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equity holders will lose out - so what, theres not much capital anyway. its the debt thats in the trillions.

if the US Govt backs the debts then US interest rates go through the roof and bonds plummet as the US will be at risk of losing its AAA rating - otherwise the dollar goes into freefall. either way this means the value of trillions of financial assets around the world plummet. thats held by sovereign wealth funds, pension funds, retail invrstment funds, etc, etc. this means the ability of major world banks will plummet as savings are destroyed.

if the US Govt doesnt back the debt then liquidity will cease for the GSEs just as it did for NR. so the same effect on financial assets and interest rates will occur but just in a different way.

take a step back, over the past 20 years financial risk was mispriced. the developed world borrowed and spent the money either in consumption or buying assets eg property.

hold the news...Fannie has just put out a statement that they have more surplus capital now than ever before in its history. they better explain how......

mark my words....US interest rates will climb/t-bonds fall next week.

i like this post.

inflate your way out, no chance.

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Given that the top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium, what are they going to do now. I cannot imagine they will want to increase their exposure , so who will take any interim risk untill the US Govt makes a decision as to what to do ?

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WASHINGTON, July 11 (Reuters) - Mortgage lender IndyMac Bancorp Inc IMB.N was taken over by the Federal Deposit Insurance Corp on Friday, the second largest financial institution to close in U.S. history.

The FDIC said the estimated cost of the California-based bank's failure to its insurance fund is between $4 billion and $8 billion. The regulator said it will operate IndyMac to maximize the value of the firm for future sale.

IndyMac's primary regulator, the Office of Thrift Supervision, blamed a senior lawmaker's comments for causing a run on the deposits at the largest independent publicly traded U.S. mortgage lender.

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WASHINGTON, July 11 (Reuters) - Mortgage lender IndyMac Bancorp Inc IMB.N was taken over by the Federal Deposit Insurance Corp on Friday, the second largest financial institution to close in U.S. history.

The FDIC said the estimated cost of the California-based bank's failure to its insurance fund is between $4 billion and $8 billion. The regulator said it will operate IndyMac to maximize the value of the firm for future sale.

IndyMac's primary regulator, the Office of Thrift Supervision, blamed a senior lawmaker's comments for causing a run on the deposits at the largest independent publicly traded U.S. mortgage lender.

The fear is starting to spread, more fannie paper required to plug the hole.

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I can't get enough of these 'juicy fannie' stories.

Fannie is getting a right pounding at the moment.

I think we will see a 'Busted Fannie', if not busted then a very battered and bruised fannie at the end of this painfull ordeal.

Edited by tuggybear
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I can't get enough of these 'juicy fannie' stories.

Fannie is getting a right pounding at the moment.

I think we will see a 'Busted Fannie', if not busted then a very battered and bruised fannie at the end of this painfull ordeal.

:lol: All the funnier cos of your nickname too! ;)

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So what is the scenario if they are just left to fail?

It would be the equivalent of that absurd scenario in that global warming movie a few years ago, where the Gulf Stream stops flowing and the entire Northern hemisphere enters a new ice age...in a matter of days. The insolvency of the GSEs is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it.

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It would be the equivalent of that absurd scenario in that global warming movie a few years ago, where the Gulf Stream stops flowing and the entire Northern hemisphere enters a new ice age...in a matter of days. The insolvency of the GSEs is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it.

Sh*t the bed. this is getting serious.

was watching CNN before, programme similar to hard talk. the libiterian presidential candidate was on. APPARENTLY the total committed US spending for social security, defence etc to date is wait for it...

ON E HUNDRED TRILLION DOLLARS (said in an evil cackle similar to Dr evil...)

seriously. Thats $100,000,000,000,000

thats just too big a number to contemplate.

Oh, apparently the deposit insurance fund (US equivalent of the 35K secure savings I imagine) is going to get hit for $3 billion. Thats the biggest ever in history. Ever. Anywhere. HALF A BILLION is not insured. Its just gone. Erased. Deleted from the annals of history.

Wait for this. According to their rules, they have to sell it in 90 days. Has anyone any idea what the hell this is going to do to the global CDO/Banking bonds market? I have a funny feeling its not good. good news is, it has only 32 billion in assets, which as we all know, means they have only 32 billion in toxic waste paper in their safe. Could have been worse.

Oh well, there goes the planet...

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Sh*t the bed. this is getting serious.

was watching CNN before, programme similar to hard talk. the libiterian presidential candidate was on. APPARENTLY the total committed US spending for social security, defence etc to date is wait for it...

ON E HUNDRED TRILLION DOLLARS (said in an evil cackle similar to Dr evil...)

seriously. Thats $100,000,000,000,000

thats just too big a number to contemplate.

Oh, apparently the deposit insurance fund (US equivalent of the 35K secure savings I imagine) is going to get hit for $3 billion. Thats the biggest ever in history. Ever. Anywhere. HALF A BILLION is not insured. Its just gone. Erased. Deleted from the annals of history.

Wait for this. According to their rules, they have to sell it in 90 days. Has anyone any idea what the hell this is going to do to the global CDO/Banking bonds market? I have a funny feeling its not good. good news is, it has only 32 billion in assets, which as we all know, means they have only 32 billion in toxic waste paper in their safe. Could have been worse.

Oh well, there goes the planet...

Reuters saying Indymac will hit the FDIC for up to $8bn.

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They are only deemed powerful because they have money, if the political elite decide it is a con and the banks don't have money then they no longer have any power. Bankers don't control armies, if the bankers had armies I would be more worried. Ultimately the bankers aren't at the top of the tree, they might just discover what it's really like to deal with the devil because I bet there are quite a few people planning to turn on them to save their own necks. A few bankers will be sweating that the political elite will suddenly discover the "truth".

Mervyn King has already said in Treasury Select Committee meetings he didn't understand what the banks where doing, as did one of the Treasury Select Committee members all very convenient if the bankers are going to take the fall to keep public order. And to keep order someone or something will get the blame.

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money." - Sir Josiah Stamp, former director of the Bank of England

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I'd change your cash for something physical if that's possible.

Fannie and Freddie going kaput could have implications none of us can fathom.

Nuclear war being one of them.

Already you can see stock market behaviour becoming erratic, less uniform and less guided.

Chances are mass panic will hit the markets in the next couple of weeks.

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the debt might be 30 year duration but notes are up for renewal all the time. its constantly rolling over the 30 year debt up for repayment. fannie's has been around since the 1930's. 30 year debt just means it funds at long term rates not short term.

Sorry, it was late, I was, ahem, tired and emotional, here's a fuller explanation of what I was trying to say.

Northern Rock borrowed 20 billion or so of the money that it lent people for mortgages over 25 years+ on terms of less than 3 months. IIRC, that was around 40% of the total. Once the people lending them the money decided they weren't going to be able to repay it, they were, effectively, bust. The BoE stepped in and lent them them 20 billion directly. Whether the BoE makes a loss on this, only time will tell of course, but the point being they had to step in and provide some very serious percentage of the total of outstanding loans immediately.

Fanny and Freddie are a bit different from this. They do have some short term money market borrowings but, as a percentage of the total, they're quite small (although, since they're so huge, the absolute amount could still be greater than Northern Rock of course). What they have instead is bonds of varying durations expiring over the next 20+ years owned by all sorts of different institutions (pension funds, unit trusts, mutual funds etc.). The money to make the interest and capital payments on these comes from the interest and capital repayments made on the mortgages they own. Using some relatively straightforward modeling, they attempt to match the cash flows coming in with those going out - they also use interest rate swaps and swaptions to perform some hedging. So, whilst they may only be buying new mortgages with 20+ years duration, they have cash flows from older ones expiring and from ones that are paid off early, that mean they can issue debt with expiries ranging from a couple of years upwards. This process of attempting to match what's coming in to what's going out over multiple time horizons is what I was referring to as duration matching.

So, if Fanny and Freddie go bang, unlike NR, the US government wouldn't need to step in and hand over 40% of the outstanding capital as a loan (i.e. about 2.4 trillion of it!) but they would need to guarantee all bond interest and capital payments over the lifetime of the longest dated debt. Thus slow death rather than quick death.

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Sorry, it was late, I was, ahem, tired and emotional, here's a fuller explanation of what I was trying to say.

Northern Rock borrowed 20 billion or so of the money that it lent people for mortgages over 25 years+ on terms of less than 3 months. IIRC, that was around 40% of the total. Once the people lending them the money decided they weren't going to be able to repay it, they were, effectively, bust. The BoE stepped in and lent them them 20 billion directly. Whether the BoE makes a loss on this, only time will tell of course, but the point being they had to step in and provide some very serious percentage of the total of outstanding loans immediately.

Fanny and Freddie are a bit different from this. They do have some short term money market borrowings but, as a percentage of the total, they're quite small (although, since they're so huge, the absolute amount could still be greater than Northern Rock of course). What they have instead is bonds of varying durations expiring over the next 20+ years owned by all sorts of different institutions (pension funds, unit trusts, mutual funds etc.). The money to make the interest and capital payments on these comes from the interest and capital repayments made on the mortgages they own. Using some relatively straightforward modeling, they attempt to match the cash flows coming in with those going out - they also use interest rate swaps and swaptions to perform some hedging. So, whilst they may only be buying new mortgages with 20+ years duration, they have cash flows from older ones expiring and from ones that are paid off early, that mean they can issue debt with expiries ranging from a couple of years upwards. This process of attempting to match what's coming in to what's going out over multiple time horizons is what I was referring to as duration matching.

So, if Fanny and Freddie go bang, unlike NR, the US government wouldn't need to step in and hand over 40% of the outstanding capital as a loan (i.e. about 2.4 trillion of it!) but they would need to guarantee all bond interest and capital payments over the lifetime of the longest dated debt. Thus slow death rather than quick death.

They also need to fund the shortfalls as mortgages go into arrears. In many US states the home owner can hand back the keys. So recent buyers - or those with little equity (most mortgage holders perhaps, because of the massive price increases), can just hand back if US housing drops 50%. But Fannie and Freddie are then left holding the keys, if those houses are sold as distressed assets at 50% of the amount of the mortgage, then Freddie and Fannie are sitting on losses of trillions of dollars.

In offering to secure all the bond and capital repayments, the US would have to stump up those trillions. Can they afford that? Almost certainly not, hyperinflation, or let the bond holders suffer.

People shouldn't forget that any rate of return higher than T-bonds in the US (or NS&I in the UK) is in exchange for default risk. People, banks, etc, may not like the idea of suffering that default risk, but they've had good returns for decades. Time now for the default risk to be paid back.

The UK and US governments ought to just step back and let whatever needs to occur happen. I bet they won't though, they'll meddle their way into a decade long depression instead.

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Some good analysis here. What's missing is the current state of US ortgage markets. The half that was subprime, Alt-A and Jumbo has effectively shut down. The half which is still functioning is 90% run through securitisation by either Fannie or Freddie. If they shut down, then the US ortgage markets will be over 90% closed to business. Securitisation would effectively be dead and only the banks left to lend. The banks are hurting for cash, and they're not going to be so keen.

The end result would be a gigantic hit to available mortgage cash, meaning far fewer mortgages and far higher interest payments for any mortgages which are made. That would be another ratchet down for house prices and thus yet more writedowns on mortgage-backed bonds by the banks. I've had Fannie and Freddie marked as Ground Zero for the bust since 2000. it looks like now we get to see what a real debt implosion looks like.

Even with any sort of bailout they'll still be injured and it's bound to affect availability and pricing of mortgages the world over. This is likely to be the single biggest incident in the credit crisis and the effectiveness of the response will most likely decide whether the world faces a recession or a depression.

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They also need to fund the shortfalls as mortgages go into arrears.

Absolutely, yes - that's the tab the US government will need to pick up over time if the companies run out of cash. Figuring out how many of the 4% of prime mortgages (that's all Fannie and Freddie are allowed to buy) that are currently in default will actually go into foreclosure and what the recovery rate after expenses will be is the hard part of course. The root of the current panic is that no-one really knows the answer yet.

edit:missing words

Edited by tbatst2000
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