This link has been bookmarked by 6 people . It was first bookmarked on 18 Jul 2008, by Kou Mikami.
-
31 Aug 08
-
He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary.
-
the Federal Reserve said Fannie and Freddie could get financing at its discount window
-
The absurdity of this situation was highlighted by the way the discount window works.
-
As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government
-
Freddie Mac was able to raise $3 billion in short-term finance on July 14th.
-
The next day Moody’s, a rating agency, downgraded both the financial strength and the preferred stock of Fannie and Freddie, making a capital-raising exercise look even more difficult.
-
the Securities and Exchange Commission
-
weighed in with rules restricting the short-selling of shares in Fannie and Freddie.
-
The belief in the implicit government guarantee allowed the pair to borrow cheaply.
-
Had Fannie and Freddie been hedge funds, this strategy would have been known as a “carry trade”.
-
The two groups had core capital
-
of $83.2 billion at the end of 2007
-
this supported around $5.2 trillion of debt and guarantees, a gearing ratio of 65 to one.
-
Fannie and Freddie were counterparties in $2.3 trillion-worth of derivative transactions, related to their hedging activities.
-
“Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.”
-
Although the two organisations have suffered from regional busts in the past, house prices have not fallen nationally on an annual basis since Fannie was founded in 1938.
-
the pair’s average loan-to-value ratio at the end of 2007 was 68%
-
declared losses on their core portfolios have indeed been small by the standards of many others; in 2008, they are likely to be between 0.1% and 0.2% of assets
-
In the late 1990s they moved heavily into another area: buying mortgage-backed securities issued by others
-
In 1998 Freddie owned $25 billion of other securities
-
by the end of 2007 it had $267 billion. Fannie’s outside portfolio grew from $18.5 billion in 1997 to $127.8 billion at the end of 2007.
-
Fannie and Freddie were buying 50% of all “private-label” mortgage-backed securities in some years
-
Both companies make a distinction between losses on trading assets
-
and on “available-for-sale” securities which they hold for the longer term and disregard, if they think the losses are temporary. At the end of 2007
-
Fannie had pre-tax losses of this type of $4.8 billion; Freddie’s amounted to $15 billion.
-
When borrowers fail to keep up payments on mortgages in the pool that supports asset-backed loans, Fannie and Freddie must buy back the loan.
-
that requires an immediate write-off at a time when the market prices of asset-backed loans are depressed.
-
Instead, the twins sometimes pay the interest into the pool to keep the loans afloat.
-
the danger that borrowers may pay back their loans early, if interest rates fall, leaving the companies with money to reinvest at a lower rate.
-
Fannie and Freddie have bought insurance against borrower defaults when the homebuyer lacks a 20% deposit. But the finances of the mortgage insurers do not look that healthy
-
At the end of the first quarter, the two companies exceeded their minimum capital requirements by $11 billion apiece
-
To fall to the “critical level”, which would require OFHEO to take the agencies into “conservatorship”
-
Fannie would have to lose $16 billion of capital and Freddie $14 billion. And because neither Fannie nor Freddie has depositors, there is no danger of their suffering a run
-
Freddie lost $3.5 billion in 2007; Fannie reported a $2.2 billion loss in the first quarter, having lost $2.05 billion last year. Each had credit-related write-downs of between $5 billion and $6 billion last year. On a fair-value basis,
-
Freddie had negative net worth of $5.2 billion at the end of the first quarter.
-
After all, the government is likely to extract a heavy penalty from shareholders in return for its support (creditors are another matter, especially as a lot of GSE paper is held by foreign central banks).
-
The authorities are keen to avoid nationalisation, which would bring the whole of Fannie’s and Freddie’s debt onto the federal government’s balance sheet. In terms of book-keeping this would almost double the public debt, but that is rather misleading. It would hardly be like issuing $5.2 trillion of new Treasury bonds, because Fannie’s and Freddie’s debt is backed by real assets. Nevertheless, the fear that the taxpayer may have to absorb the GSEs’ debt pushed Treasury bond yields higher.
-
the debt of the GSEs has been trading as if it were guaranteed by the American government, but the debt of the government was not trading as if Uncle Sam had guaranteed that of the GSEs.
-
With the credit crunch, Fannie and Freddie have become more important than ever, financing some 80% of mortgages in January.
-
The GSEs are not the only liability for the government.
-
The FDIC has some $53 billion of assets
-
But if enough banks got into trouble, the government would be on the hook for any shortfall. The same is true of the Pension Benefit Guaranty Corporation, which insures private sector benefits, but is already $14 billion in deficit.
-
-
03 Aug 08
Brady RussellFrom the page: "However, Fannie and Freddie did not stick to their knitting. In the late 1990s they moved heavily into another area: buying mortgage-backed securities issued by others (see chart 3). Again, this was a version of the carry trade: they used
-
21 Jul 08
-
19 Jul 08
-
Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.
After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.
The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.
-
The belief in the implicit government guarantee allowed the pair to borrow cheaply. This made their model work. They could earn more on the mortgages they bought than they paid to raise money in the markets. Had Fannie and Freddie been hedge funds, this strategy would have been known as a “carry trade”.
-
It also allowed Fannie and Freddie to operate with tiny amounts of capital.
-
The duo focused on mortgages to borrowers with good credit scores and the wherewithal to put down a deposit. This was not subprime lending. Howard Shapiro, an analyst at Fox-Pitt, an investment bank, says the pair’s average loan-to-value ratio at the end of 2007 was 68%;
-
Of course, this strategy only raises another question. Why does America need government-sponsored bodies to back the type of mortgages that were most likely to be repaid? It looks as if their core business is a solution to a non-existent problem.
-
However, Fannie and Freddie did not stick to their knitting. In the late 1990s they moved heavily into another area: buying mortgage-backed securities issued by others
-
Sometimes the mortgage companies were buying each other’s debt: turtles propping each other up. Although this boosted short-term profits, it did not seem to be part of the duo’s original mission. As Mr Greenspan remarked, these purchases “do not appear needed to supply mortgage market liquidity or to enhance capital markets in the United States”.
-
This left them exposed to the very subprime assets they were meant to avoid. Although that exposure was small compared with their portfolios, it could have a big impact because they have so little equity as a cushion.
-
Clearly, if the pair continue to lose money for much longer, their capital base will be eroded. And, of course, Congress wanted their businesses to expand—meaning that more, not less, capital would be needed. That would require shareholders to stump up more money. But investors tend to anticipate a big equity-raising by selling the shares, and a falling share price makes an equity issue less likely. The fall was sufficiently speedy in mid-July to prompt Mr Paulson to step in. The stockmarket had called the government’s bluff.
-
In the end, the turtle at the bottom of the pile is the American taxpayer. But that suggests that, if Americans are losing money on their houses, pensions or bank accounts, the right answer is to tax them to pay for it. Perhaps it is no surprise that traders in the credit-default swaps market have recently made bets on the unthinkable: that America may default on its debt.
-
-
18 Jul 08
-
-
-
It also allowed Fannie and Freddie to operate with tiny amounts of capital. The two groups had core capital (as defined by their regulator) of $83.2 billion at the end of 2007 (see chart 2); this supported around $5.2 trillion of debt and guarantees, a gearing ratio of 65 to one. According to CreditSights, a research group, Fannie and Freddie were counterparties in $2.3 trillion-worth of derivative transactions, related to their hedging activities.
There is no way a private bank would be allowed to have such a highly geared balance sheet, nor would it qualify for the highest AAA credit rating. In a speech to Congress in 2004, Alan Greenspan, then the chairman of the Fed, said: “Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.” The likelihood of “extraordinary support” from the government is cited by Standard & Poor’s (S&P), a rating agency, in explaining its rating of the firms’ debt.
-
However, Fannie and Freddie did not stick to their knitting. In the late 1990s they moved heavily into another area: buying mortgage-backed securities issued by others (see chart 3). Again, this was a version of the carry trade: they used their cheap financing to buy higher-yielding assets. In 1998 Freddie owned $25 billion of other securities, according to a report by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO); by the end of 2007 it had $267 billion. Fannie’s outside portfolio grew from $18.5 billion in 1997 to $127.8 billion at the end of 2007. Although they tended to buy AAA-rated paper, that designation is not as reliable as it used to be, as the credit crunch has shown.
-
Would you like to comment?
Join Diigo for a free account, or sign in if you are already a member.