walkitout (walkitout) wrote,

Fannie and Freddie in the line of fire

I've made a few negative comments about Chuck being irresponsible talking down IndyMac (not, mind you, that he was wrong). I'd like to float R.'s off-the-cuff theory as to _why_ Chuck might have wanted to limit the regulatory options for IndyMac.

Maybe some bank, somewhere, was under a lot of pressure to buy IndyMac, and they wanted an out -- or at least to push the price further down.

This is not quite as wacky as it initially seems. After all, we've already seen three purchases (Wachovia buying Golden West, BofA buying Countrywide and JP Morgan buying Bear Stearns) that have seemed like a good idea (at least to some CEOs, some of whose slots are now going begging) at the time, but that led to widespread mockery and or complaining later on. And not very later on at all. Some of the complaining has been by the purchaser, whether shareholders or Boards who then showed the CEO the door, some by other stakeholders, some by folk in the peanut gallery. I should also note that the price on each of these things has been dropping like a stone for the buyer.

So, if I were a CEO getting calls to see if I'd buyout IndyMac, or a shareholder or stakeholder or, oh, wait, I _am_ a member of the peanut gallery, I might very well want to drive the price down. By, say, talking up what a rotten piece of diseased crap this thing is that the regulators are attempting to pawn off on (somewhat) more solvent members of the financial community. That would be assuming any of them are. (There's a great quote from the 1929 crash, source not remembered. "Sell 'em all! They're not worth anything!." Dude made some money. Seriously. ETA: "Sell 'em" Ben Smith. He held on initially, then took up short selling in November.)

Beats the hell out of me if R. is right. And I have no way of knowing if we'll ever find out, either. Judging by how historians are still hashing out things like the Civil War, the economic tradeoffs of slavery, the Great Depression, etc., I'm not optimistic.

In any event, between Lehman and UBS (and given what UBS is up against right now with how they marketed auction rates? Be very suspicious of anything out of them), there's a whole lot of some scary talk out there about Fannie and Freddie. But it's not like anyone is going to buy _them_ out (other than all of us, which does seem completely inevitable). So what exactly is going on here? I was initially dismissive of a lot of it (I don't hold 'em, I don't hold their paper) and I knew they were going to get bailed out so why the panic? After scratching my head over a lot of discussion, I realized the real panic boils down to something like this.

The remaining financial community writes mortgages that get sold (to some string of fragile and possibly fraudulent companies who then sell them to) Fannie and Freddie. If they don't immediately get sold to Fannie and Freddie, they have loan guarantees from Fannie and Freddie (think of it as insurance, a la Ambac and MBIA -- yes, those guys, and the whole bond fiasco that followed on the auction rates fiasco) that encourage other people to think that these pieces of paper are worth something. If Fannie and Freddie have to pay up on those guarantees, they need to borrow money to do so, and currently, the cost of money to them is at a ridiculous spread compared to treasuries (after all, in theory anyway, they should be damn close to each other, given that the full faith etc. of the treasuries should be backing up the of-course-they'll-be-rescued-theory, right?). In at least one previous housing downturn, Fannie and Freddie bled at a horrendous rate because they had to satisfy guarantees and money cost them more to get than they were getting with what they were buying. Bad deal, all around. Bit of a fiasco.

The concern this time appears to revolve around a, um, lack of faith in the ability of the current Powers That Be to save Fannie and Freddie in enough time to avoid shutting down commercial house paper.

Short form: Fannie and Freddie bleed while Paulson and Bernanke drool and Congress gets stuck in some kind of procedural problem between the two parties prior to the election. And/or Congress _would_ act, but Paulson and Bernanke can't figure out what they want. And/or Paulson and Bernanke have a plan and Congress would implement, but Bush decides to pull the plug on it (not like he hasn't done _that_ before).

If commercial paper to buy houses grinds to a complete halt, houses just don't get sold. Period. (I mean, come on, how many houses don't have _some_ kind of paper on them?) You think you've seen free fall? Ha! Rather than wait for that to happen (and the risk arguably gets worse the closer we get to the election), the remaining members of the financial community have taken Fannie, Freddie, Hank and Ben out back and pulled out the Big Guns and said You Shall Goddamn Fix This Right Fucking Now. You will not wait for August vacation. You will not wait for the November election. You will -definitely- not be waiting for the Inauguration. *Now*.

Take Out the Trash Fridays have really been taken to a whole 'nother level lately.

ETA: While we all are quite certain that Fannie and Freddie will be protected, there is no statutory guarantee. There is a statutory guarantee with Ginnie. You'll notice no one is talking about GNMA.

ETA2: If you're _really_ paranoid, maybe you'll like this theory. The Neocons, or, at least, the current administration in its zanier moments, would _looooovvvve_ to make Fannie and Freddie just Go Away. After all, they Cost Government Money. And the Market Should Supply These Services. I mean, these are New Deal agencies that have been privatized. Kinda. One possible interpretation of what's going on could be: Bush Hates Fannie and Freddie and Is Hoping They Die. Hank and Ben are caught in the crossfire. The financial community, having finally gotten wise to how insane this administration is, isn't going to permit the murder of the GSEs.
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