Sep 5th, 2008 at 9:51 pm
The Takeover
Looks like the government is taking Fannie and Freddie into receivorship: “The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.”
Not sure I understand the logical behind “virtually” wiping out the shareholders as opposed to totally wiping them out. As per this Economist article the sensible thing seems to me to be to nationalize the GSEs entirely and then eventually have them broken up into bits that are subsequently privatized.
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36 Responses to “The Takeover”
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September 5th, 2008 at 10:07 pm
You’re right. Nationalize it, then split it up and sell it. Get rid of the incestuous political ties and the implicit taxpayer guarantee.
September 5th, 2008 at 10:09 pm
>>Not sure I understand the logical behind
The logical of it is quite hard to understand.
September 5th, 2008 at 10:17 pm
I think it is fair to say that the guarantee has now become explicit as we always knew it was. Of course, even without an implicit guarantee, the other financial institutions were and are being bailed out as well. Guarantees for all! John McCain is finished now but at least they drowned the government in the bathtub for Barack Obama.
September 5th, 2008 at 10:33 pm
The logic is that if the shareholders are offered something, they have an incentive to take it and not bog the takeover down with lawsuits. Not sure it will work (it took a sweetened offer to do the trick with Bear Stearns), but…
September 5th, 2008 at 10:35 pm
The upshot of the Economist article (several weeks old) is that 1) they’re outlived their purpose, and 2) as private corporations they’re monsters: with the implicit taxpayer backup, they felt they could take risks that a normal publicly traded firm could not. They literally privatized the profits and socialized the risks.
As private firms, they’re broke beyond the worst nightmares of most Enron shareholders. Therefore, Freddie Mae/Mac’s shareholders shouldn’t expect a GD thing, short of an aloha from the new owners.
September 5th, 2008 at 10:41 pm
virtually wiped out is the same as really wiped out except you walk away with money…
September 5th, 2008 at 10:47 pm
This is the biggest white collar fraud in history. The perpertrators will never see justice. I would expect this bailout to be in the low trillions, but they won’t be telling us that. No wonder McCain toned down his many new wars rhetoric. The bank his son was on the board of failed today too so Keating 5 will become a major issue. I’m telling you, he’s history.
September 5th, 2008 at 10:47 pm
I am a retired person living on a Pension and I have a few friends who are dependent on their Fannie Mae dividends as a primary income source because they were told, “Fannie Mae will always be there because it’s backed up by the government.” It sounds to me as though they might have been misled. Badly misled!
September 5th, 2008 at 10:51 pm
Last time I checked, and this was many months ago, half of Fannie Mae’s common stock was owned by one hedge fund. I expect that they dumped all of that stock over the last few months and that all of the common stock is now held by individual investors, like myself, who will take a complete bath.
September 5th, 2008 at 10:53 pm
David Gregory’s wife is their General Counsel. I mean was their General Counsel.
September 5th, 2008 at 10:55 pm
Off-topic, but the thought is connected to this topic. The financial firms are taking a beating and many of them are taking infusions of foreign capital.
My thought is - American CEO compensation is way out of line - will the foreign investors who will own large chunks of these firms go along with such?
September 5th, 2008 at 10:56 pm
Seems more palatable to the taxpayers…. those investing in a corp. making high risk loans actually bear the brunt of bad risks (after enjoying profit all those years).
September 5th, 2008 at 11:21 pm
Let’s not forget what John McCain was up to during the last big financial crisis.
September 5th, 2008 at 11:29 pm
I’ll bet there were lots of unsophisticated investors who piled in, thinking these stocks were safe after Bush went on TV to confirm the existence of the “implicit guarantee” without taking 10 seconds to warn that it didn’t mean the stock could still go to zero. Did they leave the warning out on purpose, hoping to stick rubes with the stock?
Ownership society.
September 5th, 2008 at 11:31 pm
You know what I meant.
September 5th, 2008 at 11:34 pm
I think the holders of preferred stock might not be totally wiped out here, just the common stock holders. That could be what they mean by “virtually” wiped out.
September 5th, 2008 at 11:41 pm
i don’t understand the need to privatize them eventually…can’t the functions of the Frannies be part of the US govt? are the mortgages of this country, like healthcare insurance, be better served by a public (and more transparent) entity. they only became private (semi private) because Johnson needed their balance sheets off his vietnam war budget. and this isn’t the first time the mortgage market seized in the US; i recall the market place being quite disable back in the early 30’s.
September 5th, 2008 at 11:45 pm
About goddamned time. Get it over with and move on.
September 6th, 2008 at 12:47 am
There are British models: Railtrack and Northern Rock. The former should never have been privatized, the latter can be returned to the private sector when it has been returned to what it once was: a regional mortgage provider.
The GSEs lie somewhere in-between. A publicly traded company that’s ‘too big to fail’, backed by the Treasury, and allowed to gamble on abstruse financial instruments like McCain throwing a grand on 8 the hard way is a bailout waiting to happen.
September 6th, 2008 at 12:49 am
but at least we’re not in a recession… ha (it must be Clintons fault)
September 6th, 2008 at 1:34 am
In terms of policy, I understand why we would want the government to promote home ownership (well actually I don’t, at least not the federal government, but this isn’t germane to this point). But why do we want the government to promote taking on debt to own a home? Someone with a mortgage, even a subsidized mortgage, doesn’t really own their home free and clear, what they really have is debt and title to a house if they can repay the debt, that they can live in and even sell in the meantime. This is not quite the same thing.
If the government was really serious about property ownership, as opposed to what they are doing now, they would sell off federal lands in small lots, and put in maximum sizes for the amount of property any one person or company can hold. Or even ban corporations from owning property, make it so only individual people can own property and they have to do it in their own name. I’m not necessarily for it, but these are the sort of things you do if you really want a large property owning middle class.
September 6th, 2008 at 1:36 am
What a fitting end for the neo-liberal era. Privatization of profits and socialization of risk, to such a gigantic tune that I can’t imagine the fallout.
The saddest part is that it’s not really the end. When the incestuous little foreign policy school met reality in Iraq nothing replaced them and they went on to forment idiocy in Georgia, no one fails in America! We just need bigger and bolder.
I don’t know if anyone is going to give them anymore money to play with but I’m sure there is some way that neo-liberal (as practiced) economics can fail in some grander scale. The dollar was making a comeback before this, it’s gonna take one hell of a knock now. I bet the brilliant folk that gave us the “ownership society” can find a way to fuck things up to give up Zimbabwe levels of inflation where we can put Reagan on the face of ten billion dollar bills.
September 6th, 2008 at 1:53 am
FDIC is out of money. Do you know how crazy that is? They need recapitalization.
Buy SKF. It’s a fund that shorts that all the financials. It’s going to look smart as hell in a few days.
September 6th, 2008 at 7:17 am
The timing of this response to the crisis — holding onto the information until a Friday afternoon — and the lack of fury at it — no pitchforks, no torches — is more proof that the glum, grim anti-democratic beliefs of the surliest neo-con is, in fact, appropriate.
People are too stupid to breathe much less to pick their own leaders.
September 6th, 2008 at 8:06 am
Um, if Matt has any knowledge about this situation, the larger issues it raises, past precedents, possible future implications or, oh, anything relevant. whatsoever beyond what he gleamed from one brief cheat-sheet article in ‘The Economist’ he might want to share it.
But, okay, needless to say, he doesn’t.
I apologize if the previous two paragraphs calls into question the very nature of kid pundit blogging.
A few of the comments though, it must be said, have been illuminating and informed. (Shame though Matt will never read them.)
September 6th, 2008 at 9:57 am
This is really all about the Bush administration seizing the opportunity to destroy heavily-regulated enterprises that operate in the public interest. I’m amazed that so many liberals are cheering this on.
September 6th, 2008 at 10:47 am
Next bailout: a $50 billion “loan” to the automakers at their request. Both McCain and Obama (the republicratic party’s 2 presidential candidates) have indicated their support.
More rewards for incompetence. It’s the american way.
September 6th, 2008 at 10:57 am
MY - nationalism should certainly not be followed by privatization. Have you paid any attention to the sub-prime crisis, which began entirely in the privae sector? It is amazing that the American elite is taught to jerk their knees whenever they see the word privatize - although, of course, being the ultimate beneficiaries, the love they give to such neo-liberal programs might simply grow out of their investment accounts.
Smaller private versions of Fannie Mae and Sally Mac would simply be a series of government bailouts of private entities. How nutty the hold of neo-liberal thinking is on someone who, otherwise, shows a certain hopeful shrewdness. MY´s suggestion is contradicted by the entire experience of the financing of the housing market in the U.S., which has been one of the great successes of the U.S. post New Deal economy.
September 6th, 2008 at 10:59 am
oops - nationalization!
September 6th, 2008 at 11:35 am
Mort Zuckerman, who actually knows what he’s talking about, wrote:
“A collapse of Fannie and Freddie is unthinkable because it would provoke a systemic risk to the financial world. Too many firms across America, and the world, are holders of their securities. And since F&F are these days virtually the only consistent buyers and securitizers of U.S. home mortgages, a decline in their lending could bring housing finance to a virtual standstill.”
http://www.usnews.com/articles/opinion/mzuckerman/2008/07/25/fannie-mae-and-freddie-mac-too-fat-to-fail.html
So, if F&F’s securities become worthless, what happens to the firms holding them, and investors in those firms? Not to mention the effect on credit, the dollar’s value, the federal debt, foreign investors’ view of U.S. securities, etc., etc., as people get an idea of the size of the bailout?
At the very least, we can discount anything Obama and McCain say they’ll do about the economy and taxes. The next administration will be an austerity regime; it will have no choice.
I’m almost hoping McCain wins. The Republicans deserve to take the full rap for the meltdown to come, and the federal government’s inability to do much about it.
September 6th, 2008 at 12:01 pm
Re: they felt they could take risks that a normal publicly traded firm could not.
Bear Syearns was a “normal publicly traded firm”. So is Countrywide. So was Indymac. A whole lot of private firms made some really, really dumb mistakes too and look whgat’s become of them.
September 6th, 2008 at 12:54 pm
Taxpayers need the names of who is getting bailed out with taxpayer gold here, and who is getting the empty shaft. Is it the large, sophisticated investors in F&F DEBT who will get the taxpayer bailout, leaving small, unsophisticated investors in F&F STOCK holding nothing?
September 6th, 2008 at 1:33 pm
Where are all the Republicans telling us about the marvel of the “free market” , the evils of government, and why women with children, victims of Katrina disasters,etc shouldn’t get shit because that interferes with market discipline. Oh –and wasn’t there something about how people should suffer the consequences of bad decisions? “Moral Hazard”? Guess it doesn’t apply to CEOs who get $38 Million in compensation and tosses large sums to Congress.
September 6th, 2008 at 1:36 pm
As noted by Chazly above , the REAL Bailout is the tens of BILLIONS of our tax dollars going to the wealthy holders of Fannie Mae/Freddie Mac securities.
September 6th, 2008 at 2:14 pm
1) Not that what Matthew does NOT say is that the bill to bail out Freddie Mac and Fannie Mae — to stick the US Taxpayers with $5 TRILLION in their liabilities — was created by House Democrats and approved by all Senate Democrats.
2) However, the provision to block Fannie Mae and Freddie Mach from tossing MILLIONS/year in campaign donations to Congress was NOT approved.
3) Gee, I wonder who has been taking money from Fannie Mae/Freddic Mac executives for the past several years — and in return, turning a blind eye to the developing disaster?
September 6th, 2008 at 6:29 pm
Re: Not that what Matthew does NOT say is that the bill to bail out Freddie Mac and Fannie Mae — to stick the US Taxpayers with $5 TRILLION
Not sure where you getting that five trillion from. Is that the total holdinsg of these companies (seems incredibly high even for these giants). However the vast majority of mortgage the companies hold are not in default or problematic in any way. Those are solid, performing assets and you need to put them in the balance pan opposite the liabilities to sum up just what the damage might be.