalized" and had ample liquidity despite swirling market fears.

The Freddie Mac statement said speculation around the issue of conservatorship "does not accurately reflect the facts. Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized."

Fannie Mae said: "As we work through this tough housing market, we are maintaining a strong capital base, building reserves for our credit losses, and generating solid revenues as our business continues to serve the market. We also have access to ample sources of liquidity, including access to the debt markets."

Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae's is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

Treasury Secretary Henry Paulson, in a statement, offered no indication of any imminent intervention.

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

Senator Christopher Dodd said meanwhile the Federal Reserve was considering opening its discount window, which had been used for troubled banks.

Paul Krugman, a Princeton economist, said in a New York Times blog that the government will be forced to come up with a rescue plan.

"Big financial crises always end with an expensive bailout of the banking system," he said.

"It happened in Sweden, it happened in Japan. Why should we be different? Except that in this case banks proper took on very little of the risk; Fannie and Freddie, on the other hand, took on a lot of it."

Joel Naroff, an economist at Naroff Economic Advisors, said the two entities are being hurt by investor panic about their future prospects.

"It's an environment when the financial markets are so weak, investors would rather sell first and ask questions later," he said.

It just doesn't look good. Both firms r trying to stay alive and not succumb to expensive interest rated-help and while doing so, r drowning b4 yr eyes. While the Feds remain non-committed about a bail-out, just offering a discount window to both firms for help if and when they need it.

I think this situation is going to carry on dismally in this fashion for some time to come despite more decline in the economy and housing market.

 

[Thorgasm]

But I thought the free market always takes care of these things. Why would the govt. have to bail them out?

 

[Trinity]

But I thought the free market always takes care of these things. Why would the govt. have to bail them out?

U see that is the crux of the problem.

As a Libertarian, we shd allow free market economy to operate. Even when Bear Stearns was bailed out, ppl lashed at the Feds for bailing them out.

But Bear Stearns is a bank.

These 2, Freddie and Fannie, affect such a lot of the housing market (both account for 40% of the market home loans to Americans.)

Guess what happens when they both go down simultaneously.

The stock market already plunged so badly with the housing market in severe shock, this will literally be GAME OVER.

It isn't a matter of whether the Feds shd help them... that choice is already redundent, it is a matter of WHEN.

(I know it is bad to even bail them out, but the Feds CAN'T afford NOT to. What the analysts r saying is to bail them out 1st and then deal with the backlash from the economy the next 18 mths. There isn't much choice left.)

 

[Thorgasm]

U see that is the crux of the problem.

As a Libertarian, we shd allow free market economy to operate. Even when Bear Stearns was bailed out, ppl lashed at the Feds for bailing them out.

But Bear Stearns is a bank.

These 2, Freddie and Fannie, affect such a lot of the housing market (both account for 40% of the market home loans to Americans.)

Guess what happens when they both go down simultaneously.

The stock market already plunged so badly with the housing market in severe shock, this will literally be GAME OVER.

It isn't a matter of whether the Feds shd help them... that choice is already redundent, it is a matter of WHEN.

(I know it is bad to even bail them out, but the Feds CAN'T afford NOT to. What the analysts r saying is to bail them out 1st and then deal with the backlash from the economy the next 18 mths. There isn't much choice left.)

I agree with you. I was just putting that question out there for those that are against regulation. It's dangerous to not regulate. I consider bailouts a form of regulation. I would like to see a law that says if a company gets bailed out the Board of Directors must resign and pay substantial fines.

 

[donsutherland1]

Guess what happens when they both go down simultaneously.

If one or both failed nearly simultaneously, there would be a high risk of a collapse of the U.S. financial system. Under such a scenario, fear-driven expectations would likely spark an equities crash. In their wake would likely be rapid transition to destructive debt-deflation that would worsen the debt overhang.

For those who are not familiar how debt-deflation operates, let's assume one owes $1,000 in debt for simple purposes of illustration. Deflation takes off and the person pays back, let's say, $100. However, prices deflate by 20% (again for illustrative purposes). As a result, in real terms, the debt has actually increased to $1,080, making a person's debt burden heavier than before even after he/she had paid off some of that debt. It's that kind of deflation that made the 1920-21 recession and the Great Depression so severe.

Some might argue for the federal government to simply print money to avoid the stark deflationary scenario given how little time would be available to take more deliberate steps to avoid the liquidity trap (when nominal interest rates fall to 0% but deflation creates positive real rates, hence downward price pressures continue). However, such an aggressive reflation strategy would create the risk of excessive and perhaps hyperinflation.

Even if the federal government took over the institutions, such a move could trigger a banking crisis, if depositors expected that the Federal Reserve would try to monetize a significant portion of the added debt. Then, depositors could rush to withdraw funds before the purchasing power of such funds is debased.

The bottom line: a laissez-faire course of allowing either Fannie Mae or Freddie Mac or both to collapse without public intervention would be unthinkable. A complete government takeover would probably be little better. Neither would be a viable option.

Lending funds through a credit line with the Treasury, granting access to the Federal Reserve's discount window, and/or creating a special temporary liquidity mechanism along the lines of the TAF, TSLF, or PDCF would probably offer the optimal solutions.​

 

[Happy Days]

But I thought the free market always takes care of these things. Why would the govt. have to bail them out?

As I understand it, Fannie Mae and Freddie Mac are the government's way of making mortgages affordable to those who otherwise couldn't afford it. Don't they lower interest rates on loans? This means that the government has already interfered with the free market. Now, because of this interference in the market, too many people were given mortgages that they couldn't afford. Once the government steps in and disrupts the free market, they are usually left with no choice but to step in and fix the mess that they cause. That is why the government has to bail them out.

 

[Thorgasm]

As I understand it, Fannie Mae and Freddie Mac are the government's way of making mortgages affordable to those who otherwise couldn't afford it. Don't they lower interest rates on loans? This means that the government has already interfered with the free market. Now, because of this interference in the market, too many people were given mortgages that they couldn't afford. Once the government steps in and disrupts the free market, they are usually left with no choice but to step in and fix the mess that they cause. That is why the government has to bail them out.

How do lower interest rates make people unable to afford their mortgage? It doesn't. The bottom line is people took on too great of mortgages and lenders weren't strict enough on who they gave loans to.

 

[1069]

How do lower interest rates make people unable to afford their mortgage? It doesn't. The bottom line is people took on too great of mortgages and lenders weren't strict enough on who they gave loans to.

Yeah; I don't understand the great rush to get out of apartments, out of the city, into some crappy tract home in the suburbs. What's the draw? A yard? I've got more square footage in my apartment than some of these tract homes my friends have purchased, and when something breaks down, maintenance comes and fixes it for free.
People have really shot themselves in the foot taking on mortgages they can't afford.
My family is proof that you don't need to own a home to be happy.
My kids are raised. As soon as they move out, I'll probably move to an even smaller apartment.

I totally agree that lenders weren't strict enough who they gave loans to; I think they gave loans to people who knew they couldn't really afford a house, but wanted one anyway for whatever ungodly reason. Status, I suppose.
Now they're screwed.

 

[Thorgasm]

Yeah; I don't understand the great rush to get out of apartments, out of the city, into some crappy tract home in the suburbs. What's the draw? A yard? I've got more square footage in my apartment than some of these tract homes my friends have purchased, and when something breaks down, maintenance comes and fixes it for free.
People have really shot themselves in the foot taking on mortgages they can't afford.
My family is proof that you don't need to own a home to be happy.
My kids are raised. As soon as they move out, I'll probably move to an even smaller apartment.

I totally agree that lenders weren't strict enough who they gave loans to; I think they gave loans to people who knew they couldn't really afford a house, but wanted one anyway for whatever ungodly reason. Status, I suppose.
Now they're screwed.

When you own a home you gain equity in your asset. When you rent you are paying into someone else's equity. After 30 years of renting you have nothing to show for it.

 

[1069]

When you own a home you gain equity in your asset. When you rent you are paying into someone else's equity. After 30 years of renting you have nothing to show for it.

My husband used to build houses for a living.
These subdivision tract homes are made of pressboard, or its equivalent. They won't be around in thirty years, and certainly trailers (another popular option with the Southern blue-collar working class set; they seem to believe it's a step up from an apartment) won't be around in 30 years; they probably won't even be worth living in after a decade.

Besides, in 30 years I'll be nearly 65, if I'm still alive. Who cares?
I doubt I'll live that long, but if I do, I'll probably have inherited some money by then. Rich or poor, I'm sure being elderly will be miserable; I really can't concern myself with it at this point in time.

 

[Thorgasm]

My husband used to build houses for a living.
These subdivision tract homes are made of pressboard, or its equivalent. They won't be around in thirty years, and certainly trailers (another popular option with the Southern blue-collar working class set; they seem to believe it's a step up from an apartment) won't be around in 30 years; they probably won't even be worth living in after a decade.

Besides, in 30 years I'll be nearly 65, if I'm still alive. Who cares?
I doubt I'll live that long, but if I do, I'll probably have inherited some money by then. Rich or poor, I'm sure being elderly will be miserable; I really can't concern myself with it at this point in time.

Perhaps you aren't aware, but they make homes other than of the tract and mobile variety. Why would you want to leave something for your children? :roll:

 

[donsutherland1]

The Federal Reserve has just announced that it would give the New York Federal Reserve authority to lend to both Fannie Mae and Freddie Mac should those GSEs need financing. The Federal Reserve issued the following statement:

The Board of Governors of the Federal Reserve System announced Sunday that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

 

[Trinity]

Freddie Mac mulling $10 billion share offer: report - Yahoo! News

(Reuters) - Mortgage giant Freddie Mac is considering raising capital by selling as much as $10 billion in new shares to investors, The Wall Street Journal reported, citing people familiar with the matter.

The report comes after the U.S. Treasury and Federal Reserve announced a plan on Sunday to shore up the balance sheets and borrowing capabilities of Freddie Mac and sister company Fannie Mae.

Such a share sale, which has not yet been determined, could forestall a full government rescue, the WSJ said.

Investors, sensing the need for these pillars of the U.S. housing market to raise capital -- and thereby diluting existing shares -- sent their stock prices down more than 60 percent this month alone.

The main buyers for any new-stock issues are likely to be existing shareholders worldwide, the paper said, citing one person involved in the discussion.

Any sale would have to offer a high rate of return to attract buyers, given the near-14 percent yield on Freddie's preference shares, the paper added.

At that rate even a $5 billion preferred-stock offering would mean a company payout of $690 million a year, reducing the money available to common-stock shareholders, cutting the value of those holdings and putting further pressure on the share price.

Shares in Asia extended losses to fall 1.1 percent on Friday after the newspaper report, which added to worries about the stability of the U.S. financial sector.

Shares of Freddie Mac and Fannie Mae have taken a beating this year as the companies face mounting losses due to delinquent borrowers, rising foreclosures and pressure to increase their exposure to the mortgage market as a way of stabilizing housing.

Shares of Fannie and Freddie surged 18 percent and 22 percent, respectively, on Thursday, after Freddie pulled off its second successful debt sale following the announcement of the U.S. rescue plan.

The shares were also helped by an emergency rule issued on Tuesday by U.S. securities regulators to limit certain types of short selling of shares in major financial companies, including Fannie Mae and Freddie Mac.

While the storm surrounding the companies appears to be easing, they still face mounting losses due to delinquent borrowers, rising foreclosures and pressure to increase their exposure to the mortgage market as a way of stabilizing housing.

Together, the companies own or guarantee more than $5 trillion in U.S. mortgages. They have lost more than $11 billion since June, and have predicted more losses to come.

Even if Freddie and Fannie survive in their current form, it is not clear if they will still be as willing to lend as much to the U.S. housing market as home prices continue to slump. The two companies finance about half of U.S. homes.

Further update on Freddie Mac. This move prevents a bail-out from the Feds, benefitting the economy but will it actually benefit the homeowners who seek loans from Freddie Mac? What do u think?

 

[Trinity]

Government may soon back troubled mortgage giants - Yahoo! News

Government may soon back troubled mortgage giants

WASHINGTON - The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

Update on the situation. Does not bode well for everyone, esp the taxpayers

 

[Thorgasm]

Government may soon back troubled mortgage giants - Yahoo! News

Government may soon back troubled mortgage giants


Update on the situation. Does not bode well for everyone, esp the taxpayers

If they were regulated properly this wouldn't have happened.

 

[Trinity]

Yes, it was a corporate mistake, but it is too late to stop it now. The mess is just too big

 

[danarhea]

U see that is the crux of the problem.

As a Libertarian, we shd allow free market economy to operate. Even when Bear Stearns was bailed out, ppl lashed at the Feds for bailing them out.

But Bear Stearns is a bank.

These 2, Freddie and Fannie, affect such a lot of the housing market (both account for 40% of the market home loans to Americans.)

Guess what happens when they both go down simultaneously.

The stock market already plunged so badly with the housing market in severe shock, this will literally be GAME OVER.

It isn't a matter of whether the Feds shd help them... that choice is already redundent, it is a matter of WHEN.

(I know it is bad to even bail them out, but the Feds CAN'T afford NOT to. What the analysts r saying is to bail them out 1st and then deal with the backlash from the economy the next 18 mths. There isn't much choice left.)

Not game over. Just a badly needed correction. The stock market needs to find its own level. The government's intervention in the market over the years created this bubble in the first place. Right now, our whole economic system is nothing but a giant ponzi scheme. Let the bubble pop. Yes, there will be pain, but not half as much pain as there will be in the future, if the government keeps sticking its nose in the way it has.

Very interesting that everybody talks about free markets, but want the government to bail everybody out when they screw up.

 

[Trinity]

Not game over. Just a badly needed correction. The stock market needs to find its own level. The government's intervention in the market over the years created this bubble in the first place. Right now, our whole economic system is nothing but a giant ponzi scheme. Let the bubble pop. Yes, there will be pain, but not half as much pain as there will be in the future, if the government keeps sticking its nose in the way it has.

Very interesting that everybody talks about free markets, but want the government to bail everybody out when they screw up.

U don't understand it impacts 40% of the home loan/housing market industry. The ppl will howl with rage. The US gov can't let that happen. There will be hell to pay. Anyway u have no choice in it, US gov is already ready poised and in place to bailout both.