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Monday, August 25, 2008

Fed Pushes Treasury To Socialize The Losses

As Fannie Mae (FNM) and Freddie Mac (FRE) hurtle towards oblivion, the only play being considered can be summed up as: SOCIALIZING THE LOSSES.

Man am I ever glad I'm not a U.S. taxpayer...
Poor bastards...

Fed Pressures Treasury Not To Wipe Out Fannie Mae Preferreds: "The Federal Reserve has been quietly pressuring the Treasury Department not to adopt a rescue plan for Fannie Mae and Freddie Mac that would wipe out the value of their preferred shares, according to a source familiar with the matter. The Fed fears that any move that hurt the preferred could worsen the crisis in regional banks that is already under way.

At issue is $36 billion of preferred stock issued by Fannie and Freddie. Under several versions of widely discussed rescue plans for the mortgage giants, the US government would take a new preferred stake in the companies, subordinating or perhaps wholly eliminating the existing preferred. Critics of Fannie and Freddie believe such a move would be necessary to punish excessive risk taking by the companies and avoid creating additional 'moral hazard.'

The situation is complicated, however, by the large share of preferred stock held by regional banks, many of which are viewed as possible candidates for failure in these credit crunched times. As the Financial Times reported over the weakened regional banks and US insurers hold the majority of Fannie and Freddie's outstanding preferred stock. The Fed has begun advocating against wiping out these shares, saying the threat to stability of the banks is greater than the 'moral hazard' argument, a source familiar with the matter says.

"The fear is that this bailout, if done in a punitive manner, could be costly, resulting in even more bailouts," the source said.

Last week Moody's cut Fannie and Freddie's preferred stock ratings from A to Baa3 on based on the uncertainty of how they would be treated in a rescue plan from the Treasury. That move could add to the need for the Treasury to take action soon, before banks are forced to report write-downs on the value of these lower-rated preferred shares. At the same time, the new pressure from the Fed to avoid wiping out the shares may stall an agreement on what form the intervention should take."

6 comments:

sc said...

This is just getting nuts!! What about all the equity shareholders? Don't ding them either? This is capitalist communism. JPM has already written off half their $1.2 holdings of GSE prefs. How stupid to invest in the equity of something that is so correlated with your core franchise. They were the firm that defined the term "wrong-way risk" for crying out loud.

I shorted FNM this morning after it was up 6% as it was the first time I could get the borrow in weeks. I sat stunned as it kept going up. FRE's auction success was for T-Bill equivalents which are in huge demand and they also have the Fed window open to them. The market misread that, but perhaps knew of the Fed's whining to Tsy. CNBC bobble head says Tsy does nothing until after election. Other says Tsy agrees to buy all MBS issuance for now. CSFB says Tsy should do convert, not pref or pure debt. Fearing BS like this I cut my short to a third at the close. I hope to see this thing crumple to 2 when I'll cover.

Anonymous said...

Even the GM,Ford and Crysler are crying for a bailout.
They want 50 Billion to do now what they havent done jet-design fuel efficient cars.
So every industrie could get a bailout for their mismanagment and stupidity.

Anonymous said...

I'm a US taxpayer although I have the means to cut my tax exposure by sitting on my ass and not working for the pleasure of paying higher taxes while getting paid in a depreciating currency. Sometimes working and being productive just doesn't make sense and right now is one of those times.

Rebecca Wilder said...

Many sovereign economies, namely in Southeast Asia (China) and the Middle East, have been accruing Fannie and Freddie bonds like they were US treasuries. It would be in our (I am a US citizen) best interest to defend these bonds in order to preserve some sort of international capital flows.

Anonymous said...

Rebecca has an intersting take.

China to US:

"Uh, our Fannie/Fred holdings had better NOT go to nil. We lent you the money so you could buy our goods on the cheap (and satisfy your instant-gratification culture), so don't tell us that our vested interests are worth ZIP. I'd hate to have to sell those bonds to the Saudi's for pennies, and watch the USD go in the crapper".

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