This is why I commented on another thread that I trust we will not be shocked when the average voter no longer sees socialized medicine, high marginal rates on top earners, or expanded EIC’s are not such bad ideas after all.

Aargh!  Can’t y’all get Taki off his yacht long enough to shrink the margins of the comment field?  Makes editing pretty damned difficult.

“One amusing aspect of the New York Times’s coverage of the government takeovers of Freddie Mac and Fannie Mae is that throughout the Gray Lady’s 2000-word lead essay, it’s never once mentioned that the two lending institutions have, well, already been federal organizations for the past 70 years (!).” -Spencer

Great post. It’s akin to a parent’s stealing of their kid’s social security number and thus these day’s his or her ‘identity’ & saving the family with all of the new loans they’ve added as a result of such new ‘collateral’ (johnny & jill’s futures) and then publically announcing once it is inevitably discovered nothing of johnny & jill’s is being paid back, and oh my - their credit is shot (though not mom & dad’s) BUT do not despair - dad will noe step in and remedy the problem.

What I thought was so humorous in the Treasury Secretary’s statement: ‘that it’s time to put an end to these govt./private company “ambiguities” and that no others exist is that he ‘forgot’ to mention the same “ambiguity” exists with the federal reserve & the irs - ‘private companies’ with boards of directors & their private shareholders, who were in effect also hired by congress to pretend they are the federal reserve or the govt. while strong-arming us to deliver our illegal federal income taxes each year to the federal grubberment/ (i.e - a.k.a. private banking system.) Crever… too crever by half? No, it’s gone on for 90 years.

How? All of this done because the banks illegally use our social security numbers when we open an account with the vipers. When shall that ambiguity end - sweet lord. ? Funny.

When hell freezes over. The lord is sweet & sour… unlike the vipers who are only sour.

(humor)

Gee, when your government’s “liquidity tools” are dominated by a printing press, why not bail every business out? Maybe we could just give everyone a pay check. Better yet, lets tuck everybody into beddy bye, every night with a peck on the cheek before climbing in and delivering the real news...en pointe...... like a lecherous uncle .

Tick....tock.

Dirk’san - ouch, papa. i’m too young to have feared this but I guess now I can say I *know. That’s our lovely aristocracy, now that no such thing anylonger exists. That’s why Dirk - I and I alone am America’s only non-pervert Aristocrat. I’d include you Dirk but thy mind is too (appropriately) bent to the times.

Probably even you knows you’d rather rely on me - than you. That’s cool. (humor Dirk - only the truth is funny.)

Errr, ahhhhhh.

You should not write about things you do not know about.

First up….take a look at the EQUITY prices of Fannie Mae and Freddie Mac (FNM US <Equity> <GO> and FRE US <Equity> <GO> on BLOOMBERG).

The Equity holders are the ones that have born most of the losses, but in addition, Fannie Mae and Freddie Mac issue DEBT (bonds of their own) and those also have born losses. Those who took a risk on the profitability of collecting and repackaging mortgages and making a profit from fees and structured product construction have indeed suffered real cash losses. All these losses have not been put to the government or made whole by the U.S. taxpayer, and will not be.

The Federal government’s intervention in FNM and FRE at this point is not to help those agencies, but to help small regional banks. This is the nature of how these agencies work.

When a bank in Florida or Arizona or Ohio or Minnesota writes a conforming mortgage, it can be resold on to one of the agencies. These mortgages are then packaged into a portfolio that then limits geographic concentration risk. Without this portfolio affect and a secondary mortgage market, regional banks suffer by having local loans all on their balance sheet, and if the local or regional economy sours, their ability to lend is hampered. The secondary market transfers this risk to the agencies, who package on the mortgages, often hedge out interest rate risk, and pass the packages onto the securities market.

But FNM and FRE are not the only people in the secondary market. They merely stabilize and participate in the vast swath in the middle of *conforming* loans, not the non-conforming ones.

Non-conforming loans are, you guessed it, the sub-prime loans (and sometimes packages of jumbo mortgages for very expensive homes). These are the ones that are the toxic wasteland, which have created a *contagion effect* on all Mortgage Backed Securities (MBS), whether they are performing or not. Performing MBSs are ones where all the mortgage payments are arriving right on schedule and have suffered no defaults. Over 98% of Fannie Mae and Freddie Mac created securities are performing.

When the agencies asked for an *increase* in the allowable conforming loans, it was not to reach for home-price inflation, but to *avoid* the crappy part of the market. As home prices increased at a faster rate than GDP or the standard risk free rate, the static price of the average home on which the conforming mortgages are calculated as allowable became the less expensive homes. Less expensive homes tend to be in less desirable neighbourhoods with higher default rates.

While it is true that the agencies taking away the easy middle of the market created distortion it is not true that the agencies created the sub-prime mess. In addition, it is also not true that the loss is being entirely born by the U.S. taxpayer, as investors in both the debt and equity of the agencies have suffered losses. Finally, the seizure of the agencies by the government helps small regional locally owned banks, not the flashy New York-based investment banks. These small regional banks need the secondary market to function so that they can continue to make home loans as households form in their area. Without the secondary mortgage market, anyone under 30 years old and without $100,000 in savings and ten years of proven steady employment reading TakiMag can fully expect to take their brides to their parent’s homes for many years of uncomfortable living until he saves up enough money to obtain a mortgage under those restrictive lending standards.

James,

In that event, demand for fee simple housing, and therefore prices, would plummet.  Then, and only then, would housing prices and mortgages finally begin to make financial sense, after many decades of distoriton.  If the shake-out is painful, it is only because the economy has been distorted by government and central bank policy for so long.

And what, by the way, is so wrong with multi-generational households?

You have to understand that I agree that these beasts should never have existed, and that in their absence house prices would plummet….eventually.

And there is nothing wrong with multi-generational households, except my wife would have murdered me if she ever had to live with my mother.

But just letting both agencies collapse now would, I assure you, be very very bad for the banking system (Note: NOT the Investment banking system) and take ten years to fix and completely arrest the ability of savers to meet and auction their savings with borrowers. A slow unwind is preferable.

Banks borrow short (deposits) and lend long (loans). If the underlying VALUE of what they have lent long on collapses, that wipes out the bank’s balance sheet, and the bank closes (or there is a run on deposits, even with FDIC insurance).

Local and regional banks can have 20 or 30% of the underlying value of a house collapse in an area before there are a lot of folks who PUT the house to the bank (default on an otherwise healthy mortgage). Remember, CREDIT is the “ability and willingness to pay.” Folks who have a 30% drop in the implied value of something they are in debt for have huge moral hazard to (eh-hem) not be willing to pay, even when they are able.

So Mom and Pop, who only have five more years on their 30-year mortgage, and the value of the house contracts 30% (or more) still do not put the house to the bank.

But anyone who has more than 20 years left on the mortgage and has lost more than 30% or more of the value is sorely tempted to do so.

Small local or regional banks that have a lot of homes on their books are in bad bad trouble, and go out of business. This is bad for depositors (it gives them fewer choices) and borrowers (less of an auction for savings).

There are a couple things that are happening in the US Gov takeover that may, sadly, be PROFITABLE for the USGOV.

The plan is to cut the dividend to ordinary and preferred shares, and the USG gets a new set of 80% of the equity capital as preferred shares (entitled to dividends, but suspended). If they clear the books, the preferred shares become valuable, and voila! All the money the USGOV spent is back.

The other injection is to buy, on the open market, PERFORMING Fannie and Freddie MBSs. These are trading at distressed levels, and have been marked down….BUT….they (unlike their sub-prime MBS counterparts) have not defaulted. So if the USGOV buys these at 70 and latter they return to par or pay off at maturity, that is a healthy healthy return.

This is one of the few times the wise men of the Fed and Treassury have done the right thing.

But the thrust of the article is that basically these beasts should have died a long time ago, especially when the secondary mortgage market thrived for non-conforming loans implying a market for conforming loans, without Fannie and Freddie in the way, would have been just fine too.

James, I have a couple of problems with this scenario.  First, what do you mean “if the books clear?” The companies are a fraudulent mess.  That’s why their stock tanked.  There is nothing in the fundamentals to support upward stock prices other than government injections of capital, the polite term for freshly printed money.  This brings us the same moral hazards as before.  Second, I would trust the market as well on the MBS’s.  Competition for returns is just too intense--if MBS’s are a good deal, somebody besides the government will buy them.  I suspect instead they are mostly fancy, engraved bird cage liner.

I think we are in a trap.  We are using a credit card to reinflate a bubble.

“The companies are a fraudulent mess.”

Only if you believe accounting to be a fraud.

The packages of *performing* mortgages, MBSs, on the books of Fannie and Freddie are, appropriately, and according to the rules, marked to market…which accounting reflects. Because these assets are trading below the capital of the firm, the USGOV decided to intervene.

So something that was once trading at par (100) is now often trading at 70 or worse or better.

Keep in mind, these are not *defaulted* MBSs, these are *performing*.

If the USGOV buys others like it back onto Fred and Fan’s books, and they continue to perform as they mature, the price will gradually return to par, and you will have both capital appreciation and have clipped the coupon.

Why are they trading at 70 instead of 100 if they are performing? The reason is that non-performing, defaulted MBSs are considered the same asset class by the institutions and funds that hold these securities, and *those* securities are trading at 10 to 30. Many funds that hold these are for pensions and insurance firms (I manage money for an insurance firm, for example, and am also a professor of finance) and these institutions mmust make regular payments to their beneficiary off of assets, *regardless* of market conditions. So you often have to sell *performing* MBSs (because you can get a bid for them) to cover the income you needed to have to pass on to your beneficiaries that did not arrive from your *defaulted* MBSs.

“There is nothing in the fundamentals to support upward stock prices other than government injections of capital, the polite term for freshly printed money.”

I’ll sort-of agree, but we need to make some distinctions.

“Money” is always whatever the most people agree on is a medium of exchange. Gold was it for awhile, the US dollar is it now. Money and capital are not the same thing.

The USGOV then, as you point out, is not really putting any capital into Fred and Fan, merely “the full faith and credit of the United States Government.”

Keep in mind, I’m all for Ron Paul and an abolition of the Fed, but I’m a realist of what is going on now.

“to support upward stock prices”

We need to be careful here. Ther is the *common* stock, which is equity, and there is the *preferred* stock, which is also equity but has a defined and fixed dividend.

Common stock has a variable dividend, and can only be paid out on by a vote of the board of directors.

Preferred shares typically *must* pay a dividend , unless the firm is bankrupt (there are exceptions and variations).

I’ll agree that there is nothing in the fundamentals to support the common stock ever being worth anything, but disagree on the preferred. The USGOV plan currently is to inject “capital” and take 80% of the *equity* of the firm in the form of *preferred* stock which has a *suspended* but accumulating dividend. In other words, they won’t pay any cash, but if they turn the companies around they pay out cash to themselves eventually.

“Competition for returns is just too intense--if MBS’s are a good deal, somebody besides the government will buy them.”

This would be true in a perfect market for capital, but in the real world, markets are not perfect (which is why bubbles happen in the first place, eh?).

Markets are not perfect for a variety of reasons. Here are a couple:

1) Information is distributed asymmetrically, and good information is inversely proportional to the probability of its significance (Shannon).
2) Laws, bounderies, contracts and transaction and switching costs can keep capital distributed sub-optimally. This is particularly true for regulated funds that have prospectuses that define what is permissible to invest in: you are often a forced seller or forced buyer because of these definitions. Most capital is managed by institutions, not individuals, and this is a persistent, systematic problem well examined in empirical academic literature on finance.
3) Human biases (sometimes called “behavioural finance”).
4) Noise and opinion. Sometimes a lawyer is liquidating an estate on a certain day….he is not selling a stock for any informed reason at all except a calendar a probate judge has set. This is noise. Crazy people have opinions. This is noise.
5) Capital is also of the fixed and mobile variety: you can’t move houses instantly over oceans. Purchasing power parity should be transportable, but it sadly isn’t as reflected in currency markets and price differentials in Big Macs (the prices should be the same around the world, but they aren’t….and you can’t arbitrage off them either, but you can with gold).
6) Labor (human capital) also tends to be sticky localized, and price differentials exist accordingly, and labor tends to be an input for any auction.

But the most important thing is to realize, value can exist and assets can be oversold because bad information is embedded in the asset price. Bill Gross of PIMCO made $1.7 billion in a single week by betting that MBSs were oversold, and has proven to be correct.

So, while I agree this is a mess, the best work out is the USGOV intervention and then dismantling these two beasts (and the Fed, and returning to the gold standard). And yes, I ultimately think these MBSs are valuable because we have the rule of law, the mortgages arte backed by houses, and I believe houses in the USA are valuable. I believe houses in the USA are valuable because folks keep flocking legally but mostly illegally over our boarders for a chance to live the life of an American. As long as the world opinion is still trying to buy a piece of the American dream, the long-term value of an American home is a great asset.

Dear Mr. Ward, do you happen, perchance, to write any economic or whatever papers or articles anywhere on the net? If thats the case I´ll be more than happy to read them.
I find your style easy to assimilate, crystal clear and very articulate, not very common features - let me tell ya - to be found in the economic comentators of these “stranges days” we live “into”.

PS: If thats not the case may i suggest you to start an economic blog or something of the species; that would be a great thing for the thousands like me, who came from a completely different background and are eager to finally know what is all this big fuzz about “economics” and why is so damm important nowdays :).

For instance: do you really think a gold standard could cope with the inherent EXPLOSIVE NATURE of the technological-scientific metamorphosis (and ITS RESEARCHING & DEVELOPMENT FUNDING) that enforce the real dynamic of our realy system; those technological evolutions represent the high tension lines along whose lines our society runs and runs on. Wouldnt be preferable (to the gold thing, i mean) an ad-hoc style, working with patches and ad-ons, erratic, peripàthetic procedures and syncopatic rythms… that is, the same “messy charade” we got it today passing as “the financial structure of the world”. Could it be true, to all appearances contrary, that we live in the best posible world? do you really believe that a mad man (finances) could be guided - & saved - by a gold stone?:)