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Coming global economic collapse?

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Are Fanny and Freddie now effectively nationalized?
Yes and no. They are nationalized in the sense that the government controls them more directly than ever (i.e. in more direct, operational terms). On the other hand, the current structure appears to give the government a theoretical "out" when it comes to their obligations. In theory, the government's liability is limited to the extent of the money it puts into the companies.

So, the creditors of these companies still do not have a clear assurance that the government will pay them what they have lent. I hope against hope that the government will not give them any unqualified assurance that their loans are 100% guaranteed. Indeed, I think keeping everyone guessing is the worst. It simply drags things out. If the government is going to guarantee the debt taken on by Fannie and Freddie, it is better they simply say what they mean and stick with it.

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Thank you. :)

Yes and no. They are nationalized in the sense that the government controls them more directly than ever (i.e. in more direct, operational terms). On the other hand, the current structure appears to give the government a theoretical "out" when it comes to their obligations. In theory, the government's liability is limited to the extent of the money it puts into the companies.

So, the creditors of these companies still do not have a clear assurance that the government will pay them what they have lent. I hope against hope that the government will not give them any unqualified assurance that their loans are 100% guaranteed. Indeed, I think keeping everyone guessing is the worst. It simply drags things out. If the government is going to guarantee the debt taken on by Fannie and Freddie, it is better they simply say what they mean and stick with it.

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Politicians prefer this option of taking by one hand and giving with another. So, they make tax-payers prop up Freddie and Fannie, so that Freddie and Fannie can provide subsidized mortgage-insurance.

These so-called "Government Sponsored Enterprises" were never fully private nor fully government owned. It's a recipe for disaster. They attract the worst type of "businessman" to be CEOs. These two had a dedicated regulator: one regulator just for these two companies. Yet, year after year, we hear stories of poor accounting practices at both companies. Then companies issued debt saying that it was not backed by the government; yet, everyone assumed it probably was, and when push came to shove, the government did step in. On the one hand, the government subsidises the companies; on the other, these companies had high-paid lobbyists, lobbying government! As Barry Ritholtz said: "What form of free markets have we evolved into? It is not Capitalism, it is not Socialism, it is not intelligent regulation. WTF is this?!?"

I have friends who worked on the forensic accounting investigation that was needed to untangle the book-keeping mess created at these two GSEs. It was every bit as bad as has been reported in the financial press.

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Are Fanny and Freddie now effectively nationalized?

It seems to be a rather weird situation. The reports were that the common stock holder would lose their investments entirely, since effectively the government took over and will issue different stocks -- and yet, the common stock was still trading Monday and though they came down 80+%, they didn't actually become worthless. I've read reports that the details still need to be worked out. What gets me -- and I protested this in the debate forum -- is that supposedly, the common shareholders are no longer the owners. The government put something like $100 billion into the companies, but they didn't actually buy the stocks (as what happens in a usual take-over bid). So, to be honest, I don't understand what happened. A great deal of money went into the companies, but the shareholders are no longer the owners of those companies, and yet their common stock is still trading on the open markets. So, who owns these companies?

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The shares are trading at about $.88, down from $80+ in 2007. This may be one of those situations where the shares continue to trade due to the uncertainty of the deal actually happening. Often when mergers are announced, the acquiree's stock price will rise (assuming a premium to the market price is being paid), but doesn't climb to the announced merger price until the deal closes. The reason for this is the uncertainty associated with the transaction. Lots of deals fall apart and never actually close. I'm just speculating that this could be happening here.

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From what I understand, the common stock shareholders are not being wiped out or bought out. Instead, the government can end up with ownership of 80% of the common stock. So, those who owned 100% of the company can end up owning 20% of it. Whether the common-stock is worth anything depends on how much money the government pours into the company. The government is supporting them (itself?) in a variety of ways:

  • Cash infusion of $2 billion, purchasing preferred shares plus warrants representing 79.9% ownership
  • Treasury has established a new lending facility for the use of these two firms
  • Treasury is initiating a temporary program to purchase GSE Mortgage-backed securities
  • IRS has exempted the firms from the tax-rule that says they cannot carry-forward certain losses in case of a change of control

In a post today, Galileo Blogs points out that Fannie and Freddie have been "implicitly" nationalized since their inception. Check it out.

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From what I understand, the common stock shareholders are not being wiped out or bought out. Instead, the government can end up with ownership of 80% of the common stock. So, those who owned 100% of the company can end up owning 20% of it. Whether the common-stock is worth anything depends on how much money the government pours into the company.

Even that mechanism is a handout to the shareholders. Normally when old investors are diluted by new ones, the value of the old equity decreases (is diluted) with more money put in by the new investors. With the equity split fixed, but the bailout amount not yet set, that means that the stockholders value will go UP with more money put in by the govt.

Is there any player in this scam that deserves to fail? Oh yeah, the govt itself....

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Even that mechanism is a handout to the shareholders.
Yeah. I don't know why the government opted to let the common shareholders keep some part of the potential pie.

From Paulson's statements, it does appear that the government is going to fully underwrite the bonds:

I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. ..."

... ...

"These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

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Lehman's went bust this morning.

Merrill Lynch is no more.

Obama's blaming the the Republicans for not "minding the store." "I certainly don't fault Sen. McCain for these problems," Obama said, "but I do fault the economic philosophy he subscribes to." Which philosophy is that, Mr. Obama?

Meanwhile, McCain is pledging to tighten restrictions. "It is essential for us to make sure that the U.S. remains the pre-eminent financial market of the world. This will be a highest priority of my administration. In order to do this, major reform must be made in Washington and on Wall Street," McCain said in his statement. "Efforts must also be focused on ensuring that the deposits of hardworking Americans are protected."

More of the same from the anti-capitalists as our economy spirals down in a deluge of paper money.

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Interesting the way there is never recognition of the fact that government is responsible for much of the current troubles we are encountering. Whenever there is a crisis like this, it will be used as an excuse for more regulation. The Republicans aren't much different from the Democrats in this regard.

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Lehman's went bust this morning.

Merrill Lynch is no more.

And it looks like it is hitting a wide range of banks and financial institutions all around the country. Just checked the stock price of my bank and it began to fall off a cliff in mid-2007, and may declare bankruptcy. Supposedly my deposits are insured, but it definitely has me worried.

Of course I agree with those saying this is a government boondoggle. It was their regulations that made this happen in the first place -- especially forcing banks to take on higher risks than they normally would, which is now coming home to roost, and guaranteeing irrational decisions.

You can read about this in Yaron Brook's Forbes commentary here.

And we cannot expect the government officials to learn their lesson, not with them having the power to stab a few more people in the back in order to get the money from the tax payers to cover their losses.

Obviously both Bush and McCain are blaming it on the banks and financial institutions, and want even more regulations, which will cause even more problems down the road.

In the last year, the stock market has fallen over 20%, and I have no idea how far down it will go when the dust settles. It's now back where it was in 2006; though I'm not sure why it rose so much from that point in the first place.

The same can be said for the dramatic increase in gas and oil prices -- regulations forbid the drilling of new oil and the building of new refineries.

What we need is a good dose of freedom across the board. But I doubt if that is what we are going to get.

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I think it's funny that the government fell over itself to assure people it was bailing out Bear Stearns, but now it refuses to do the same for Merill Lynch/Lehrman. When it seemed like the crisis was stopped at Stearns bailing out seemed like the thing to do, but whoa uh-oh, now that there's more pragmatism kicks in and they have to draw the line.

My understanding of this mess is fairly limited, so let me see if I have at least the general idea. It seems as though a large part of the blame rests on the Community Reinvestment Act which tempted banks to take on risky borrowers they otherwise likely wouldn't have. In addition, the Fed inflating the currency by printing money, banks lending out far more money than they actually have on hand, and decades of the government propping up the corrupt pseudo-business' Fannie Mae and Freddie Mac. All of these things and a general abundance of regulation across the board in economics (making new oil production in the U.S nearly impossible for example) contribute to the current situation.

Is that a decent general assessment?

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After reading Yaron Brook's commentary in Forbes about the Fannie/Freddie mess and the CRA, I would love to see a full-blown report in something like TOS, in the same style as Paul Hsieh and Lin Zinser's report on healthcare... something that recounts all the various regulations and government goings-on that have contributed to a situation that is blamed on the free market.

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My understanding of this mess is fairly limited, so let me see if I have at least the general idea. It seems as though a large part of the blame rests on the Community Reinvestment Act which tempted banks to take on risky borrowers they otherwise likely wouldn't have. In addition, the Fed inflating the currency by printing money, banks lending out far more money than they actually have on hand, and decades of the government propping up the corrupt pseudo-business' Fannie Mae and Freddie Mac. All of these things and a general abundance of regulation across the board in economics (making new oil production in the U.S nearly impossible for example) contribute to the current situation.

Is that a decent general assessment?

Yes.

Looking at this situation more broadly, one realizes that decades ago democrats figured out that by pandering to blacks, Hispanics and other minorities, they could bring them into their voting block along with gays, environmentalists, socialists, communists, anti-Christians, etc. So liberal democrats set up government-sponsored housing such as Section 8 housing for blacks, Hispanics & minorities. These minority groups, blacks in particular, simply had to vote democrat in exchange for free housing, food stamps, etc.

When liberal democrats realized they merely trapped blacks & minorities in government housing projects, they decided to put them into homes in order to strengthen the black vote. So in 1977 democrat Jimmy Carter and his democratic congress passed the Community Reinvestment Act (CRA) which prohibits banks from "discriminating" against poor people when making home loans.

After two decades of the CRA, the Clintons decided to get more aggressive with this Act. In 1995 Democrat Bill Clinton revised the Act, forcing banks to lend money to people who could not qualify for a mortgage in the free market. This led to burgeoning subprime mortgages and securitizing these into financial instruments called derivatives.

Well, Carter and Clinton succeeded in getting many more people into homes who could not afford them, and this boosted the popularity of democrats during voting season. But it resulted in an artificially high percentage of home ownership that could not be sustained in the free market.

All this new home ownership drove the price of houses up and up and up...until reality exerted itself and the housing bubble burst. What happened is that millions of people who could not afford a home but got into one anyway simply could not pay their mortgages. Thus mortgage derivatives held by investment companies like Bear Sterns & Lehman Brothers became worthless and triggered their demise.

Ironically, liberal democrats such as Obama use this situation to say the free market has failed and now it is time for government intervention in the housing market.

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decades ago democrats figured out that... So liberal democrats set up... When liberal democrats... in 1977 democrat Jimmy Carter and his democratic congress passed... democrats during voting season... liberal democrats use this situation...
Republicans are just as much to blame, and probably more to be condemned for their part in this affair.

Interesting the way there is never recognition of the fact that government is responsible for much of the current troubles we are encountering. Whenever there is a crisis like this, it will be used as an excuse for more regulation. The Republicans aren't much different from the Democrats in this regard.
Indeed.

When the Democrat says we need more regulation :P the Republican replies... that we do need more regulation, just not as much regulation as the Democrat is asking for. :wacko: :wacko:

Bad principle vs. no principle??

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Bad principle vs. no principle??

I see it as misintegration versus misintegration; and the Religious Right is more and more coming out for the misintegration of religion. I saw a snippet of Bill O' Reilly's show tonight (Monday) where he was talking about the Left attacking Palin; and he said that the NY Times and the Left have the horrid views of Palin they have because of their secularism. In effect, by saying this, he is implying that the Left has reason on their side, but that the Religionists have something better because God is greater than society.

So, one side is misintegrated towards society as the standard, while the other side is misintegrated towards God as the standard; neither has a clue about individual rights, so it doesn't matter who wins the argument -- the individual creator is left without a defender.

And in this particular matter, if the Left says low income people ought to have houses, the Religious Right is not going to come out and say no they shouldn't because they cannot afford them. Altruism is their common ground, and McCain wants to bring both sides together and to hush us up during election times.

I see the Religious Right ascending, but I'm not convinced the Socialist Left is descending, so I still haven't decided which party to vote for this election -- even as a protest vote as a registered Republican. I think the choices are dismal, and things won't be getting better for quite some time.

I'm sorry to be so down and out about it, and I think Objectivists are making headway, but both major political parties are selling us down the drain, and there is no viable alternative -- certainly not the Libertarians. I think the best thing at this point would be DC gridlock, but with McCain at the helm, I'm not sure we would get that. His recent commercials have stated proudly how he and Palin have fought against Republicans -- and they chose him as their Presidential candidate :P

And they all want change, and all the change they talk about is more and more regulations; as none of them are for freedom, which is the only thing that would get us out of this mess.

So the battle becomes more and more intellectual. Reason and Reality are still on our side, but it may get a lot worse before we can change enough minds to our side.

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Republicans are just as much to blame, and probably more to be condemned for their part in this affair.

This Investor's Business Daily editorial in today's paper confirms my post yesterday:

The Real Culprits In This Meltdown

By INVESTOR'S BUSINESS DAILY

Big Government: Barack Obama and Democrats blame the historic financial turmoil on the market. But if it's dysfunctional, Democrats during the Clinton years are a prime reason for it.

Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the "trickle-down" economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck...continued

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In 1995 Democrat Bill Clinton revised the Act, forcing banks to lend money to people who could not qualify for a mortgage in the free market. This led to burgeoning subprime mortgages and securitizing these into financial instruments called derivatives.

Do you have any info on exactly what Clinton did in 1995? I've tried a few different search formats, on things like 'Clinton 1995 Community Reinvestment Act' but have come up short.

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Do you have any info on exactly what Clinton did in 1995? I've tried a few different search formats, on things like 'Clinton 1995 Community Reinvestment Act' but have come up short.

Go to http://google.com and type in (ignore brackets): [clinton +"community reinvestment act"].

You will find many articles on it, including this one from near that date. It was basically pretty well known among many people at the time that boosting subprime loans by this act would lead to trouble, but Washington is notoriously pragmatic and short sighted, and besides any mess caused would be blamed on another administration.

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While the CRA definitely push lenders into poorer loans, I have not seen any evidence to suggest that this is a primary cause of the current mess. I'm not saying that it isn't, just that all the evidence I've seen suggest that it is not the primary factor.

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While the CRA definitely push lenders into poorer loans, I have not seen any evidence to suggest that this is a primary cause of the current mess. I'm not saying that it isn't, just that all the evidence I've seen suggest that it is not the primary factor.

I don't think it's the primary factor either. Other factors such as the mismatch between risk and return caused by the government's implicit guarantee of the debt generated by Fannie and Freddie, lax underwriting standards, artificially low interest rates, etc.. all played a big role in this mess. Nevertheless, one can't ignore the fact that Washington made it official policy to promote home ownership for everyone, whether they could afford it or not.

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I don't think it's the primary factor either. Other factors such as the mismatch between risk and return caused by the government's implicit guarantee of the debt generated by Fannie and Freddie, lax underwriting standards, artificially low interest rates, etc.. all played a big role in this mess. Nevertheless, one can't ignore the fact that Washington made it official policy to promote home ownership for everyone, whether they could afford it or not.

But those are all related. It's a pernicious results of seemingly innocuous interference at different points in the economy. That's what Brooks article really states.

Bad debts by themselves clear out of the system when people realize the added expense load. However, if money policy is loose, and housing increases are stimulated, then people can continue to pay on the debt that they realistically can't carry. This allows MORE of such debt to be issued, and when you have an agency who is backing 50-75% of all home mortgages generating this sort of debt, its a recipe for disaster.

Govt created the incentive through altruistic lending policy.

Govt owns the engine that creates the debt instruments.

Govt then packaged that debt and sold it off in big blocks. Banks bought it because of the implicit financial guarantee.

Govt kept a stimulatory monetary policy in place to mask the implications of that debt until it had generated and placed far too much of it.

The minute that monetary policy couldn't sustain the growth any longer, the whole thing unwound. Businessmen's decisions to buy these packaged instruments although poor are only a small intermediary in the mix.

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Businessmen's decisions to buy these packaged instruments although poor are only a small intermediary in the mix.

I disagree. Lehman, for example, started in 1844. The company survived over 150 years of various economic and political conditions, including The Civil War and The Great Depression. These are supposed to be the experts of the American finanicial world (and they sure were - that kind of success does not happen by accident but via a stream of sound business decisions.).

This is not a small error at all.

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