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 phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 26 minutes, 21 seconds
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 FNM, FRE bail-out
#8885821 - 09/06/08 09:21 AM (2 months, 27 days ago) |
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From the WSJ:
http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news
There are plenty of conflicting rumors on exactly what the bail-out entails, but the article above makes the most sense.
Simply put:
Gov't gives periodic capital injections, as needed - this means the actual size of the bailout won't be obvious until well after the election
Senior debt is safe
Junior debt and preferred are probably safe, but there's some question about this
Common stock will face massive dilution, but won't be wiped out completely (or will it? again, conflicting rumors) Both FNM and FRE common are down 20+% after hours.
Senior management is out, sooner rather than later - no surprise here
General suspicion is that a final, official announcement with all the pertinent details will be made before Asian markets open Sun/Mon.
So we have BSC, FNM, FRE, plus a continuing trickle of FDIC takeovers - isn't free market capitalism grand?
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GnosticWarrior
Hermit
Registered: 03/11/07
Posts: 226
Loc: Oahu, Hawaii
Last seen: 6 days, 2 hours
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Re: FNM, FRE bail-out [Re: phi1618]
#8886754 - 09/06/08 12:43 PM (2 months, 27 days ago) |
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Quote:
phi1618 said:
So we have BSC, FNM, FRE, plus a continuing trickle of FDIC takeovers - isn't free market capitalism grand?
It sure is! Capitalism, is supposed to allow individuals to have the right and ability to fail. Which on the other side of the coin means allowing individuals the ability to succeed.
FNM and FRE where definitely big players in the financial system that were allowing individuals to borrow money, who did not have the ability to make payments on their loans. Why? That's not a sound long term business model.
Hindsight is 20/20, and the picture is clearer now. And the non-GSE companies like BSC, got caught bcs they forgot, that FNM and FRE even with all that liquidity was operating with a flawed model that was destined to reach the point of failure.
Now, is a govt. funded bailout a REAL help to the taxpayers? NO! True Capitalism improves the system by allowing those with flawed policies to fail, and eventually the system is only comprised of individuals (corporations) who have been battle tested and have demonstrated their ability to win over the patronage of the customers they serve.
Govt. and its services, financed with taxes, can never truly help its citizens, as long as it is managed and operated by people who maybe should have been given the right to fail. It perpetuates the losers and rejects the winners.
This will be the cause of the decline of the country. In the long term, a flawed model ultimately fails. However, nature is self correcting, and one needs to experience failure in order to improve. And it could very well be that we are in our destined process of improvement. 
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 26 minutes, 21 seconds
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Re: FNM, FRE bail-out [Re: phi1618]
#8892433 - 09/07/08 06:43 PM (2 months, 26 days ago) |
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Final announcement:
http://www.ustreas.gov/press/releases/hp1129.htm
CEOs eventually replaced
GSEs will continue to support mortgage market until 2010, at which time they will be forced to shrink
As needed, the treasury will inject capital as needed - this supports the debt, but the preferred and common can still be wiped out; senior and sub debt is supported
Treasury will also directly purchase GSE MBS to support the housing market
GnositcWarrior:
I think Paulson really agrees with you - observe that the common shareholders are punished severely under this plan, just as the shareholders of BSC were. The only reason these major bailouts have occurred is that the failure of these institutions would pose major systemic risk.
I agree to an extent - I agree that markets can be the best way to allocate resources and that failure is necessary for a healthy society, but I think as well that intelligent regulators are needed for a healthily functioning financial market. In this case, the regulators failed to perform their jobs upfront, but the bailouts are still given in the back.
Credit and financial innovation has the potential to make resource allocation much more efficient, but also the potential to cause massive crises of unbounded size. Unbounded is the key word here - the Depression was the product of a financial crisis, and there's no reason that the results of some future crisis couldn't be arbitrarily worse than that.
On the other hand, the relative prosperity since WW2 is partly a product of free markets, credit expansion, and financial innovation.
I suggest reading something by George Soros - his new book is pretty well written, but they all contain his key ideas (plus dire and worthless predictions - I think his bank account attests to the fact that he doesn't take his own predictions too seriously, and he's pretty clear on what he takes a good ideas and what's current speculation, out of date by the time you read the book) - for a view into the types of failures that markets are prone to.
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 SFsorrow
Is Born
Registered: 11/11/07
Posts: 183
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Re: FNM, FRE bail-out [Re: phi1618]
#8896634 - 09/08/08 02:32 PM (2 months, 25 days ago) |
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Does this mean that the USD is now backed by 5 trillion dollars in mortgages that continue to be worth less?
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GnosticWarrior
Hermit
Registered: 03/11/07
Posts: 226
Loc: Oahu, Hawaii
Last seen: 6 days, 2 hours
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Re: FNM, FRE bail-out [Re: phi1618]
#8896694 - 09/08/08 02:44 PM (2 months, 25 days ago) |
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Quote:
phi1618 said:
GnositcWarrior:
I think Paulson really agrees with you - observe that the common shareholders are punished severely under this plan, just as the shareholders of BSC were. The only reason these major bailouts have occurred is that the failure of these institutions would pose major systemic risk.
I agree to an extent - I agree that markets can be the best way to allocate resources and that failure is necessary for a healthy society, but I think as well that intelligent regulators are needed for a healthily functioning financial market. In this case, the regulators failed to perform their jobs upfront, but the bailouts are still given in the back.
I've read what both Warren Buffett and Jim Rogers have talked about the govt. bailouts. Their opinions vary and Buffett did agree that the Fed did the right thing to step in with BSC. Buffett also mentioned what you said about the need for intelligent regulators, but also implied that might not be possible the way the system is.
Rogers says that Bernake should resign.  That's not going to happen. Buffett says, he does not envy Bernake's job.
Here's a pretty good article where Jim Rogers mentioned that he thought Paul Volcker was the last decent American Central Banker. http://www.moneymorning.com/2008/08/19/jim-rogers/
We do need govt. to an extent. A standard currency, and therefore centralized regulation. The best individuals can do is to understand the flaws of the system and try their best to counter any negative effects that affect them personally.
Best wishes to all! 
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phi1618
old hand
Registered: 02/14/04
Posts: 3,921
Last seen: 26 minutes, 21 seconds
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Thanks for the link. Scary stuff, though one interesting note is he has covered a good portion of his financial shorts now - he's talking about secular decline, not so much an acute crisis.
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