Fannie and Freddie Mac have been nationalized [Archive]

Veritas

9/7/2008, 02:48 PM

SoonerBorn68

9/7/2008, 03:00 PM

If everyone involved was allowed to fail, lessons would be learned & hopefully not repeated.

Okla-homey

9/7/2008, 03:12 PM

It's between this and the people who lied about their income to get those mortgages.

That's the thing man, a lot of these folks didn't lie. Far too many mortgagees took them on knowing they could quickly sell the paper on the secondary market and get away clean before the happy new homeowners figured out they had too much month left after their paycheck was spent. You know, that conundrum of do we eat, or make the house payment?

bluedogok

9/7/2008, 03:23 PM

There is plenty of blame to go around on this one. Banks that grossly failed in their fiduciary responsibility when underwriting loans. Mortgage brokers that put people in homes worth many times their annual income. And finally stupid consumers that weren't bright enough to realize that the majority of their income being obligated to their mortgage payment represented a serious problem.

The whole situation is a perfect storm of stupidity and greed, and as usual those of us that are financially responsible get to pick up the tab because we're still making enough money to pay taxes.
That and the banks who wrote loans like crazy with the intention to bundle them and sell them off, much like the energy loans that fueled the energy/housing boom/bust of the 80's. The institutions that held onto their loans and did due diligence prior to issuing them aren't the ones in trouble. Too much greed and corruption (knowingly funding those that had no business getting loans or loans for much more than they should qualify for) fueled this boom/bust just like all the ones prior. The financial world never seems to learn from history.

Rogue

9/7/2008, 03:26 PM

Seems the problem is being able to buy and sell debt from bank to bank. As long as there's an open market on who holds my mortgage, there is a huge incentive for the original lender and any lender who thinks they can "flip" my debt to another bank, to keep doing it. I don't know the answer, but the bailout seems to address this crisis without getting at the root of the problem.

Chuck Bao

9/7/2008, 03:35 PM

There most definitely will be a ripple across global financial markets on Monday and it starts in Asia in about six hours. I'm expecting a half reaction here with Asian markets opening 3-4% down on light trading volume. Most investors will be waiting on the sidelines and I see no reason why anyone should be brave enough to step in to buy now.

The cost of the bailout will be staggering. I haven't seen any estimates and I wouldn't want to guess on a figure now. We may not actually get the full cost of the bailout for another six months or so.

The key thing, at this point, is that Fannie and Freddie remain ongoing entities and do not further worsen the mortgage crisis.

When there are massive capital injections, shareholders should see their shares diluted to next to nothing. This is where the ripple turns into a tsunami. Some very large financial institutions, such as JPMorgan Chase, own a lot of the preferred shares of Fannie and Freddie.

Shareholders lose everything. Then, taxpayers have to foot the bill.

RUSH LIMBAUGH is my clone!

9/7/2008, 03:40 PM

In any case, the way to deal with it is to let the homebuyers fail, and the lenders fail, without having the taxpayers' bail them out. Lessons would be learned, that way.

Chuck Bao

9/7/2008, 03:41 PM

Banks never learn. You would think after a dozen or so financial crises that they would get their act together.

There is just boom and bust and a new generation of bankers.

Rogue

9/7/2008, 03:47 PM

Is it too obvious to point out that with this much of the treasury now tied up that inflation is about to skyrocket?

GrapevineSooner

9/7/2008, 03:52 PM

In any case, the way to deal with it is to let the homebuyers fail, and the lenders fail, without having the taxpayers' bail them out. Lessons would be learned, that way.

In a strict free market sense, yes.

However, considering how much of our economy is built on banking and real estate, I'd say our government had no other choice than to nationalize these two companies.

Granted, I'll gladly defer to people like Froze and Chuck on complicated issues such as these.

Rogue

9/7/2008, 03:57 PM

Is this permanent, like forever-permanent?
Or is it for 10-20 years until it's safe to un-federalize these companies?

Also, will the smaller mortgage companies cry foul since they will just go bust while the biggest monopolies get safety-netted?

If one can expect massive inflation for 4-10 years, like I do, what makes sense as an investor? Bonds? International stocks? Safer big businesses and less small-bus investing? None of the above?

SoonerBorn68

9/7/2008, 04:12 PM

In a strict free market sense, yes.

However, considering how much of our economy is built on banking and real estate, I'd say our government had no other choice than to nationalize these two companies.

I'm afraid that was too easy of a decision for the government to make. What's next? The auto industry? Banks? Any large (or small) industry that is about to fail?

Unfortuantely we as a nation have just set ourselves up for socialism/facism by nationalising (s instead of z intended) ANY private industry.

Mixer!

9/7/2008, 04:14 PM

According to all the ads on radio, GOLD! GOLD! GOLD!

SoonerBorn68

9/7/2008, 04:17 PM

If hyper inflation sets in & paper money is useless, I'd hate to have to break off a $200 chunk of gold for a loaf of bread. :D

That's silver, Jerry, silver!

tommieharris91

9/7/2008, 04:19 PM

If hyper inflation sets in & paper money is useless, I'd hate to have to break off a $200 chunk of gold for a loaf of bread. :D

That's silver, Jerry, silver!

Yea, but then that gold will be worth like $1500. Meanwhile, crude oil will reach $200, and all other commodities will have a likewise gain.

SoonerBorn68

9/7/2008, 04:23 PM

I'm not worried, check out my sig. ;)

Chuck Bao

9/7/2008, 04:43 PM

Honestly, I don't see inflation stemming from this issue.

Okay, the dollar may and probably should weaken on a further blow out of the fiscal deficit. But, what is a few hundred billion dollars in this day and age?

Commodity prices in dollar terms should rise. But, the overriding factor should still be "demand destruction" as the global economy slows on adjustments to higher prices.

In other words, don't worry so much about inflation. Worry more about a slowing economy, deflation of asset values and declining personal net worth. The threat of deflation is worse than the threat of inflation, as I'm seeing it.

Rogue

9/7/2008, 04:55 PM

Commodity prices in dollar terms should rise. But, the overriding factor should still be "demand destruction" as the global economy slows on adjustments to higher prices.

In other words, don't worry so much about inflation. Worry more about a slowing economy, deflation of asset values and declining personal net worth. The threat of deflation is worse than the threat of inflation, as I'm seeing it.

I got a C-minus in Macro. What constitutes a commodity? Real Estate, guns, cars, anything of value?

Deflation would really be the succ.

mdklatt

9/7/2008, 05:43 PM

It's between this and the people who lied about their income to get those mortgages.

The brokers did most of lying, encouraging people to get mortgages they could never afford. Can you even get away with lying about your income on a mortgage application? Don't the mortgage companies verify that kind of thing?

mdklatt

9/7/2008, 05:45 PM

So now WE get to pay for other peoples' greed/mistakes.

What do you mean now? When has it been any different?

Tulsa_Fireman

9/7/2008, 06:08 PM

The brokers did most of lying, encouraging people to get mortgages they could never afford. Can you even get away with lying about your income on a mortgage application? Don't the mortgage companies verify that kind of thing?

How can you lie, though?

You are borrowing X amount at Y APR for Z term. This is your payment now. If you get off your knuckle dragging nuts and read the contract you're signing, as any prudent individual would do, you will see that Y will vary and thusly, from someone that's never even had an economics class, your payment will change to reflect this.

The whole root of the crisis is the mass defaulting on loans, isn't it? Folks signing the dotted line on adjustable rate mortgages and promptly getting it jagged in their ***? Not to support either side in this deal, but if I can sell someone a turd I just spraypainted gold for a hundred bucks, and they're willing to buy it, why CAN'T I sell a turd to someone stupid enough to buy a gold painted turd?

Why does that make a person/company/lender a bad guy? Help me understand because in all sincerity, I don't outside of foolish people stepping on their own nuts.

royalfan5

9/7/2008, 06:11 PM

How can you lie, though?

You are borrowing X amount at Y APR for Z term. This is your payment now. If you get off your knuckle dragging nuts and read the contract you're signing, as any prudent individual would do, you will see that Y will vary and thusly, from someone that's never even had an economics class, your payment will change to reflect this.

The whole root of the crisis is the mass defaulting on loans, isn't it? Folks signing the dotted line on adjustable rate mortgages and promptly getting it jagged in their ***? Not to support either side in this deal, but if I can sell someone a turd I just spraypainted gold for a hundred bucks, and they're willing to buy it, why CAN'T I sell a turd to someone stupid enough to buy a gold painted turd?

Why does that make a person/company/lender a bad guy? Help me understand because in all sincerity, I don't outside of foolish people stepping on their own nuts.

The lender can be considered a bad guy because he was entrusted with OPM, and lent it to somebody who didn't have a reasonable chance of paying it back. It ain't like the lenders are loaning their own money out.

Also, it will be interesting to see if the Koreans step in to save Lehman Bros, of if it will fail in the near future too.

mdklatt

9/7/2008, 06:20 PM

How can you lie, though?

I guess you're talking about the brokers? I'm sure there were plenty of cases where they buyer asks, "can I really afford that?" and the broker says, "sure, no problem". I'm sure unscrupulous brokers also said stuff like, "well it's only a problem if your house value decreases--but that will never happen". If you don't know anything about buying a house, or you've never dealt with an ARM before, in a lot of ways you're at the mercy of the broker. You could and should do your own research, but is it unreasonable to assume that your broker should be more trustworthy than a used-car salesman?

Veritas

9/7/2008, 06:25 PM

...it unreasonable to assume that your broker should be more trustworthy than a used-car salesman?
Nope. Many mortgage brokers were in it for the quick buck.

r5TPsooner

9/7/2008, 06:31 PM

Nope. Many mortgage brokers were in it for the quick buck.

Yep, now they're on to there next money making scheme... The Reverse Mortgage.

Mixer!

9/7/2008, 06:39 PM

If I can sell someone a turd I just spray-painted gold for a hundred bucks, and they're willing to buy it, why CAN'T I sell a turd to someone stupid enough to buy a gold painted turd?

http://osu.okstate.edu/news/BPS-02.jpg

;)

Oldnslo

9/7/2008, 09:25 PM

This cant be good.

You know, I'm not a gloom and doom kind of guy. But there's nothing about this that gives me a warm and fuzzy. To the contrary, I see printing presses churning out devalued dollars to make up the debt. Sorry to disagree with you Chuck, but I think we're in for substantial inflation.

Mandibleclaw

9/7/2008, 09:31 PM

The whole root of the crisis is the mass defaulting on loans, isn't it? Folks signing the dotted line on adjustable rate mortgages and promptly getting it jagged in their ***? Not to support either side in this deal, but if I can sell someone a turd I just spraypainted gold for a hundred bucks, and they're willing to buy it, why CAN'T I sell a turd to someone stupid enough to buy a gold painted turd?

Why does that make a person/company/lender a bad guy? Help me understand because in all sincerity, I don't outside of foolish people stepping on their own nuts.
To borrow your analogy, all these turds were packaged together in a bundle and resold as gold. Basically kind of like a loan laundry to disguise their true value.

r5TPsooner

9/7/2008, 09:42 PM

Next up for nationalization? The airlines.

WooHoo.

bluedogok

9/7/2008, 09:44 PM

Next up for nationalization? The airlines.

WooHoo.
Very probable....

royalfan5

9/7/2008, 09:48 PM

Very probable....

I'd bet that GM will come before the airlines.

Mandibleclaw

9/7/2008, 10:03 PM

Maybe we should nationalize the oil industry so those profits could offset all these other money losing businesses. ;)

Vaevictis

9/7/2008, 10:55 PM

Not to support either side in this deal, but if I can sell someone a turd I just spraypainted gold for a hundred bucks, and they're willing to buy it, why CAN'T I sell a turd to someone stupid enough to buy a gold painted turd?

If you sell it representing it as a gold painted turd, you're good.

If you sell it representing it as a solid gold turd (knowing it's only gold-painted), you're committing fraud.

Originators would sign a bunch of mortgages. Their companies would then bundle them together, and have a ratings company (like Moody's) rate the portfolio. Many of these were rated highly, and were then sold to third party investors.

In essence, these portfolios were represented as "solid gold" when sold. They weren't.

Is this fraud? Rating debt is not always an exact science, and I think you'd have to show that somebody (the ratings agency or the issuer) knew or should have known that the mortgage pools were junk. Can you prove that? Depends on what their internal records show, I imagine.

That said, I imagine someone had to know. It's just that finding who that was and sticking it to them is probably not going to be easy.

Vaevictis

9/7/2008, 11:09 PM

In any case, the way to deal with it is to let the homebuyers fail, and the lenders fail, without having the taxpayers' bail them out. Lessons would be learned, that way.

Lessons don't get learned.

This kind of behavior is actually highly profitable for management, and highly profitable for every shareholder that cashes out before the crash. It is also highly profitable for everyone that figures out the crash is coming. This behavior is incentivized by the system. You have seen it over and over and over again, and you will continue to see it over and over and over again until someone takes out the incentive to do so.

That requires regulation. I know that violates the tenants of your religion. Sorry. But that's the way it is.

RUSH LIMBAUGH is my clone!

9/7/2008, 11:36 PM

Lessons don't get learned.

This kind of behavior is actually highly profitable for management, and highly profitable for every shareholder that cashes out before the crash. It is also highly profitable for everyone that figures out the crash is coming. This behavior is incentivized by the system. You have seen it over and over and over again, and you will continue to see it over and over and over again until someone takes out the incentive to do so.

That requires regulation. I know that violates the tenants of your religion. Sorry. But that's the way it is.You're suggesting incentives to do business should be regulated out of doing business. Oh, yeah, really a good idea!

Vaevictis

9/7/2008, 11:38 PM

As far as why you might not want to let big financial houses go kaput, here's how I understand it:

(1) If a big financial house goes under, folks start to wonder if other potential debtors have might have trouble.
(2) Institutional lenders, who are often intermediaries, have a hard time raising funds due to these doubts. The funds they raise require higher risk premiums, assuming the funds can be raised at all.
(3) Corporate entities have a hard time directly raising debt by bond issue for the same reasons in #2.
(4) People doing equity issues have an even harder time -- because equity is no-recourse, folks demand are even less likely to provide capital, and are going to require an even higher risk premium.
(5) In essence, due to #2, #3 and #4, any business seeking to raise capital has a hard time doing so, and must pay a high risk premium to do so.
(6) Due to high cost of capital and/or total unavailability, businesses don't invest in new projects.
(7) Due to #6, the economy stops growing, more businesses tank, and you go likely back to step #1.

Essentially, you tighten up credit, and you contract the economy. You can actually deliberately cause recessions in this way. Sometimes this is a good thing -- this is believed by some to have been done in Reagan's first term, and is believed to have broken the stagflation cycle.

It is also believed that you can cause depressions this way, most importantly by the current head of the Fed. Bernanke will not permit credit markets to lock up. He has essentially stated that he will ensure liquidity at any cost, and I think his actions bear that out.

Get used to it. This is the way it's going to be so long as Bernanke is at the helm.

Vaevictis

9/7/2008, 11:40 PM

You're suggesting incentives to do business should be regulated out of doing business. Oh, yeah, really a good idea!

Straw man! Watch it burn!

No, that's not what I'm saying. I'm saying that the incentives that push management and investors to focus on short term returns at the expense of long term returns and society as a whole should be regulated out of existence.

Limited liability is a major problem, and should perhaps be limited in cases like these.

Ike

9/7/2008, 11:58 PM

The brokers did most of lying, encouraging people to get mortgages they could never afford. Can you even get away with lying about your income on a mortgage application? Don't the mortgage companies verify that kind of thing?

The way I understand how this whole mess got going:

1) Investors discover "mortgage backed securities" and start making sweet love to them down by the fire.
2) Suddenly, the investors want more of the mortgage backed securities, but there aren't enough to be had.
3) To meet demand, banks start relaxing the requirements of mortgages, because they have guys with money waiting to eat this stuff up...
4) It gets so bad, that in the end, some banks are offering home loans that only require the borrower to tell them what they earn, and do not require any following up on that. Essentially, banks start telling borrowers "go ahead, lie to us, we don't mind".
5) Meanwhile, all of these MBEs are still being rated as "AAA"
6) Suddenly, the borrowers at the bottom of this can't pay
7) The investors who threw all their money into these things suddenly go "WTF man? Wheres my money?!? This was supposed to be a sure thing!"
8) All hell breaks loose.

Stop me if I got anything wrong in there.

Vaevictis

9/8/2008, 12:11 AM

Stop me if I got anything wrong in there.

That's about right from what I understand. Let's carry it out a little further:

9) Banks start looking at each other, wondering how much of their balance sheet consists of the worthless securities and obligations, and stop lending each other money or continue doing so for higher prices.
10) Businesses and individuals find credit difficult and expensive to acquire.
11) Businesses and individuals spend less money.
12) Businesses go, "Oh crap, our revenues are lower than we expected"
13) Some businesses go under, other businesses cut back. Consumers spend less too.
14) Go to #9.

Bernanke's actions to provide liquidity and shore up failing banks attempt to nip this cycle in the bud at #9 and #10. Has he caused inflation? Yup. Has he done stuff you might consider "socialist?" Yup.

But just how many times do you think 9-14 are going to repeat, just how bad do you think it might get before it stops, and are you really willing to tolerate/risk those depths?

Bernanke is a student of the Depression, and it's clear that he's saying it can very easily get god-awful bad, and he's not putting up with that ****, inflation and ideology be damned. I don't think I disagree with him.

RUSH LIMBAUGH is my clone!

9/8/2008, 12:20 AM

..."banks start relaxing the requirements of mortgages, because they have guys with money waiting"...Businesses that do/did that should not be bailed out by the US Taxpayer.

KingBarry

9/8/2008, 03:20 AM

The brokers did most of lying, encouraging people to get mortgages they could never afford. Can you even get away with lying about your income on a mortgage application? Don't the mortgage companies verify that kind of thing?

Lenders were encouraging their applicants to lie. They were bundling home sales with the loans to buy them-so they pushed buyers to get bigger and more expensive homes than the clients could reasonably be expected to afford.

They won by inflating their home sales, and then sold off the questionable debt as legitimate.

These lenders justified it to themselves, and their clients, by assuming that the boom market would continue indefinitely, so if you could not handle the mortgage it would be easy to resell and at a hefty profit.

Unfortunately, what goes up, must come down.

The real villains here are, marginally, the initial lenders who were helping new home owners over extend themselves, and mostly the loan buyers who should have been paying attention to what they were buying.

On the other hand, this is nice revenge for me on all those undergrads who would not pay attention in my econ classes.

RFH Shakes

9/8/2008, 11:50 AM

If I am not mistaken, the Macs were originally govt entities setup in the 30's to back people who couldn't afford or were otherwise unable to obtain a home loan (low to middle class, high risk borrowers) basically to create "affordable housing" and jump start a slumping market.
They were then privatized but with special status from the gov't. thereby giving them an unfair advantage vs private mortgage co's. So the private mtg co's , to compete w/ the macs, started lending to high risk borrowers thus leading to the mess now.
All started by the gov't to try to boost a slumping housing market which is now in the crapper.

am I close on that?

Vaevictis

9/8/2008, 12:23 PM

am I close on that?

The condition you describe does distort the market.

But it's not the root cause of the current situation. That has been described at some length in this thread already. See Ike's post above.

The key step is that the securities maintained a AAA rating despite continually declining debtor quality.

olevetonahill

9/8/2008, 12:41 PM

So what would Happen If the Gov. Just let em Fall on their Butts ?

Vaevictis

9/8/2008, 12:48 PM

See post above. (http://www.soonerfans.com/forums/showpost.php?p=2390197&postcount=44)

This is generally what happens when credit markets lock up. Some cycles are worse than others.

Point is that you generally don't know how bad it's going to get in advance, and it's rather hard to break the cycle if you don't stop it early.

mdklatt

9/8/2008, 12:59 PM

So what would Happen If the Gov. Just let em Fall on their Butts ?

It's my understanding that, as quasi-government entities, they are at least implicitly backed by the "full faith and credit" of the US government. If the US government is no longer seen as a reliable debtor, then we're pretty much screwed.

r5TPsooner

9/8/2008, 01:50 PM

So what would Happen If the Gov. Just let em Fall on their Butts ?

A lot of politicians would lose a lot of financial backing and insider information on Wall Street

Vaevictis

9/8/2008, 02:15 PM

It's my understanding that, as quasi-government entities, they are at least implicitly backed by the "full faith and credit" of the US government. If the US government is no longer seen as a reliable debtor, then we're pretty much screwed.

I think that this is only a minor factor. Investors may have inferred that the debt was guaranteed by the US government, but it never really was.

The real problem: the two companies have $1.6 trillion in debt.

Think about the impact on the economy if they were to default on that.