Update: Bush administration comes to rescue of Fannie, Freddie

Update: The A.P. now reports the Bush administration, acting in concert with the Federal Reserve, has announced steps to rescue Fannie Mae and Freddie Mac: "(Treasury) Secretary Henry Paulson said the government is planning to expand its current line of credit to the two companies should they need to tap it and Treasury could buy equity captial in the companies -- if needed. The moves will require congressional approval."

The L.A. Times' Tom Petruno blogs, "The Bush administration acknowledged today that it couldn't afford to leave mortgage giants Fannie Mae and Freddie Mac on their own to face another ravaging by Wall Street.

Earlier: The New York Times reported that the Bush administration will announce plans tonight to ask Congress for authority to rescue Fannie Mae and Freddie Mac: "Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday."

The administration appears to be rushing to have a plan in place -- or at least an announcement of a plan -- in time to reassure investors around the world before Monday-morning trading begins in global markets.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[Tombstone Realty]

This is like pouring blood into a tank of sharks.

And this announcement will mean nothing once some of the other banks start announcing their massive losses from the previous quarter.

It will embolden any of the speculators out there, and terrify anyone else.

[Michael T]

Let's remind folks that the Bear Stearns sale to JPM was supposedly not to cause the taxpayer a hit. The Federal Reserve lent $30 billion backed by former Bear assets to accomplish the deal. JPM was to have first loss of $1.25 Billion, meaning if he assets decreased in value JPM took the first loss up to $1.25 Billion, any losses thereafter are for the account of the Federal Reserve (meaning taxpayers). Well guess what, they have already burned through $1.1 billion. Given the adverse selection of what went into this pool, I would expect further losses. All this so existing Bear Stearns shareholder got $10 per share. Can you say moral hazard?

[Jazzman]

The health insurer FDIC (Fiscally Doubtful Insurance Corp), refuses to cover liposuction to remove cellulite for an overweight Fannie, that has suffered years of abuse due to lack of regulatory exercise and high calorific tax breaks. Meanwhile, a close friend Freddie the freeloader chokes on lunch in the lobby. Apparently, the offending morsel was actually an angry tax payer looking for accounting records for the last ten years.

As to the surprising coincidence, marxist tabloid the NY Times, reports that both parties are fitted with 'somnambulant' regulators, a kind of defibrillator that insulates internal CEOs (Cholestral Eating Organs) from the outside world. Apparently, a toxin called 'subprime lending' has caused internal rupturing, and new donors are currently being sought.

Meanwhile, the pop duo Bernanke and Paulson break through with another hit single, entitled "It's Contained", and CNN continues to report the mortgage crisis is somehow linked to recent UFO sightings.

[CD]

Well, a song for you all, fans of Velvet Underground's Niko:
Sunday morning, praise the dawning
it's just a restless feeling by my side
Early dawning, Sunday morning
It's just the waisted years so close behind
Watch out, the world's behind you
always someone around you who will call Its nothing at all
Sunday morning and I am falling
I've got the feeling I don't want to know......

Blast, I chose the wrong day to quit ambien, pass the Bong....

[Roger Ramjet]

The perfect crime! People walked with billions. I love it...........

[Ragnar]

I enjoyed your storied rant, Jazzman. Thanks for the memories.

[Nick]

End of an era.

Historians will likely note this day as the day when the US committed to the path of insolvency, by socializing the losses of the massive GSE's which have generated billions in privatized profits acting as enormous, government-backed leveraged hedge fund companies. It will be marked as the day when the US chose insolvency, due to clearly having a choice with two completely different paths, one a hard struggle with a path to emerging whole eventually, and the other slashing the life rafts and reassuring the passengers that there's no reason to be afraid as the ship sinks.

A historic, yet sad day...

[John Galt]

I worked full time during college, slept very little, finished an engineering degree in 4 years, accepted no financial aid, and graduated without debt and money in the bank. I lived frugally for years and saved 20% for a down payment on my first house so I wouldn’t have to pay PMI. Even with a large down payment and no debt, my lender scrutinized all my financials in great detail and forced me to account for every penny of my down payment. It is simply astonishing that unqualified homebuyers were able to borrow large sums of money with little or no down payment and no income verification.

Saving and investing for my kids’ college started before they were born. This preplanning insured that they now have adequate funding to meet their entire educational funding requirements while attending the private universities of their choice. This adequate personal funding makes them ineligible for any institution or government financial aid and forces each of them to pay inflated full list prices for tuition. Others who lived lavishly and didn’t plan or save are now attending the same schools with huge subsidies from my tax dollars and and my children's full list price tuition.

My family has always been insured for medical emergencies even in difficult times of temporary unemployment. On the rare occasion I’ve had to take a child to the emergency room, we were forced to wait hours for hoards of uninsured patients receiving free medical care paid for with my hard earned tax dollars.

I have worked hard and have been successful for my family. Despite paying higher taxes than most, my family was ineligible for the Bush “economic stimulus” that took my tax revenue and rebated it to those who paid little if any taxes.

My family has always been interested in living in Southern California (great weather). I’ve been offered jobs there many times. Unfortunately, the combination of poor schools, inflated housing costs, and high taxes were never a viable combination for my family. Now my tax dollars are being spent to bail out the corporations (Fannie MAE and Freddie MAC) that profited from funding the insanity of the Southern California real-estate bubble that prevented my family from living in SoCal.

I am a schmuck. I should have lived above my means like the rest of America instead of saving and let the rest of society bear the burden of supporting my life style. The United States has become a country of debtors and freeloaders.

[gassem]

Check out this article in Monday's Wall Street Journal.

http://online.wsj.com/article/SB121599431834249563.
html?mod=hps_us_whats_news

At the bottom of the article is a chart showing how much further prices have to fall before hitting the beginning of this RE boom, which they calculate as Jan 2002. Vegas needs to fall another 31.5% and LA has to fall ANOTHER 40%!

[SoCalRealEstateNews.com]

Is Nick really Herbert Hoover?

They had to do something. So far, all they've done is keep Fannie & Freddie afloat, but the core problems created by a lack of better federal oversight (among other things) aren't going away real soon.

For details, you might want to check out my latest post on this mess:

http://socalrealestatenews.com

[F/C Master]

I'm highly angry that I'm going to have to bail out Fannie and Freddie instead of foreclose on them. Darn, I was just getting excited.

[Steve]

What happend to 'FREE MARKET' and "believe in capitalism" the administration is so proud of?

This administration's been asleep and raping the taxpayers for the past 8 years.

All started with Enron and MCI. Special insterest and contributors to the Republication party.

Just wait... Big oil next.

[CaliforniaDreaming]

John Galt: what you say is true, and is exactly the root of the problem. Sad, but true.

[Nikki]

To: John Galt | July 13, 2008 at 08:43 PM

I feel the same way. It's such a slap in the face to be rewarded with higher taxes and prices for living within our means and saving for a rainy day.

[Michael Snyder]

As I'm enjoying my third cup o' Joe I opened up www.bloomberg.com where Carol Massar and Eric Martin did an excellent job of putting the whole debacle into a nutshell. Take special note of the last line in the article.
July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies' shares may fall another 35 percent.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''

Stocks Rise

Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Freddie Mac rose 22 cents, or 2.8 percent, to $7.97 at 10:13 a.m. in New York Stock Exchange trading, while Fannie Mae rose 73 cents, or 7.1 percent, to $10.98. Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Last Week's Slump

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Goldman's Zimmerman said today the U.S. government's plan to rescue Fannie Mae and Freddie Mac won't benefit shareholders. He lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

I for one am continually amazed at the blatant culture of corruption within this Bush administration. If there was ever proof of the need for an informed electorate, this is it.

[Roger Ramjet]

Hey John Galt,
Your Un-American! Your not supposed to plan, save, and do long-term thinking. Your supposed to live for the moment and spend every cent you have. Buy big, fancy, gas guzzling (look-at-me) cars. You should be very deep in debt and also have a morgage that well explode in a year with triple payments. What's wrong with you? Your saving money! How dare you reject the American way of spending like there is no tomorrow and straddling our children with the enormous debt...........

[Fourth Generation]

Hey everybody instead of whining and crying about this implosion let's look ahead and envision what the next bubble would be. Let's bundle a lot of bad investments in securities and sell it to Wall Street's surviving investors and banks. Once the bubble burst let the Fed come to the rescue and bail us out since the securities and banks involved are holding assets too big to let them fail!!! The Fed to the rescue and we walk away with our ill gotten riches......... Is a proven model tested and approved by the Fed.

[TomServo]

70% of foreclusures have Hispanic last names? How does a comment that factually inaccurate get through on this blog?

I would tell you to put up or shut up, but we both know that you're using culturalism as a crutch. Congratulations to you for being born non-Hispanic, nice work.

I'm a white guy from Ohio, and I can't believe how stupid that comment was. Next you'll argue that the other 30% are just African-Americans using their slaveowner "white" names.

Oh, and John Galt... quit whining because you had no faith in yourself to pay back loans. There's no problem taking credit, as long as you have a plan to repay it. Nobody making $50k has a plan to repay a $500k loan, but lots of us take out student loans, car loans, or home loans with a budget-minded approach and a willingness to work hard. Refusal to recognize changes in the market is a weakness, not a strength.

[waitingforgodot]

I agree with sentiments of poster "John Galt," but please -- Ayn Rand was a terrible writer with pretensions of being a crappy philosopher. I still find it hard to believe that her "philosophy" (more like a rehash of really, really old ideas, some of which conflict with one another) has any appeal. You'll get a lot more out of reading Milton Friedman or your basic econ textbook.

[Swing Voter]

The post by "Alice B. Toklas" should be removed.

[yours truly, Johnny Dollar]

Peter, tell me that I am wrong.
The US has been in a recession since gas prices
hit $4/gallon.
The US is in a depression since the government
printed the billions of dollars and wallpapered
Freddie and Fannie's mansion.
Looking at the lines outside of IndyMac (and soon at
WaMu (who would place their hard-earned money
with someone named WaMu--unless, it wasn't
hard-earned...laundered? and Downey Savings?)
It's the S&L scandal of the late '80 in re-run (as on the
banks).
Called it what you may: 1929, 1984, 2008.
Where's George Bailey.
(Oh, Mary....Rochester).
Jack Benny was right.
But, Don Wilson was wrong when he said:
"Jack will be back in a moment; but, first......"
This whole country has gone Venezuela--
Hugo Chavez or no Hugo Chavez.
(put that in your pipe--dream--and smoke it).

[yours truly, Johnny Dollar]

John Galt, you must have bought your house
during the Reagan years.
I applaud you.
John Galt, real American.

[jag]

- John Galt

I feel the same way as you do. It seems that those of us are being punished for saving money and debt free. Just today Bernanke is pushing for more credit! Those folks that purchased a home that they couldn't afford have a chance of having their homes modified so that they won't walk away. Unbelievable!

[jb]

private gains, public losses.

The whole system is crooked. We need a regime change - to you rich folks out there, we have had all we can take - you have cheated us out of our last $ - we are now coming to get your money by force.

[yours truly, Johnny Dollar]

Some people rob you with a gun;
some people rob you with a pencil.
--Mark Twain & Will Rogers.