More on Fannie and Freddie, by Yves Smith, at Naked Capitalism. Here’s the Fannie theme song, this time with a video to go with it. (Discovered at The Big Picture, Barry Ritholtz’s blog.)
So Where is That GSE Bailout?
Excerpt: "Yes, it’s the end of the summer, but the Fed boys worked over the weekend, so what’s the excuse of Hank Paulson & Co.? The saber rattling for the Fannie and Freddie rescue program to be unveiled is getting louder and louder.
We had an unmistakable demand from the Chinese over the weekend, if you somehow managed to miss it: From Bloomberg:
A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China’s central bank.
“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to questions yesterday. “If it is not the end of the world, it is the end of the current international financial system.”
You can’t say we weren’t warned.
Politer reminders came from some US financial heavyweights today, as Reuters tells us:
Two of the biggest U.S. bond investors said they would get involved in a capital raising by Fannie Mae and Freddie Mac as long as the U.S. Treasury participates in the new deals.
But Bill Gross, chief investment officer at Pacific officer at Pacific Investment Management Co., and Dan Fuss, vice chairman of Boston-based Loomis Sayles, disagree on what shape any deal with Treasury should take, according to separate interviews on Friday.
Gross would be drawn to a straight preferred stock offering similar to securities sold by Fannie Mae and Freddie Mac in raising capital this year and last, while Fuss wants an offering of convertible debentures.
And John Jensen tells us that the mood in the markets is lousy:
…During the day the depth of the problem resonated with word that JPMorgan in an SEC filing has acknowledged that it had lost $1.2 billion in write downs on FNMA and Freddie Mac preferred stock. If they are down that much what is the fate of regional banks with less capital and a far larger (percentage) holding than JPM.
…Leaving the GSEs to their own devices is no longer an option; no one is going to pony up new equity, given the high odds that any investment by the government will wipe out or at least damage current shareholders. The Treasury would love to take out both the preferred and common equity holders, but too many banks, like JP Morgan, own preferred, and the last thing it wants to do is further weaken bank balance sheets. We’ve noted that the easiest-to-implement option would be for Treasury to bid for GSE debt when and if needed, but that’s a solution that the markets are likely to deem a mere stop-gap…"
