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Friday, August 22, 2008
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8 comments:
Regarding Fannie & Freddie:
With regard to equity, the dominant concern is about preferred stock rather than more widely held common stock. Preferred shareholders get paid in a bankruptcy before common stockholders and can receive large dividends. Because of the high dividend payment and the government's implicit backing of Fannie and Freddie, many banks considered them a very reliable source of capital.
Some investors have expressed concerns that under a Treasury bailout officials could take action rendering the companies' stock worthless or eliminating the dividends. This could leave banks undercapitalized. That is why Treasury is considering how to keep Fannie Mae and Freddie Mac as stock-based companies rather than having the government take them over outright, analysts said.
"There's a lot of internal lobbying of Paulson to try to maintain some value in those preferred shares," Miller said. "There would probably be some banks that fail if the preferred gets wiped out."
http://tinyurl.com/5u78vt
I love how the whole system seems to need a bailout. One bad decision depending on another.
If Fannie and Freddie DIDN'T have their implicit backing do you think they would have received anything like the trust they did? Their under capitalization and accounting scandals were widely known. Nobody in their right mind would have gotten deeply involved with these companies if they weren't seen as totally safe due to the government's backing...
Now that it appears the government really will have to step in, we are finding out that the whole situation has been made worse because a great deal of risky behavior was encouraged by the idea that the government would ride to the rescue.
Leroy,
The government is in a bind regarding Phonie and Fraudie. Their spreads are wide, which means that mortgages are expensive vis-a-vis Treasuries. That creates a political problem since homes become less affordable. And as losses continue to deteriorate on their books, the companies' stock prices won't allow them to raise needed capital via stock issuance. That means that Uncle Sam will be forced to take over their highly-rated debt and leave the shareholders holding the bag.
Back in 2004-05, there were an isolated few, viewed as crackpots, who were warning us about this mess. I'd put Fleck at the top of the list. But we seem eager to learn the same lessons, over and over.
Fleckenstein is a perma-bear IMO (his comments are often on MSN) but he makes for a good canary in the coal mine.
He usually ends up being right (I saw that with the dot.bombs and now housing) but is consistently 2-3 years early. When he starts harping on a topic, I know the bubble involved has a few more years of life -- and then run for your life. :-)
We're watching things with a certain amount of trepidation. There are many, many issues right now. Are we in for inflation or deflation? Will the dollar collapse? Have we reached peak oil? Global warming (although if global warming brings more Augusts like this I'm tempted to say go GW! :-)). But these are the times for great opportunities as well.
terminator-x,
"Phonie and Fraudie" -- perfect! LOL!
I love how the whole system seems to need a bailout. One bad decision depending on another.
Sad that Ford and GM now seem to be trying to go to the same trough.
We all want a correction in housing, but unless something is done to allow knife catchers to orderly bring the market down... the economy would get into dire conditions. Due to the near shutdown of the securitization market for mortgages, some bail out is required. My preference is to break up the GSE's; but that is, alas, unlikely.
Got Popcorn?
Neil
Well, well, look who else owns Fannie & Freddie preferred . . . wouldn't want them to take a haircut . . . the taxpayers must bail'em out:
J.P. Morgan details losses on Fannie, Freddie preferred
By John Spence
4:03pm 08/25/2008
"The firm estimates that such preferred stocks have declined in value by approximately an aggregate $600 million in the third quarter to date, based on current market values," J.P. Morgan said in the filing. "The precise amount of losses that may be incurred on these securities for the third quarter is difficult to determine, given the significant volatility being experienced in the market values of these securities." J.P. Morgan shares were off more than 3% in afternoon trade Monday.
http://tinyurl.com/6mrgcr
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