US Nationalizes Mortgage Lenders

[Mental Gridlock]

The US has taken over Freddie Mac and Fannie Mae, the two biggest privately owned mortgage lenders in their country.

They fired and replaced the CEO's and board of directors.

They will now conduct the day to day operations of the companies.

They are taking money away from the investors by eliminating their dividends.

Here is the source for all of the above factual claims:

http://money.cnn.com/2008/09/07/news/companies/fannie_freddie/index.htm?eref=edition

Besides these consequences, the takeover may have big costs for the US taxpayers as well. Treasury secretary Henry Paulson stated he was unsure how much it would be costing, but certainly did not deny the expenditures. The treasury department said they would possibly spend as much as 100 billion dollars over time. The following is the source for these claims:

http://seattletimes.nwsource.com/html/businesstechnology/2008161349_apmortgagegiantscrisis.html

I am posting this thread to inform people of what is going on as well as the consequences that it will have on its investors and the taxpayers, as well as to inquire on what the good side might be or to simply discuss if it's a good decision, or other concerns for why it might be bad. I would like to know what other people think about its effectiveness as well. Do you believe that this will help the economy and the housing market, or could it make things worse? I invite anyone from anywhere in the world to comment or dispute.

The following is my opinion about the matter:

I don't like it because it is a step towards communism. I feel the government's role is not to interfere in the affairs of private corporations so much, let alone take them over. And nationalizing any company in any industry may be a slippery slope. Today it's okay for them to take over private institutions, this might mean that they could do the same in the future for other companies as well, perhaps even outside the finance industry. This of course is speculation on my part. But I'm no fan of a move towards communism.

 

[Alfi]

They fired and replaced the CEO's and board of directors.

Ya right.
I bet they walk away free and clear with millions.

 

[wildman]

They fired and replaced the CEO's and board of directors.

Ya right.
I bet they walk away free and clear with millions.

Ya got that one right. $15 million for the CEO's. That is the reward for failure.

 

[Mental Gridlock]

They fired and replaced the CEO's and board of directors.

Ya right.
I bet they walk away free and clear with millions.

"ya right." ?

Are you denying that they were ousted?

SAN FRANCISCO (MarketWatch) -- The multimillion-dollar exit packages for the ousted chief executives of Fannie Mae and Freddie Mac drew sharp criticism on Monday from shareholder- and consumer rights groups that deemed the compensation excessive, particularly given the almost-complete collapse of the mortgage giants' shares.

http://www.marketwatch.com/news/sto...x?guid={832C8CA2-92B9-4AE4-9D8F-6105C62DBA1B}

They were forced out. Removed. aka fired. Like was mentioned, they failed and so were removed.

They fired the CEO's and there certainly doesn't seem to be any choice they had in the matter.

They were fired. Ousted. Discharged. Dismissed. Relieved of their command. Let go. Shown the door. Got the axe. Got the pink slip. Terminated.

Call it what you want; that's what happened.

This isn't changed by the fact that they got a severance.

Their severance payment was part of the contracts (source is my link above).. The government couldn't do much about that. But the fact they got paid doesn't change the fact that they were ousted.

 

[cristo]

Isn't this a little ironic: how can people be "free" if their government is getting more and more power, and now owns the monopoly on mortgage lending. Doesn't this go against the whole American ideal?

 

[wildman]

Isn't this a little ironic: how can people be "free" if their government is getting more and more power, and now owns the monopoly on mortgage lending. Doesn't this go against the whole American ideal?

Yep. But I think you all missed why Bush and the Congress are doing this. They did it because the Chinese ordered us to do it. We have lost our independence due to the large amount of money we owe others.

 

[Alfi]

15 Million severance. ( 300 years worth of my average pay ) They earned that!

Who pays for that? Taxpayers or the investors?

 

[edward]

The bail out was a necessary evil. Ironically it was also done to protect foreign investors.

http://www.latimes.com/business/la-fi-asianstocks9-2008sep09,0,361126.story

10% of China's GDP is invested in the mortgage giants.

http://www.npr.org/templates/story/story.php?storyId=94369826


Everyone sing: Its a small world after all...it's a small world after all

 

[mgb_phys]

So should china have just bought them?
A bankruptcy sale on a financial company with no assets, they should have paid around 10c on the $, since they were set to lose 10% they could have got the whole thing failry cheaply.

 

[edward]

So should china have just bought them?
A bankruptcy sale on a financial company with no assets, they should have paid around 10c on the $, since they were set to lose 10% they could have got the whole thing failry cheaply.

Do you really think that the American people would go for that?? We wouldn't even let them buy Maytag. China would much prefer that the American tax payers pick up the tab.

For that matter other foreign companies might oppose that kind of deal.

Foreigners own 39% of all asset-backed securities in the U.S. and would bear 39% of any mark-to-market write-downs associated with those securities. That's 39% of $5 trillion,

http://www.forbes.com/finance/2008/09/09/fannie-freddie-roubini-pf-ii-in_rl_0909croesus_inl.html

 

[mgb_phys]

Do you really think that the American people would go for that??

It's a free country, they are a listed public company ;-)
It's not like the USA is some S. American banana republic that would just unilaterally nationalise foreign owned companies.

 

[f95toli]

I feel the government's role is not to interfere in the affairs of private corporations so much, let alone take them over. And nationalizing any company in any industry may be a slippery slope. Today it's okay for them to take over private institutions.

AFAIK both companies were founded by the federal government (early 30s?) and although they were later privatized (mid 60s?) they have never been "private corporations" in any normal sense of the world, it has ALWAYS been implicit that the US government was behind them and that they would never be allowed to collapse.
Hence, the government simply had no choice in this case; not saving them would have amounted to breaking an implicit promise to the market.

 

[quadraphonics]

AFAIK both companies were founded by the federal government (early 30s?) and although they were later privatized (mid 60s?) they have never been "private corporations" in any normal sense of the world, it has ALWAYS been implicit that the US government was behind them and that they would never be allowed to collapse.

Specifically, Fannie Mae and Freddie Mac are not private corporations, but Government Sponsored Enterprises (see http://en.wikipedia.org/wiki/Government_sponsored_enterprise ). And while there is no explicit guarantee of any of their instruments, it has always been assumed (with good reason) by pretty much every one that the Federal Government would not allow them to go bankrupt.

It's funny how shocked some people get by things like this; I guess all the years of portrayal of the United States as the epitome of unrestrained capitalism (both inside the US and without) have made people forget that the US is, in fact, a mixed economy, just like most other countries.

 

[russ_watters]

Yep. But I think you all missed why Bush and the Congress are doing this. They did it because the Chinese ordered us to do it.

Just so we're clear, was that intended to be a serious statement? Do you have a source for it?

 

[wildman]

Just so we're clear, was that intended to be a serious statement? Do you have a source for it?

Large exaggeration, Of course they would never tell us if what I said was true,
but look at:

http://biz.yahoo.com/rb/080908/fannie_freddie_china.html?.v=1

 

[Astronuc]

The US has taken over Freddie Mac and Fannie Mae, the two biggest privately owned mortgage lenders in their country.

Um - the 2 FM's are not privately owned. They are publicly traded companies, and are actually GSE's. They may however be delisted from the NY Stock Exchange, but one can still by their common and preferred stock.

. . . . why Bush and the Congress are doing this. They did it because the Chinese ordered us to do it. We have lost our independence due to the large amount of money we owe others.

Economics dictated the takeover. The 2FM's were having trouble raising capital - so the government stepped in with it's full faith and credit.

The world financial markets are jittery, and it could very well be that the aggregate debt now exceeds the ability to pay. Certainly the US economy appears to be over-leveraged.

 

[Jimmy Snyder]

Specifically, Fannie Mae and Freddie Mac are not private corporations, but Government Sponsored Enterprises (see http://en.wikipedia.org/wiki/Government_sponsored_enterprise ).

Here is a quote from the link you provided:

Some of the GSEs, such as Fannie Mae and Freddie Mac, are privately owned but publicly chartered;

Um - the 2 FM's are not privately owned. They are publicly traded companies, and are actually GSE's.

Langauge is weird. Publicly traded means privately owned (though not vice versa obviously). See the wiki quote above concerning GSE's.

 

[Jimmy Snyder]

Here is an excerpt from the US Code. It is from a definition of the term "government-sponsored enterprise", but it is just a snippet, not the entire definition.

(8) The term "government-sponsored enterprise" means a

corporate entity created by a law of the United States that -

(A)(i) has a Federal charter authorized by law;

(ii) is privately owned, as evidenced by capital stock owned

by private entities or individuals;

http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t01t04+10699+0++()"
That means that when you say Fannie Mae and Freddie Mac are not privately owned, you are breaking the law.

 

[kronon]

The Regulators sit on their hands for 7 years just watching as a 5 trillion dollar hole opens in economy, bringing it to the brink.

They ignore the warning signs that others have been pointing out to them.

And now they are the saviours?

Terrorist before the explosion and doctor after it.

In my view they are a major disappointment who have very seriously failed their obligations.

 

[Astronuc]

Langauge is weird. Publicly traded means privately owned (though not vice versa obviously). See the wiki quote above concerning GSE's.

Ah - my mistake. Thanks for the correction.

So publicly-owned implies owned by the government.

Presumably privately-held and privately-owned don't mean the same thing.

I have to wonder if the laws are written to obfuscate the details and snooker the general population with respect to investing.


Edit: With respect to "is privately owned, as evidenced by capital stock owned by private entities or individuals;" - what is a private entity - anything not the government? So in essence, a publicly-traded company is still a 'private entity'.

 

[Mental Gridlock]

Thank you for the clarification, jimmysnyder.

I did do fact checking when I chose my words to determine that privately owned was a legitimate label. The investors were private people, and the people who staffed the companies weren't government employees, as opposed to say the USPS which is a government corporation.

The total extent of government involvement in the corporations (prior to the unprecedented takeover of course) was:

1) founded/chartered by the government, a long time ago. It's irrelevant since they became purely private since then, and in the market world of today they certainly were not government corporations.

2) I am hearing mentions of an "implicit" agreement that the government would not allow their collapse, as they were GSE's. Then I hear people state that because of this agreement, it makes sense that they were taken over and we shouldn't be surprised or complaining.. The problem with this is that a full takeover isn't required to prevent their collapse. I would sooner expect a "bailout" rather than a communist policy of nationalization.

The airline industries weren't GSE's but the government bailed them out via funds and tax breaks. They never just assumed control of the companies and fired all their executives and directors and took over their operations. The airline industry appears to have rebounded and is still in business, although could still have issues due to the rising fuel costs. Nevertheless the bailout worked.

This is what I could expect for Freddie and Fannie as well, not this unprecedented assimilation of their companies into the federal government.

 

[Jimmy Snyder]

Presumably privately-held and privately-owned don't mean the same thing.

I don't follow. I'm pretty sure they do mean the same thing.

With respect to "is privately owned, as evidenced by capital stock owned by private entities or individuals;" - what is a private entity - anything not the government? So in essence, a publicly-traded company is still a 'private entity'.

The difference between publicly owned and privately owned should be clear. If the gov't owns it, it's publicly owned, otherwise, it's privately owned. There is no difference between holding and owning in this context.

Publicly traded refers to a privately owned company whose stock is traded on one or more stock markets. Not all privately owned things trade publicly. For instance, a family owned company may be owned by several people, but restrictions are placed on the shares so that they cannot be sold outside that small group. These shares are not sold on stock exchanges. You may have heard the term "initial public offering (IPO)", in which the stock of a closely held company is released for sale to the larger public on stock exchanges.

The bit about entities I believe refers to the fact that some GSEs are owned by a small group of companies (the private entities) who are also the customers of the GSE. These are privately owned, but not publicly traded since only the customers are allowed to buy in.

 

[Jimmy Snyder]

The total extent of government involvement in the corporations (prior to the unprecedented takeover of course) was:

1) founded/chartered by the government, a long time ago. It's irrelevant since they became purely private since then, and in the market world of today they certainly were not government corporations.

2) I am hearing mentions of an "implicit" agreement that the government would not allow their collapse, as they were GSE's.

On point one, the only involvement of the gov't is in chartering. I don't really know what that means, but it excludes founding. GSE's are private from their inception. Edit: probably a charter is a document listing the rules with which a company must comply.

On point two, I quote the wiki page again. The wiki page quotes Dan L. Crippen.

In fact, GSE securities carry no explicit government guarantee. The then-director of the Congressional Budget Office, Dan L. Crippen, testifed before Congress in 2001, that the "debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee. . . ."

 

[Astronuc]

The GSE's Fannie Mae and Freddie Mac are/were publicly-traded companies although privately-owned.

"debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee. . . ." is somewhat inaccurate - he should have said " . . . . because of the misperception of a government guarantee" The US Code explicitly states that the GSE's are not backed by the "full faith and credit" of the US government.

(8) The term "government-sponsored enterprise" means a

corporate entity created by a law of the United States that -

(A)(i) has a Federal charter authorized by law;

(ii) is privately owned, as evidenced by capital stock owned

by private entities or individuals;

(iii) is under the direction of a board of directors, a

majority of which is elected by private owners;

(iv) is a financial institution with power to -

(I) make loans or loan guarantees for limited purposes such

as to provide credit for specific borrowers or one sector;

and

(II) raise funds by borrowing (which does not carry the

full faith and credit of the Federal Government) or to

guarantee the debt of others in unlimited amounts; and

(B)(i) does not exercise powers that are reserved to the

Government as sovereign (such as the power to tax or to

regulate interstate commerce);

(ii) does not have the power to commit the Government

financially (but it may be a recipient of a loan guarantee

commitment made by the Government); and

(iii) has employees whose salaries and expenses are paid by

the enterprise and are not Federal employees subject to title

5.

The term 'weasel-words' comes to mind, but I don't want to defame weasels. Weasels have more integrity than politicians.

Basically the government doesn't commit to bailing them out unless they screw up majorly (which they did), in which case the Secy of Treasury is likely to step in and bail them out, 'because they are too big to let fail' - and most individuals are too small to help out.

Something smells rotten - and it's not the Limberger.

 

[Jimmy Snyder]

The term 'weasel-words' comes to mind, but I don't want to defame weasels.

I'm not sure what you mean by this. When I think of 'weasel words' I think of saying one thing and meaning another. I note that you emphasised some of the words. Are these the weasel words? Do you think they have a hidden meaning? Please clarify.

 

[Jimmy Snyder]

"debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee. . . ." is somewhat inaccurate - he should have said " . . . . because of the misperception of a government guarantee".

I believe that he was trying to convey the idea that it was indeed a misperception.

 

[Astronuc]

I'm not sure what you mean by this. When I think of 'weasel words' I think of saying one thing and meaning another. I note that you emphasised some of the words. Are these the weasel words? Do you think they have a hidden meaning? Please clarify.

The language leaves the door open, i.e. the government isn't committed to stepping in (i.e. which does not carry the full faith and credit of the Federal Government), but the other lines implies that it might (but it may be a recipient of a loan guarantee commitment made by the Government), or suggests/infers, or it is hoped the reader will be swayed to believe the government will step in, but only if . . . .

The government is not in, but it's not out either.

 

[BobG]

Five trillion dollars is pretty hard to wrap your mind around. Only the US and Japan have national debts greater than 5 trillion dollars (in fact, only 7 countries have national debts greater than 1 trillion).

Realistically, Freddie Mac and Fannie Mae own 5 trillion dollars of debt. I guess if every loan they own defaulted (in other words, half the home owners in the US walked out of their homes and their mortgages), their own personal debt might be pretty close to that, but that $5 trillion is almost a number just thrown out there for shock value.

 

[Mental Gridlock]

On point one, the only involvement of the gov't is in chartering. I don't really know what that means, but it excludes founding. GSE's are private from their inception. Edit: probably a charter is a document listing the rules with which a company must comply.

On point two, I quote the wiki page again. The wiki page quotes Dan L. Crippen.

You're right.. By chartering I mean founded based on government legislation. The government was definatily behind the founding/chartering of the companies, their creation was an act of government.. It doesn't change the fact that as of Sunday they were private corporations however.

As for point two, I agree as well.. I don't think that an "implicit" guarantee of government intervention means anything, but I was responding to the claims made on this thread that the government is known to be called upon in the event these companies get into trouble. So if such a claim were true, then I'm just saying that the government could still fulfill that obligation (if such obligation were to exist) by propping them up via a bailout, without any need for full scale nationalization.

 

[Jimmy Snyder]

The language leaves the door open, i.e. the government isn't committed to stepping in (i.e. which does not carry the full faith and credit of the Federal Government), but the other lines implies that it might (but it may be a recipient of a loan guarantee commitment made by the Government), or suggests/infers, or it is hoped the reader will be swayed to believe the government will step in, but only if . . . .

The government is not in, but it's not out either.

The two sections that you highlighted are quite different in their meaning. The first one "full faith and credit", refers to the fact that when the GSE borrows money, the government does not guarantee that the GSE will pay back its creditor(s). The second one "loan guarantee committment" refers to the fact that when the GSE loans money, the government may, at its own discretion, guarantee that the GSE will be paid. If they do, and the borrower defaults, the gov't pays the loan.

 

[Astronuc]

I think (but it may be a recipient of a loan guarantee commitment made by the Government) is a bit ambiguous. Does it mean the government will cover the lenders who loan money to the GSE, or does it meas that it will cover the GSE on money it lends, or both?

The statement by itself seems to have multiple meanings.

Famous last words from Congress - "that wasn't the intent"

 

[edward]

Originally Posted by wildman

Yep. But I think you all missed why Bush and the Congress are doing this. They did it because the Chinese ordered us to do it.

Just so we're clear, was that intended to be a serious statement? Do you have a source for it?

There is no way China could order us to do anything, although they may have requested it. China as well as Japan have billions invested in Fannie and Freddie.

Large holders of the two companies debt, including overseas central banks, had shown increasing nervousness recently, dumping more than $27 billion in agency securities in just the last two months. China and Japan, the biggest buyers of the two companies' bonds, welcomed the bailout.

http://uk.reuters.com/article/newsOne/idUKN0527106320080908?pageNumber=3&virtualBrandChannel=0

 

[Jimmy Snyder]

I think (but it may be a recipient of a loan guarantee commitment made by the Government) is a bit ambiguous. Does it mean the government will cover the lenders who loan money to the GSE, or does it meas that it will cover the GSE on money it lends, or both?

The statement by itself seems to have multiple meanings.

Famous last words from Congress - "that wasn't the intent"

(ii) does not have the power to commit the Government

financially (but it may be a recipient of a loan guarantee

commitment made by the Government);

It means that the GSE cannot commit the government to a loan guarantee, but that the government may make that commitment on its own.

I think it is clear that it only refers to borrowers who default on money owed to the GSE, not on the GSE defaulting on money borrowed from its creditors since the previous clause said they would not do so.

However this distinction would be meaningless if the government, at its own discretion, decided to guarantee with full faith and credit that the GSE would pay its creditors even though the previous clause explicitly said that they would not make such a guarantee.

I don't dispute that politicians are weasels and that the insult is to the weasels. But I think the wording of this particular definition is clear.

 

[quadraphonics]

On point one, the only involvement of the gov't is in chartering. I don't really know what that means, but it excludes founding. GSE's are private from their inception. Edit: probably a charter is a document listing the rules with which a company must comply.

What do you mean "excludes founding?" Both Fannie Mae and Freddie Mac began as explicit arms of the government; not GSE's, not private corporations, but actual divisions of the Treasury Department. The granting of Congressional Charter is what changed their status from plain Federal government components into GSE's, which is to say, privately-owned, publicly-chartered corporations. The basic idea is to use private capital to perform a public mission, thus keeping it off the government's balance sheet. The Congressional Charter has a number of implications that make GSE's different from your standard private corporation. In addition to establishing the rules the GSE operates under, it can also *exempt* the GSE from Federal regulations that apply to private corporations (such as, say, reserve requirements for lenders). In this case, there are also rules about the sizes of loans that the GSEs will guarantee. Perhaps more importantly, however, government sponsorship gives the Federal government authority over a GSE that it does not have in the case of a purely private corporation. Just to pick an example out of thin air, the Treasury Secretary can summarily dismiss all of the executives of a GSE, and place it into a government conservatorship, without any consultation with the shareholders, or avenues for appeal. More generally, the rules are up for revision by Congress at any time, and so things like access to low-interest, short-term loans from the Federal Reserve can be introduced on short notice, should political conditions favor them.

As far as the China element goes, it is true that they've bought up tons of shares of Fannie Mae and Freddie Mac as part of the trade/finance relationship that characterizes the China/US bilateral relationship. It is thus in their interest that the GSEs not fail, as this would take a big chunk out of their central bank, with devestating consequences. It is also in the United States' interest that the GSEs not fail, as this would also have devestating consequences for our financial system. This would gravely undermine both economies, and the relationship between them, which nobody wants. It is much better for everyone if Fannie Mae and Freddie Mac are preserved, which will spare both our banking systems a big crunch, and allow China to continue to provide demand for low-return instruments and so sustain America's ability to borrow money cheaply, arrest the yuan/dollar exchange-rate equalization, and so preserve the bilateral trade relationship. So, to suggest that China "ordered" America to do this is preposterous: it's in the vital interests of *both* parties that it be done, and China is nowhere near influential (or ham-fisted) enough to issue such an "order," nor is America stupid enough to shoot itself in the head just to spite China.

 

[Jimmy Snyder]

What do you mean "excludes founding?"

I was wrong on this point.