OT: Freddie, Fannie and you.

OT:
As most of us are aware, the US government has just placed our two largest mortgage companies, Freddie and Fannie in
conservatorship, not receivership. [Sun Sep 7th] http://www.iht.com/articles/2008/09/07/business/treasury.php
Does anyone know or even suspect the actual reasons for Treasury action at this time, given that the elections are less than 60 days away? Who "put the wood" to the regulators/pols, or were things really this close to going south?
For some insight as to how things got to this state [in 4 words -- they cooked the books] click on http://www.iht.com/articles/2008/09/08/business/08norris.php "The U.S. government's planned takeover of Fannie Mae and Freddie Mac came together hurriedly after advisers poring over the companies' books for the Treasury Department concluded that Freddie's accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter."
[old accounting joke: The horses never come in, but auditors always do...]
This is of concern to not only US citizens but also our readers in all countries because of the large amounts of the common and preferred stock, and mortgage backed CDOs owned by foreign financial institutions (including pension/hedge funds) and sovereign wealth funds.
Technically both Freddie and Fannie still exist. Indeed, this appears to be one critical reason for conservatorship and not recevership/bankruptcy. This has two vital effects: (1) As the stock still "exists," if an institution such as a bank claims they are holding this as "long-term investments," they don't have to write this down to fair market value [ i.e. zero], but can value at the purchase price. This preserves a considerable quantity of capital [on paper] for institutions [such as commercial banks and insurance companies] that *MUST* maintain a minimum loan reserve or capital base. (2) Just as important, this keeps the debts off the US governmental books.
Some of the recent news articles have published the CBP [Congressional Budget Office] estimates of "only" a 20 billion dollar cost to the taxpayer. This is under "best case assumptions," and assumes that the CDOs issued by Freddie and Fannie maintain their value, being backed by actual real estate, and the existence of huge amounts of CDSs [Credit Default Swaps] insuring against surges in defaults.
The real numbers, based on the historical experience with the earlier S&L melt-down and the RTC indicate the likely real US tax payer exposure to be in the range 1.3 to 1.6 trillion $ when the probable value of the real estate collateral is considered. E.g., just because there is a 500,000$ mortgage on a house does not mean that that much will be collected if it must be sold.
A very considerable complication is the financial stability [or even existence] of many of the counter-parties to the CDS "insurance" on the bonds. If significant amounts of these CDss are uncollectable, the potential tax payer exposure could reach 3.5-4.5 trillion dollars. Even if the counter-parties are able to meet this huge demand, this will extract 1.5 to 2.5 trillion dollars from the financial markets further stressing these organizations, and depleting the capital of many of them below regulatory minimums.
for more complete information click on http://mises.org/story/3062
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How about gmac offering 1 year cd's at almost 5%? Wtf is that about? The national average is only 2%. And it's not like they can get 5% on any investments, so are they intentionally taking a loss? GM is bankrupt...yet they can still give money away? wtf is going on?
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wrote:

=========In this case the tax payer is on the hook through the FDIC as GMAC also owns a "bank." Given that both GMC and Cerberus [co-owners of GMAC] don't have any capital invested [they did, but its long gone] and the taxpayers will pick up the bill, they can offer 5% CDs and make high interest / high risk consumer loans [e.g. credit card debt at 36% per year] If things go well they can "double down" and "get even," and if things go as expected, the FDIC/taxpayers take the loss. This is a major reason why the regulators demand a minimum ratio of owners' equity to debt [loan reserves] to insure the owners have some "skin in the game." FWIW -- this appears to have been a major contributing factor in the S&L disaster.
Another example of a financial vampire: dead, but sucking the blood from the living to stay animated.... To see the GMAC bank click on http://www.gmacbank.com/index.html
Now where did I put that garlic???
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F. George McDuffee wrote:

And the corporate execs that put these institutions walk away with a pile of cash and pensions. The did some of their contract flimflaming as late as July of this year, about 25 million in bennies in addition to some other perks.
John
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you have to ask ?
you give the money first, THEN they lose it for you. simple.
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