

Feds to take over Fannie Mae, Freddie Mac - furiouslol
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/05/BUKS12OVO1.DTL

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JeffJenkins
I've been following this for weeks in The Economist. They recommended that the
Fed do this, but I honestly didn't think it would happen. Here are a couple
recent articles if ou haven't been following:

Recent background article:

[http://www.economist.com/finance/displaystory.cfm?story_id=1...](http://www.economist.com/finance/displaystory.cfm?story_id=11985948)

about nationalisation:

[http://www.economist.com/opinion/displaystory.cfm?story_id=1...](http://www.economist.com/opinion/displaystory.cfm?story_id=12009702).

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ojbyrne
Since Jim Collins (Built to Last, Good to Great) has come up a few times here,
just thought I'd mention that Fannie Mae is one of his "Good to Great"
companies.

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esja
In Search of Excellence (the classic of this genre) had the same problem.
Being profiled in a pop-business book should be considered a huge red flag.

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jlhamilton
The Halo Effect, by Phil Rosenzweig, does a good job describing many of the
problems with popular business books like Good to Great and In Search of
Excellence. It's worth reading.

[http://www.amazon.com/Halo-Effect-Business-Delusions-
Manager...](http://www.amazon.com/Halo-Effect-Business-Delusions-
Managers/dp/0743291255)

~~~
lallysingh
I'm suspicious because it sounds like a popular business book.

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ctkrohn
A bailout has been rumored for quite some time. There have been a couple
instances in the past few months where news outlets have reported that a
weekend deal is imminent, but nothing ever came. The mortgage basis (i.e. the
difference in yield between mortgage-backed bonds guaranteed by Fannie/Freddie
and Treasury notes) has compressed quite a bit in recent weeks, indicating a
lower expectation of risk because market participants have been expecting a
deal. But yesterday when the news hit, mortgages didn't really do much... we
sold off a couple ticks and the basis tightened by 2 basis points or so, but
that was it.

In short, the bond market won't treat this as news until some concrete
announcement comes out -- it's already been priced in. It's only the common
equity holders who are reacting, since any deal will likely wipe them out.

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patrickg-zill
I have come to have a term for these announcements of action to take over
banks, restructure credit, etc. which _always_ seem to happen on Friday
afternoons, timed perfectly to have minimal impact on the news cycle and get
the least amount of attention.

"FDIC Fridays" or in this case "Fed Fridays"

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notauser
They are done on Fridays so that stockholders have time to calm down and get
some perspective before trading restarts on a Monday morning.

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mtw
can somebody say why this is necessary? what would happen if the gov. wouldn't
have taken over?

would the fed. gov bail out general motors, boeing or google if those are in
the verge of bankrupting?

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etal
The U.S. mortgage system works like this: Freddie Mac and Fannie Mae make the
housing market more liquid by buying up mortgage loans satisfying reasonable
criteria. Other banks can issue mortgages and then immediately resell the
loans back to Fannie and Freddie. This makes it easy to get a mortgage through
any bank if you have a reasonable financial history, because the other banks
don't have to serve out the loans they issue.

Since Fannie and Freddie were implicitly backed by the Fed, they were able to
leverage their capital much more than a normal bank in taking on loans -- only
a few percent of their issued loans were backed up by real money. These beasts
were designed to be too big to fail, and in the unlikely event that they did
fail, the companies' histories indicated that the Fed would step in. This is a
huge advantage for the two companies, and over the years they essentially
squeezed other banks out of the prime mortgage market.

The entire housing market therefore depends on the ability of Fannie and
Freddie to buy up the mortgage loans that other banks issue. Without them, the
pool of available capital to support those loans would suddenly shrink
dramatically, meaning much fewer loans can be issued. Meaning none of us could
buy a house for the next few years.

The Fed is stepping in because (1) they created both companies originally,
though they cut the umbilical cord at some point; (2) they're still tied into
the companies' finances in various ways; and (3) crippling the housing market
and setting off a chain reaction of more bank collapses is not something this
economy needs, particularly in an election year. There are a few other
government-sponsored enterprises that would also get this sort of rescue if
needed. Boeing isn't one of them, but as a matter of national security, I
doubt the government would allow them to fail. (I still can't quite explain
why Bear Stearns got bailed out, but they did.)

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gills
The prospectus for every bond issued by these agencies explicitly states that
it is not guaranteed by the United States.

The housing market does not need Fannie and Freddie. What it needs is a stable
provider of liquidity (a broker for the secondary mortgage market). Let Fannie
and Freddie fail, and simultaneously introduce an explicitly-backstopped
liquidity mechanism/agency.

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misterbwong
While this sounds good in theory, I get the feeling this is one of those
easier-said-than-done situations. Even if there was a replacement liquidity
provider ready to replace the two firms, letting them fail would cause a huge
amount of stress for the market.

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mleonhard
> After stock markets closed on Friday, the shares of Fannie and Freddie
> plummeted. Fannie was trading around $5.50, down from $70 a year ago.
> Freddie was trading at about $4, down from about $65 a year ago.

It looks like a good time to buy Fannie & Freddie stock!

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Alex3917
This got deleted when I submitted it, but I think it's a good read anyway:

[http://www.dailykos.com/story/2008/7/31/64417/6293/543/55984...](http://www.dailykos.com/story/2008/7/31/64417/6293/543/559842)

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byrneseyeview
_In other words, unscrupulous investment bankers might see an opportunity in
helping weaker banks launching covered bonds; given their circumstances, these
banks will have to provide top notch collateral, ie their best remaining
assets, and will probably not get a great price for them (ie the bonds will be
both overcollateralised and expensive)._

Either the offered price is less than what these assets could otherwise be
sold for (i.e. the transaction won't happen) or it's more (in which case the
price criticism doesn't make sense).

Other than that, decent but fear-mongering article. Pretty much any scheme by
which you exchange cash for a set of promised future cash payments is bound to
be abused at some point. There is very little new here, except that this is
another quasi-guaranteed asset.

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Protophore
It's about time they work out a plan to move forward and add some stability to
these two companies and the market. I don't like the idea of having the
taxpayers foot the bill for all of this mess, but the alternative is even
worse (doing nothing and letting the market continue to its downward trend). I
would imagine that in this day and age the majority of people have some, if
not all, of their retirement money in the stock market either through 401ks or
through private brokerage firms. Either way the the common American gets to
pay for this mess - through depressed stock prices or through taxes used to
bail out Freddy, Fannie, and others like them.

It's got to suck for anyone how owned shares of either of these two firms.
Down something like 80% this year. Ouch!

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Xichekolas
> _Down something like 80% this year._

Well, now that they have been nationalized, it's more like 100%. From my
understanding (as gleaned from the Economist), this will wipe out
shareholders, both common and preferred.

But either way, I think the Feds are doing a good thing, as these guys were
pulling Enron-style shenanigans, (guaranteeing their own mortgages, etc) and
dominating the conforming mortgage market due to their access to cheap debt.
Let regular banks step in and serve that market, instead of being confined to
riskier mortgages that the two giants weren't allowed to buy.

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zandorg
Maybe they should get married...

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fugue88
There goes the neighborhood!

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mick_m
A wholesale indictment of American capitalism, if I've ever seen one.

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epi0Bauqu
Not really. Both were chartered by Congress, and at best are considered quasi-
private. This position (being quasi-private) may actually be worse than either
totally private or totally public, but in any case isn't anything close to
unfettered capitalism.

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stcredzero
Yes, but he said "American capitalism" not "unfettered capitalism."

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davidw
I'm going to put a premature stop to this by beating everyone to the
punchline.

Libertarians: "It's always, everywhere, every time the government's fault. If
the government would just get out of the way, everything would be roses and
flowers in Libertopia".

Left-wingers: "You're on crack. This whole thing happened because we need more
government regulation. If we could just get good regulations and put the
people in power over greedy multi-national globalized corporate ... (and so
on) ... we would be much better off!".

Real-worlders: "Libertopia is about as likely to work as Marxistan, the system
we have is pretty good, but will always need some tweaking. There is plenty of
scope for debate, on a case by case basis, looking at the actual facts and
data for each case. Sometimes we should tack away from regulations, in other
cases some government intervention might work to improve markets. In this
case, Fannie Mae and Freddy Mac were probably not that good an idea to begin
with. Oh, and by the way, these sorts of debates probably don't belong on
Hacker News;-)"

Oh, and by the way, "wholesale indictment of American capitalism" is just
handwaving. "American capitalism" is an awfully broad range of things, from
Joe's Corner Sandwich Shop to Goldman Sachs to, well, Y Combinator.

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ivankirigin
Pigeonholing commenters is kind of patronizing, isn't it? Those general
arguments, in the right context and with the right facts, can all be
reasonably made.

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davidw
"The right context" is over a bottle of good wine, an offer open to anyone who
happens by the same corner of the world I happen to be in. I didn't mean to be
patronizing; there are smart people I respect that take those views, merely to
'head them off at the pass'.

