Appearing on this morning on "Meet the Press," broadcast from Beijing, Treasury Secretary Henry Paulson was pretty clear in asserting that Fannie Mae and Freddie Mac won't be getting any government help — even with the passage of the housing bill he brokered to do just that. "We have no plans to insert money ... in either of those institutions. I think it was very important that we get these temporary backup facilities because Fannie and Freddie are very important to our capital markets broadly. ... And so a key to our getting through this, this housing situation, this housing correction and getting some stability is that we continue to have mortgage financing available."
Paulson also poses the question on everyone's mind — when will the housing crisis hit bottom? — but doesn't answer it. He does say that it's going to take "well beyond the end of the year" for the nation to work through the housing mess, which is, in his words, "at the heart" of the nation's economic woes. "I think the key question is when will the largest part of this housing correction be behind us? Because until the biggest part of the housing correction is behind us, we're going to continue to have turmoil in our capital markets.
"I think the housing correction is really at the heart of our economic problems as a nation right now. So, again, I think given that Fannie Mae and Freddie Mac are solely involved in housing — that's their sole business — and given the magnitude of the housing correction we've had, it, it, it's not a surprise to me to, to see those, those losses."
During his interview with Tom Brokaw, Paulson talked at length about the need to get through the housing turmoil but was squishy on details. However, one detail he was quite emphatic about was that he has no plans to stay on as Treasury secretary come Jan. 20.
— Annette Haddad
Photo credit: 'Meet the Press'
Questions? Comments? Insights? email annette.haddad@ latimes.com
-- Fannie whack: Fannie Mae reports a bigger-than-expected $2.3-billion loss and says mounting  mortgage defaults mean more losses are on the way. The hemorrhaging, coupled with Freddie's equally grim earnings report Wednesday, are ratcheting up talk of a taxpayer, er, government bailout.
-- Mozilo gone but not forgotten: The Times reports that regulators have stepped up their investigation of Countrywide Financial Corp. -- now part of Bank of America -- and are probing whether ex-CEO Angelo Mozilo violated insider-trading laws.
-- Saints and sinners: Fortune has a snappy photo gallery highlighting eight players who saw the credit crunch/mortgage mess coming and eight who didn't. No big surprises -- Mr. Mozilo pops up on the "didn't" list -- but interesting viewing nonetheless.
-- Latest foreclosure stats: Mr. Mortgage at Implode-O-meter gets a jump on parsing July foreclosure data from for-profit foreclosure research outfit ForeclosureRadar, via Patrick.net.
-- Annette Haddad
Photo: Getty Images
Tips? Email annette.haddad@latimes.com
 That's the title of a provocative and seemingly counterintuitive study by UC Irvine's Paul Merage School of Business Center for Real Estate. It wasn't the selling of home loans to credit-risky borrowers that sparked the phenomenal run-up in prices per se, it was "the changing credit regime" beginning in 2003 that inflated the bubble -- and Fannie and Freddie seem to be have major, albeit unwitting roles.
When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.
And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says. Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the "dog").
"We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors including the market," says Kerry Vandell, the UCI finance professor and director of its real estate center who was the lead researcher on the study. "But we were really blown away when Fannie's and Freddie's continuing presence in the market was shown to be so important."
Co-authoring the study was doctoral student Major Coleman IV and Michael LaCour-Little, a Cal State Fullerton finance professor who theorized in a provocative 2006 research paper that prepay penalties saved borrowers money.
The latest study was partly funded by the Mortgage Bankers Assn., the National Assn. of Realtors' Subprime Crisis Research Consortium and -- drumroll please -- Freddie Mac.
--Annette Haddad, Times staff writer
Photo credit: Associated Press
Questions? Comments? Tips? E-mail annette.haddad@latimes.com
 As your Congress rushes to write a blank check for government aid to Fannie Mae and Freddie Mac, this caught my eye: Wall Street Journal columnist Paul Gigot's withering criticism of one of the meanest gangs in Washington, "The Fannie Mae Gang."
Highlights: After describing Fannie and Freddie as "perverse," "relentless," and "untouchable," Gigot writes, "Their unique clout derives from a combination of liberal ideology and private profit. Fannie has been able to purchase political immunity for decades by disguising its vast profit-making machine in the cloak of 'affordable housing.' To be more precise, Fan and Fred have been protected by an alliance of Capitol Hill and Wall Street, of Barney Frank and Angelo Mozilo."
More: "... about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 (Franklin) Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing."
My two cents: There is a phrase in wide circulation in America today that accurately describes the this kind of enterprise: Privatize the profits, socialize the losses.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: A.P.
 The recent troubles for Fannie Mae and Freddie Mac have raised the possibility that perhaps these quasi-public financial giants have grown too big for anybody's good. Holman Jenkins Jr., writing in the Wall Street Journal this week, suggests, "With Fannie and Freddie on the ropes politically, let's put them on a path to privatization and liquidation."
Reality check: Not gonna happen. Both presidential candidates are deep in the embrace of the two-headed lobbying machine known as Fannie and Freddie. From today's L.A. Times story about conservative pressure on John McCain (pictured) to push for a fig leaf of reform in the way Fannie and Freddie operate:
McCain's campaign manager, Rick Davis, was president of an
organization, the Homeownership Alliance, that advocates for expansion
of low-interest loans funded by the two mortgage giants. Federal
records show that Arthur Culvahouse Jr., who is heading McCain's vice
presidential search effort, was a lobbyist for Fannie Mae. Former U.S. Sen Warren Rudman, a McCain advisor, was
hired by Fannie Mae to lead an internal review of the company's
accounting policies that concluded in 2006.
On Barack Obama: Until recently, one of Obama's advisors on vice presidential selection was James A. Johnson, who once led Fannie Mae. Obama has been one of the largest recipients of campaign contributions
from donors associated with Fannie Mae and Freddie Mac, receiving
$105,849 since he first ran for national office four years ago. That
made him the third-largest recipient among the top 25 listed in a
recent report by the Center for Responsive Politics, which looked at
contributions dating to 1989.
Posted by Peter Viles
Note: Pieter Severynen's "Tree of the Week" will return next Saturday
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: L.A. Times
 Republican Sen. Jim Bunning of Kentucky today slammed the Bush administration's proposal to bail out Fannie Mae and Freddie Mac, declaring, "socialism is alive and well in America."
"When I picked up my newspaper yesterday, I thought I woke up in France," Bunning said in a statement today. "But no, it turns out socialism is alive and well in America. The Treasury secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed's purchase of Bear Stearns' assets was amateur socialism compared to this."
In a news conference this morning, President Bush (pictured) defended the rescue plan for Fannie and Freddie, saying, "I don't think it's a bailout."
"If your question is, should the government bail out private enterprise, the answer is, no, it shouldn't," Bush said. "And by the way, the decisions on Fannie Mae and Freddie Mac -- I hear some say 'bailout' -- I don't think it's a bailout. The shareholders still own the company. That's why I said we want this to continue to be a shareholder-owned company."
Relatedly: The Securities and Exchange Commission is taking emergency action to protect Fannie and Freddie in the stock market. Bloomberg News: "The U.S. Securities and Exchange Commission will take emergency action today to the limit the ability of traders to bet on a decline in the shares of Freddie Mac, Fannie Mae and brokerages, the agency's chairman said."
Analysis: Under the president's proposal, the government could become a shareholder of Fannie and Freddie. That's not what most Americans mean when they talk about a "shareholder-owned company." The government is taking extraordinary and unprecedented steps to protect and support Fannie Mae and Freddie Mac.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Getty Images.
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.
The Sunday Tmes of London is reporting that Treasury Secretary Henry Paulson is working on a $15-billion federal rescue of Fannie Mae and Freddie Mac that is considered so urgent it may be announced before the stock market opens Monday.
To be clear, The Times is not reporting that this rescue will definitely occur, saying the plan "is said to be high on a list of options being considered by regulators."
The Times: "U.S. Treasury Secretary Hank Paulson is working on plans to inject up to $15 billion of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms. ... Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders. ... Some in Wall Street believe a rescue plan may be announced ahead of (Monday's) US market opening to calm nerves and support the debt auction."
The New York Times, meanwhile, files a must-read what-went-wrong story about how Fannie and Freddie bullied their way into becoming way too big for anybody's good -- an "arrogant, two-headed monopoly," in the words of former Republican congressman Jim Leach. That's a strong quote, but not quite as strong as what Richard Baker said about the duo in 2002: "The gorilla has outgrown the cage, and we don't know what to do with him."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
News item from the AP this morning (since updated with an L.A. Times story): "Treasury Secretary Henry Paulson sought for the second straight day to calm investors panicked about the financial state of Fannie Mae and Freddie Mac, saying the agency aims to keep the mortgage finance companies 'in their current form' without a government takeover."
His attempt to calm investors was not particularly successful: At 10:15 L.A. time, Fannie Mae shares were down $4.05, or 31%; Freddie Mac shares were off $2.01, or 25%. Those are the declines this morning. Fannie lost nearly a third of its value today. (Update: At 11:20 a.m., both stocks had recovered some of their losses; Fannie was down 22% for the day and Freddie 9%).
In a note to clients today, Goldman Sachs puts the Fannie-Freddie crisis of confidence in pretty good perspective. The issue, Goldman says, it not how the government figures out a way to keep these two companies alive. The issue is how does the government figure out a way to make them bigger, and in a hurry. That's because, Goldman writes, the U.S. economy desperately needs Fannie and Freddie out there buying mortgages; otherwise, the economy is in even deeper trouble than is now obvious.
From the Goldman note: "The key significance of Fannie Mae and Freddie Mac in the current economic climate is their ability to soften the impact of the credit crunch. Of the almost $25 trillion of lending capacity to the nonfinancial private sector, roughly half -- on-balance-sheet lending by banks and quasi-banks plus private-label securitization -- is either stagnant or shrinking at present. This means that the other half -- of which the $5.3 trillion Fannie/Freddie book of business is the biggest component -- needs to grow rapidly to generate at least some credit growth over time."
More: "In this environment, the federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business. Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support, first with verbal measures -- beyond Treasury Secretary Paulson's brief statement this morning -- and proceeding to outright credit support if needed."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: U.S. Treasury Secretary Henry Paulson, left, looks on as President Bush talks to the media after a meeting with members of his economic team at the Department of Energy in Washington today.
Credit: AFP/Getty Images
 The dangerously declining duo known as Fannie Mae and Freddie Mac is dominating financial news today. Worth noting:
Tom Petruno reports on his Money & Co. blog that both stocks are sliding today "on fears that they won’t survive without a government bailout that could wipe out their shareholders’ stakes.
Not helping: A former regional Fed president says Fannie and Freddie "are insolvent." From Bloomberg via Calculated Risk: "Chances are increasing that the U.S. may need to bail out Fannie Mae
and the smaller Freddie Mac, former St. Louis Federal Reserve President
William Poole said in an interview. Freddie Mac owed $5.2 billion more
than its assets were worth in the first quarter, making it insolvent
under fair value accounting rules, he said. The fair value of Fannie
Mae's assets fell 66% to $12.2 billion, data provided by the
Washington company show, and may be negative next quarter, Poole
said.
More from Poole: "Congress ought to recognize that these firms are
insolvent, that it is allowing these firms to continue to exist as
bastions of privilege, financed by the taxpayer,'' Poole, 71, who left
the Fed in March, said in an interview.
Also: John McCain (pictured), campaigning in Michigan, says he's open to a federal bailout of the big loan buyers: "Senator John McCain said here Thursday that he
would be open to federal intervention to save the nation’s two most
important mortgage companies, Fannie Mae and Freddie Mac, the New York Times reports, quoting McCain: "Those institutions, Fannie and Freddie, have been responsible for
millions of Americans to be able to own their own homes, and they will
not fail, we will not allow them to fail,"
Two more to chew on: Reliably right of center CNBC talking head Larry Kudlow says if Fannie and Freddie need cash, they ought to get it the old fashioned way: by asking rich people investors for money: "I would prefer, at least at this point, that private capital do the job," Kudlow writes.
Why would a right-leaning economist bother to say he prefers a private solution? Because the Wall Street Journal today editorializes that Fannie and Freddie need public money (that would be your money): "Our own proposal, made months ago, is to require a more honest form of
socialism by injecting taxpayer money now into both companies (say, in
the form of subordinated debt or preferred stock) to recapitalize them
enough to weather the current storm. This would help prevent a U.S.
balance sheet debacle, and it would force the politicians to
acknowledge the mess they have created."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo credit: Associated Press
|
|
even with the passage of the housing bill he brokered to do just that. 
