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Extradry Martini

Fannie And Freddie Stocks Plunge

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Fannie Mae and Freddie Mac shares have fallen 20% and 25% respectively today. From what I have heard, this is the result of rumours of downgrades of their credit ratings. You may think this is a bit of a strong reaction, but it should be remembered that Fannie and Freddie are essentially giant hedge funds leveraged thousands of times, and invested in mortgages. The reason they still exist is that because they were set up by Congress, they are deemed to have an “implicit guarantee” from the US government, so are rated AAA and are considered next to US treasuries in creditworthiness.

The arguments here can get a little circular, so I’ll take it step by step:

The first point to note here is that in March, the Presidents Working Group, the body composed of Treasury Secretary Paulson, Fed Chairman Bernanke and SEC chairman Cox, allowed Fannie and Freddie to expand their balance sheet beyond its previous limits, thereby enabling banks to divest of mortgage assets a little more easily. This was part of the successful avoidance of the collapse of the financial system that they carried out (see my previous posts). This to me implies that the US government would make the guarantee explicit if it needed to. However, and this is the second point, with ratings agencies under a great deal of scrutiny, they have to downgrade their debt if the dislocation in the prime US mortgage market continues, with the guarantee still only implicit. So, there are two outcomes in my view: 1. that the US government makes the guarantee explicit and 2. that they don’t, but nationalise Fannie and Freddie when they subsequently go bust, meaning that they get an explicit guarantee anyway. Some version of the latter is the most likely by far, as it would be very difficult to forcibly nationalise these companies otherwise, and the US government could not simply give a guarantee without getting something big in return.

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A bit more depth here.... ratings downgrades were not the story this time (though they almost certainly will be. Either way, the points I make above are still valid.... GSEs, are strange beasts!

+------------------------------------------------------------------------------+

Freddie Mac, Fannie Mae Plunge on Capital Concerns (Update1)

2008-07-07 17:07:40.510 (New York)

(Adds comment in third paragraph)

By Jody Shenn and Shannon D. Harrington

July 7 (Bloomberg) -- Freddie Mac and Fannie Mae plunged in New York Stock Exchange composite trading on concern the two largest mortgage-finance companies may need to raise more capital.

Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion.

Speculation that the companies may need to make further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Freddie Mac fell $3.31, or 23 percent, to $11.19 at 1:04 p.m. Fannie Mae dropped $3.43, or 18 percent, to $15.35. The cost to protect against a default by Fannie Mae or Freddie Mac on their bonds also rose.

Brian Faith, a Fannie Mae spokesman, didn't immediately return a call for comment. Michael Cosgrove, a Freddie Mac spokesman, declined to comment.

FASB Rule

Fannie Mae and Freddie Mac will probably get an exemption from the new FASB 140 rule that would force the companies to bring their off-balance sheet assets back onto their balance sheets, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Yields on agency mortgage securities relative to U.S.

Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.

Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in note to clients.

``Balance sheets are constrained,'' Hackel said, referring to agency mortgage bonds.

The difference between yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.

Freddie Mac, the second-largest U.S. mortgage-finance company, said it's ``unlikely'' to raise capital until after reporting second-quarter earnings next month.

Capital-Raising Delay

Executives told investors in May that the McLean, Virginia- based company would obtain $5.5 billion in additional reserves by ``mid-year,'' after registering its common stock with the Securities and Exchange Commission.

The cost to protect the subordinated debt of Fannie Mae and Freddie Mac rose to the highest since March 17, according to CMA Datavision in London.

Credit-default swaps tied to Fannie Mae's debt rose 6 basis points to 183 basis points, CMA data show. Contracts on Freddie Mac increased 5 basis points to 182. An increase in the contracts, used to speculate on the companies' creditworthiness or to hedge against losses, signal deteriorating investor confidence.

For related news:

For news on Freddie Mac earnings: FRE US <Equity> TCNI ERN <GO> For news on agency mortgage bonds TNI AGE US BN <GO> News on mortgage delinquencies, foreclosures: STNI MORDEL <GO> Top real estate news: TOPR <GO>

--Editors: Emma Moody, Alan Goldstein

To contact the reporter on this story:

Jody Shenn in New York at +1-212-617-2380 or jshenn@bloomberg.net; Shannon D. Harrington in New York at +1-212-617-8558 or sharrington6@bloomberg.net

To contact the editor responsible for this story:

Emma Moody at +1-212-617-3504 or

emoody@bloomberg.net

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EDM - I think the GSE issue will be dealt with after, not during the election. To borrow a euphamism, it's a giant piñata filled to bursting with dung - nobody but nobody in Washington will want to start the party early (and I'd take an educated guess that Wall Street are hedging their politics too).

In other words - my read (for what it's worth) is that diffusing this bomb will require plenty of blame, and the soon-to-be-previous incumbant is my pick for this.

Edited by ParticleMan

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EDM - I think the GSE issue will be dealt with after, not during the election. To borrow a euphamism, it's a giant piñata filled to bursting with dung - nobody but nobody in Washington will want to start the party early (and I'd take an educated guess that Wall Street are hedging their politics too).

In other words - my read (for what it's worth) is that diffusing this bomb will require plenty of blame, and the soon-to-be-previous incumbant is my pick for this.

I think you misunderstand me. My point isn’t that Fannie and Freddie’s mortgage assets are bad, just a very small proportion of them (though on a MTM basis they’re not looking that pretty). Instead, what I am saying is that it is very likely that they will have to be nationalised at some point soon – with ratings agencies under the cosh, this will have to happen. How it happens is going to be interesting, because the US government will have to let their shares go to nothing before being able to nationalise them for nothing….

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I think you misunderstand me. My point isn’t that Fannie and Freddie’s mortgage assets are bad, just a very small proportion of them (though on a MTM basis they’re not looking that pretty).

I'll take that on spec, but...

Instead, what I am saying is that it is very likely that they will have to be nationalised at some point soon – with ratings agencies under the cosh, this will have to happen. How it happens is going to be interesting, because the US government will have to let their shares go to nothing before being able to nationalise them for nothing….

What I'm getting at is the timing of this. I can't see anyone in Washington being willing (in a political sense) to touch any of the available ideas with a bargepole until there's a newly viable ex-President to blame for the mess.

This issue is going to chew vast amounts of political capital, and that's a rare and expensive commodity in the run-up to an election.

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I'll take that on spec, but...

What I'm getting at is the timing of this. I can't see anyone in Washington being willing (in a political sense) to touch any of the available ideas with a bargepole until there's a newly viable ex-President to blame for the mess.

This issue is going to chew vast amounts of political capital, and that's a rare and expensive commodity in the run-up to an election.

Assuming there is an election.....

It's the dilemma of implicit guarantees of this nature that they are only worth something as long as there is no need for them!

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It's the dilemma of implicit guarantees of this nature that they are only worth something as long as there is no need for them!

Precisely... hence my point about circularity (and also much like inflation targets being set up to manage inflation expectations!)

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Precisely... hence my point about circularity (and also much like inflation targets being set up to manage inflation expectations!)

They are going to print and print, aren't they?

Here is what I think has happened (in general) - the feedback mechanism that tells most of us when we have gone too far is entirely absent for these jokers - the wall street connected, the fed, the governments etc.

They think it's business as usual but actually they have reached their natural limits some time ago and are digging their own graves.

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Looks like ex-governor Poole agrees with me....

The end game is nationalisation (you heard it here first!)

Fannie Mae, Freddie Losses Make Them `Insolvent,' Poole Says

2008-07-10 04:01:00.300 (New York)

By Dawn Kopecki

July 10 (Bloomberg) -- Borrowing at Fannie Mae, the

U.S. government-sponsored mortgage company, has never been so

expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on

the sale of $3 billion in two-year notes yesterday amid concern

the biggest provider of financing for U.S. home loans won't have

enough capital to weather the worst housing slump since the

Great Depression. The company's credit-default swaps show

traders are treating the AAA rated debt as if it were five steps

lower. Fannie Mae shares tumbled 13 percent yesterday in New

York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out

Fannie Mae and the smaller Freddie Mac, former St. Louis Federal

Reserve President William Poole said in an interview. Freddie

Mac owed $5.2 billion more than its assets were worth in the

first quarter, making it insolvent under fair value accounting

rules, he said. The fair value of Fannie Mae's assets fell 66

percent to $12.2 billion, data provided by the Washington-based

company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are

insolvent, that it is allowing these firms to continue to exist

as bastions of privilege, financed by the taxpayer,'' Poole, 71,

who left the Fed in March, said in an interview.

Fair value accounting measures a company's net worth if it

had to liquidate all of its assets to repay liabilities. Fannie

Mae and Freddie Mac, both of whom have the implicit backing of

the government, make money by borrowing in the bond market and

reinvesting the proceeds in higher-yielding mortgages and

securities backed by home loans.

`Inflection' Point

Lawmakers in Washington may question Federal Reserve

Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson at

a 10 a.m. hearing today about the financial health of the

companies and whether they jeopardize the financial system.

``At some point we're going to reach that inflection, where

the government is going to have to either guarantee explicitly

or Fannie and Freddie are going to have be left to fend for

themselves,'' Peter Boockvar, an equity strategist at Miller

Tabak & Co. in New York, said in an interview with Bloomberg

Television. ``We're getting to that point where a decision has

to be made by Washington.''

The plunge in Fannie Mae and Freddie Mac yesterday in New

York Stock Exchange trading led financial shares to their

biggest decline in six years and sent the Standard & Poor's 500

Index into its first bear market since 2002. Fannie Mae shares

dropped $2.31 to $15.31 and Freddie Mac declined $3.20 to

$10.26, a decline of 24 percent.

`Well-Capitalized'

The government is counting on Fannie Mae and Freddie Mac,

which own or guarantee about half the $12 trillion in home loans

outstanding, to help revive the housing market. Congress lifted

growth restrictions on the companies, eased their capital

requirements and allowed them to buy bigger ``jumbo mortgages''

to spur demand for home loans as competitors fled the market.

Paulson said on July 8 he was pleased with Fannie Mae and

Freddie Mac's efforts to raise capital. Bernanke said the same

day the firms need to be ``strong, well-regulated, well-

capitalized'' to provide credit ``without posing undue risks to

the financial system or taxpayer.''

``We are managing our business and maintaining a capital

position that will allow us to fulfill our congressionally

chartered mission now and in the future,'' Brian Faith, a

spokesman for Fannie Mae, said.

Poole is ``a long-time critic,'' said Sharon McHale, a

spokeswoman for McLean, Virginia-based Freddie Mac.

``Freddie Mac is doing exactly what Congress intended when

it chartered the company and, more recently, when it passed the

Economic Stimulus Act,'' McHale said. ``We are well capitalized

and positioned to continue to serve our vital housing mission.''

Government Ties

While leading the St. Louis Fed, Poole roiled markets in

2003 when he said the government should consider severing its

implied backing of Fannie Mae and Freddie Mac and said the

companies lack the capital to weather financial market

disruptions. In 2006 and 2007 he called for lawmakers to strip

Fannie Mae and Freddie Mac of their charters.

Congress created Freddie Mac and expanded Fannie Mae in

1970 to promote home buying in the U.S. The companies' charters

give the Treasury the authority to buy as much as $2.25 billion

in each of their securities in the event of possible default.

The government will likely be forced to take over the

companies because of the mortgage meltdown, Poole said.

``We know in a crisis the Federal Reserve tap would be

open,'' said Poole, now a senior fellow at the Cato Institute.

$20 Billion Raised

The bailout of Bear Stearns Cos. by JPMorgan Chase & Co.,

arranged by the Fed, demonstrates the government's unwillingness

to allow ``large, systemically important'' financial

institutions to fail, he said. Bear Stearns collapsed after

customers fled amid speculation the company faced a cash

shortage.

``I worry about those institutions,'' retired Richmond Fed

President Alfred Broaddus said. ``They are huge. They dwarf the

Bear Stearns issue. In the very worst case scenario, I don't

know how you do it other than extend money and the public takes

the loss.''

Fannie Mae and Freddie Mac have raised a combined $20

billion since December to cover losses of more than $11 billion

generated since the credit crisis began last year. Freddie Mac

has yet to raise a planned $5.5 billion, scheduled for mid-year.

The companies have access to the Fed's so-called Fedwire

payments system allowing them to access funding if needed, said

Vincent Reinhart, the Fed's chief monetary-policy strategist

from 2001 until September 2007.

Pre-2006 Mortgages

They can withstand the slump in part because most of their

investments are mortgages made before 2006 when lending

standards were tighter, making them less likely to default, said

Eileen Fahey, a Chicago-based analyst at Fitch Ratings.

``We do not believe they are technically insolvent,'' Fahey

said. ``People seem to lose sight of the fact that a majority of

the mortgages that they are holding and are guaranteeing were

originated pre-2006.''

Comments by the companies' regulator this week that they

are adequately capitalized also eased concern, said Lawrence

Yun, chief economist of the National Association of Realtors in

Washington. The companies have about $80 billion of regulatory

capital supporting $5.2 trillion of mortgages.

``Just given the size of the two companies, surely the

government would not stand aside'' and let them fail, Yun said.

Record Yield

Fannie Mae sold $3 billion of two-year notes yesterday to

yield 74 basis points more than Treasuries. A basis point is

0.01 percentage point. That's the widest spread since Fannie Mae

first sold two-year notes in 2000 and triple what it paid in

June 2006.

The price of credit-default swaps, contracts used to

speculate on the creditworthiness of Fannie Mae and Freddie Mac,

doubled in the past two months to more than 80 basis points for

the senior debt, according to London-based CMA Datavision.

The median credit-default swap on debt rated Aaa by Moody's

was 26 as of basis points as of July 8, data from the credit

rating firm's strategy group show. It was 76 basis points for

debt rated A2.

Credit-default swaps are financial instruments based on

bonds and loans that are used to speculate on a company's

ability to repay debt. They pay the buyer face value in exchange

for the underlying securities or the cash equivalent should a

borrower fail to adhere to its debt agreements. A basis point on

a contract protecting $10 million of debt from default for five

years is equivalent to $1,000 a year.

For related news:

For news on Freddie Mac earnings: FRE US <Equity> TCNI ERN

<GO>

News on mortgage delinquencies, foreclosures: STNI MORDEL <GO>

Top real estate news: TOPR <GO>

--With reporting by Shannon D. Harrington and Kathleen Hays in

New York, Craig Torres in Washington, Vivien Lou Chen in San

Francisco and Steve Matthews in Atlanta. Editors: Romaine

Bostick, Emma Moody.

To contact the reporter on this story:

Dawn Kopecki in Washington at +1-202-624-1915 or

dkopecki@bloomberg.net;

Shannon D. Harrington in New York at +1-212-617-8558 or

sharrington6@bloomberg.net.

To contact the editor responsible for this story:

Emma Moody at +1-212-617-3504 or

emoody@bloomberg.net.

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I remember back in March when the rules were relaxed on excess-capital requirement, everyone said nationalisation was just around the corner. Foreign ownership seen as a risk.

Everyone trying to sell mortgage assets back to them, people refinancing on fixed rates. Trust is the final currency, and national ownership might give it.

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Don't worry. The U.S will not allow these to fail.

Has the US got the spare cash to bail em out? or do they need thier Allies near Iran to take a pre-emtive strike against a nuclear aggressor that conviently happen to be sitting on another massive oil reserve.

I expect Iran to be attacked in weeks and I expect they will defend themselves and I expect that will allow justification of the overwhelming retaliation they will receive.

Remember WMD's are bad things, Iraq was literally crawling with them...

Edited by Yoss

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New York Times is reporting that the Bush administration is considering a government takeover of Fannie and Freddie.

U.S. Weighs Takeover of Two Mortgage Giants

WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

[...]

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Edit: spelling

Edited by FreeTrader

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New York Times is reporting that the Bush administration is considering a government takeover of Fannie and Freddie.

U.S. Weighs Takeover of Two Mortgage Giants

Edit: spelling

Thisis really bad and could signal the printing presses being turned on..... any ideas how much the US is signing its self up for in losses by holding up fannie? :lol:

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Thisis really bad and could signal the printing presses being turned on..... any ideas how much the US is signing its self up for in losses by holding up fannie? :lol:

ohhh about 12 trill

http://www.bloomberg.com/apps/news?pid=206...&refer=home

The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, and Democratic Senator Charles Schumer. Fannie Mae and Freddie Mac would have to post pretax losses and writedowns of about $77 billion before the U.S. would be compelled to start a rescue, according to estimates by Fox-Pitt Kelton and Friedman, Billings, Ramsey & Co.
Edited by jonpo

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I remember back in March when the rules were relaxed on excess-capital requirement, everyone said nationalisation was just around the corner. Foreign ownership seen as a risk.

Everyone trying to sell mortgage assets back to them, people refinancing on fixed rates. Trust is the final currency, and national ownership might give it.

Yes - I think it's the only logical conclusion

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