November 11, 2007

This should scare you. Or at least wake you up a bit.


Close your eyes and picture the day the US defaults on its debt. Or has to print so much currency to compensate for this housing disaster that the value of the dollar goes from laughable to downright disgusting.

The biggest bagholders aren't the banks folks. Nope, they're Fannie and Freddie. And because of their implied government guarantee, after all loans melt down and not just subprime and Alt-A, that means, drumroll please, that the ultimate housing crash bagholder is, are you ready for it? Are you ready? The ultimate bagholder is...

You.

From the reform hearings on Fannie and Freddie:


The housing GSEs are among the largest borrowers in the world. A comparison I like to make is when you add Fannie’s and Freddie’s outstanding debt of almost $800 billion each, with the FHLBanks’ debt outstanding of $900 billion, and Fannie’s and Freddie’s net guaranteed MBS of $2.9 trillion, it comes to $5.4 trillion. That is bigger than the $4.9 trillion publicly held debt of the U.S.

Like other financial institutions, the housing GSEs face a full range of risks, including market risk, credit risk, and operational risk -- only on a much larger and more concentrated scale than other financial institutions.

Fannie Mae, Freddie Mac and some of the FHLBanks have each experienced serious difficulties handling those risks over the years. Current remediation efforts will help reduce operational risks, in particular, but all three risks will continue into the future.

22 comments:

Andrew Hac said...

Americano is as toasted as a snapper turtle on a skewer over a bed of sizzling red hot charcoal !!!

Peter T said...

I think you are right on the spot with this poist, Keith. Fannie and Freddie are the BIG PROBLEM, both with their portfolio and their guarantees. The big fundametal truth behind the credit mess are sinking house prices: the collateral for billions and trillions on paper is vanishing by the day. That is true for all mortgage categories, not only subprime; subprime was only first and most obvious. I still hope that the government declares that Fannie's and Freddie's obligation are not the government's obligation (as they have done in the past in less cloudy days), but I fear that the politicians are not willing to make such a cut to so many retirement accounts. They rather devalue the dollar even more.

Edgar said...

No problem. It's all good.

Anonymous said...

Chuck Schumer and the DemoCrooks want to expand Fannie and Freddie and increase the loan limits to $1 in order to save their Wall St buddies.

CHARLES E. SCHUMER: CAREER PROFILE (SINCE 1989)
Top Contributors
1 Goldman Sachs $458,440
2 Citigroup Inc $399,716
3 JP Morgan Chase & Co $325,200
4 Morgan Stanley $298,946
5 Bear Stearns $230,350
6 Merrill Lynch $226,150
7 UBS Americas $222,000
8 Credit Suisse Group $199,044
9 Lehman Brothers $181,450
10 Time Warner $167,500

http://tinyurl.com/35klv9

Anonymous said...

Thankyou FDR and the 'rats for creating the Social inSecurity ponzi scheme and the GSE's

Anonymous said...

does everything the federal government, or unions, touch (e.g., airlines, public education, auto industry) turn to poo?

anonymous wimps posting said...

Keith, I've followed this site for over a year, and I have to tell you, you're really reaching with the 'Fannie and Freddie will die and take us all down with them'.

Please post evidence that they are in financial trouble if you have it. Most of their portfolios are based on conforming loans with large down payments. If the house prices fell enough for F&F to fail, we'd have way more to worry about than these GSE's.

Anonymous said...

I live in DC, where Freddie & Fannie have TONS of employees.

It will be good to see some of those smug smart asses get the smack-down!!

BRING IT ON !!

Anonymous said...

“There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925. The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage. The shirt-sleeved crowds hurrying to and fro under the widely advertised Florida sun talked of binders and options and water-frontages and hundred thousand-dollar profits; the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion. The warm air vibrated with the clatter of riveters, for the steel skeletons of skyscrapers were rising to give Miami a skyline appropriate to its metropolitan destiny. Motor-busses roared down Flagler Street, carrying "prospects" on free trips to watch dredges and steam-shovels converting the outlying mangrove swamps and the sandbars of the Bay of Biscayne into gorgeous Venetian cities for the American homemakers and pleasure-seekers of the future. The Dixie Highway was clogged with automobiles from every part of the country; a traveler caught in a traffic jam counted the license-plates of eighteen state among the sedans and flivvers waiting in line. Hotels were overcrowded. People were sleeping wherever they could lay their heads, in station waiting- rooms or in automobiles. The railroads had been forced to place an embargo on imperishable freight in order to avert the danger of famine; building materials were now being imported by water and the harbor bristled with shipping. Fresh vegetables were a rarity, the public utilities of the city were trying desperately to meet the suddenly multiplied demand for electricity and gas and telephone service, and there were recurrent shortages of ice.”

http://financialsense.com/fsu/editorials/drhousing/2007/1109.html

Butch said...

I don't know how to break this to you all gently, so I won't.

Fannie/Freddie/FHLB/Ginnie represent the nationalization of the mortgage industry.

The final step is coming soon via all the "Save the Sheeple" acts now woking themselves through Congress. The dialogue between Schumer and Bernanke during Ben's testimony last week was a telling sign that we are in the end-stages of completing the transition--as they openly discussed having Fannie and Freddie's debt oficially backstopped by the American taxpayer.

It's just about all over but the shouting, folks. And, given the complete collapse in the securitization/derivatives markets the pace will now really accelerate toward complete government control of the banking system too.

Anonymous said...

Ginnie Mae is guaranteed.

Fannie and Freddy are not guaranteed.

They'll still probably get some bailout however.

charlatan said...

evenif all that coems to pass you can bet america will still be lecturing the rest of us on freemarkets, freedom and the rest. if it only it practised what it preached for half an hour once in a while...

Anonymous said...

Anonymous said...

I live in DC, where Freddie & Fannie have TONS of employees.

It will be good to see some of those smug smart asses get the smack-down!!

BRING IT ON !!

November 11, 2007 11:07 PM
----------
Agreed they are paid to match private sector pay + they get all the job security and low expectations of gov't workers. There are tons of fat on their payrolls that can be cut!!

Anonymous said...

Hmm, I tend to agree with Butch. A+

B747

Anonymous said...


really accelerate toward complete government control of the banking system too.


I thought it was the banking system in control of the government? Maybe they'll work hand in hand, like the totalitarian/fascist governments.

Anonymous said...

This is becoming Japan. The government there propped up hundreds of zombie companies after their economy went bust in the early 1990's. They did not want mass bankruptcies and layoffs. The support of insolvent and uncompetitive zombie companies has dragged their recession out for nearly two decades. This is the soft landing they are looking for

Anonymous said...

Forget the sheep , the bad loans can't be saved by government backed loans (maybe a few )

The Fed Chairman should immediately raise interest rates and save the dollar .

The United States should issue a long term loan at a punishment interest rate to all the STUPID LENDERS that can't cover their loss from bad loans . At least that way the taxpayers could collect interest on the money they will come up with ,(rather than just give money to the STUPID LENDERS and Wall Street in the form of government backed loans to bail out these creepy lender bad loans on the books ).

The STUPID GREEDY lenders would have to pay for their crimes by lower profits for a long time because of the payment monthly to the UNITED STATES TAXPAYERS LOAN .


With the lenders knowing that they had to pay for their loss on their bad loans ,they would come up with more creative ways to make some of the loans work at some profit margin ,rather than foreclose .Also the lenders would have to make prudent loans in the future knowing that they have to pay for their loss ,even if its in the form of a loan for many years from the Governnment.Also the reserve requirements for any lender will have to be raised in the future .

Loans for new money will have to be insured for a while ,because investors won't invest otherwise ,but the underwriting/appraisals should be prudent with down payment requirements. Forget the 1 million dollar loans amount for government backed loans .
Wall street and other lenders can just come up with insured loans to meet the needs of the Jumbo market on new purchase money to solve the credit crunch ,and those should be prudent loans also .There should be high down payment requirement on the jumbo loans going into the future because high loan amounts pose the higher risk of loss per loan for lenders . None of this low down low document loan product anymore . Yes it will cause a correction in the inflated prices ,but that will happen anyway because the spell is broken and the thrill is gone.

The Lenders and Wall Street lending firms will have a lower net worth and profit margin for many years ,but it's better than going BK or pulling a fast one by trying to pass the buck to the public .

Than Americans will realize that real estate is just a place to live and finally face the real problems in America ,that created this stupid housing bubble to begin with .And maybe ,just maybe ,Americans will get really productive again instead of trying to flip houses to make money .

How will the Government come up with the money to make the long term loans that are needed for the lenders ? Just take the money that the feds have been using lately to make the temporary loans to the STUPID lenders at the discount window ,(that was based on lenders junk paper ) and make it into a long term loan at higher rates or just print the damn money .

Anonymous said...

butch.....The public just can't let the Senator and Fed Chairman get away with this wrong answer to the credit crunch and bad loan paper loss by the lenders and Wall Street funders of loans .

Instead of bailing out the lenders by using government backed loans,the lenders should be given a big loan by the government to cover their loss . At least that way the taxpayers can get the money back with interest over the years .

No bank can take a major loss in a short amount of time but spread out for 10 to 15 years ,at least the banks can stay solvent . That's the problem with to many foreclosures in one year .

I'm not saying that the government should make big multi-billion dollar loan to all lenders ,just the ones that have the potential of paying back the Taxpayers Loan in the course of 10 to 15 years .

The Fed Chairman should raise rates immediately to save the dollar and the real estate market will just have to adjust in prices that support prudent loans .

No I million dollar government backed loans .Wall Street can come up "insured Jumbo Loan money " for that market . The government doesnt need to get involved with that higher risk . In the future those Jumbo loans need bigger down payments and no low document low down loans on Jumbo Loans .

In the future , as a society,we cannot condone making a million dollar loan to a borrower who doesn't have alot of money for a good down payment and ability to make the payments long term . For that matter the lower loan amounts needs to be written in a prudent manner also .We can't make a bunch of bad loans good by making more bad loans .

Instead of calling this a credit crunch ,call this mess the aftermath of a mania with faulty lending ,that needs to be corrected ,so more bad loans are not made ,even if that means that prices will crash in real estate .


To think that Bernanke would cause this much suffering with allowing unbearable inflation ,while endorsing a bail out government backed loan program ,to bail out lenders at the taxpayers expense,is in violation of the oath of office of the Fed Chairman .

Anonymous said...

>> does everything the federal government, or unions, touch (e.g., airlines, public education, auto industry) turn to poo?

Indeed it does. As for the unions, their biggest failure, in my opinion, was not telling the IRS "FU" when it comes to income tax withholding. If anyone/group had the power to stop tax withholding, it was the unions. You let us down, union boys & girls...

Anonymous said...

My advisor got me into some Fannie Mae bonds about two years ago. Should I be worried? The price is right to sell them now for some reason.

What too do???

Anonymous said...

The key word is "implied". People hear what they want to hear and see what the want to see at the expense of the truth. The first to be slaughtered will be the lower level employees and then the holders of FNM and FRE common stock. Next comes the cut off of funds from the Treasury via the "special credit line". Then come those with preferred stock, some more employees, then bond holders, some more employees, it will be no different than the liquidation of any other company only that some will think that somehow government officials will soak the taxpayers and pay up with revenues derived from tax increases (my guess is they won't because they will fear being voted out of office) but in the end, it will be much the same as any other business that got ahead of itself and whose time has come. A vulture fund or two will likely make out very nicely feasting on these carcasses - maybe Cheney can get one started after 2008 is over.

Grim Reaper

Anonymous said...

I see what you are saying if that is the structure of Fannie and Freddie (which I have no idea)

So, in other words sell now at a high or hold out and loose money most certainly. The terms say a "guaranteed" principal investment payback in 2012. (If I hold them). And 5% may be a good return during the next few years.

What too do.???