The U.S. government has finally stepped in to stop the bleeding. Fannie Mae and Freddie Mac, the two giant government sponsored enterprises have been taken into conservatorship and are now government property. As I consider this move a bankruptcy, I will add these two to my list of Global Banking Bankruptcies. These are by far the largest bankruptcies in U.S. history and the move to shore up Fannie and Freddie is unprecedented. The move was widely anticipated and pre-announced by Barney Frank, chairman of the Congressional Financial Services Committee. However, this is still an enormous financial event that will have major consequences on financial markets around the world.
Fannie and Freddie make up half of the U.S. home loan market. If this doesn’t remind one of the Great Depression, then one needs to get in touch with what is really happening to the capitalist system.
Please see sources below for the multiple takes on this news.
The following are the main features of this government bailout. This is a wholesale nationalization of the entire U.S. mortgage problem. Of particular note is the fact that the plan does not say what will happen after conservatorship, i.e. whether Fannie and Freddie will be nationalized permanently, re-privatized or liquidated. Also of note is the extension of a secured line of credit to the Federal Home Loan Banks.
- The Treasury gets $1 billion of senior preferred stock — with warrants — representing 79.9 percent of Fannie and Freddie. The government receives 10% interest on its investment.
- Existing shareholders will still be left with a share of the business but will pick up expected future losses before the taxpayer becomes liable. Obviously, shares in the two organizations are now worthless.
- The U.S. government will now have all voting rights and own 80% of the common stock on a fully diluted basis. Again, the equity of existing shareholders is now worthless.
- Preferred shares have had their ratings slashed to junk, which is not a good sign for them. Bloomberg reports Gimme Credit analyst Kathleen Shanley as saying the takeover is “unambiguously bad” for preferred shareholders who, along with holders of common stock, “will in all likelihood be wiped out.”
- U.S. regulators are very concerned that five or size U.S. regional banks may have outsized exposure to Fannie and Freddie preferreds and will have their capital wiped out. Look for regional banks to be very volatile on Monday morning in U.S. trading. Gateway Financial and Midwest Banc are most exposed.
- Sheila Bair, head of the FDIC said “across the industry, banks do not have significant exposure to GSE equity securities. Any negative impact will be narrowly focused only on a few smaller institutions.” Nonsense. Don’t believe a word of this. You have been warned.
- Fannie and Freddie debt is expected to be backed by the full faith and credit of the U.S. government.
- Any capital shortfalls induced by losses incurred by either organizations will be made up by funds from the U.S. Treasury. The treasury has received a blank check from the U.S. congress and is authorized to make good on any sum to bail out losses at Fannie and Freddie.
- As a result of this unprecedented move, Fannie and Freddie will be forced to reduce their relative size in the U.S. mortgage market. The U.S. Treasury has mandated that the combined Fannie/Freddie portfolio value “shall not exceed $850 billion as of Dec. 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion.” How the government intends to achieve this without the market seizing up due to illiquidity is beyond me. However, Bloomberg says “Fannie’s portfolio was $758 billion at the end of July, and Freddie’s was $798 billion.”
- The executives and Board of Directors of both institutions have been replaced. Herb Allison, a former executive at Merrill Lynch, was picked to head Fannie, and David Moffett, a former vice-chairman of U.S. Bancorp, was selected to head Freddie.
- However, the CEOs of Fannie and Freddie will make out like bandits even though they were effectively fired, the New York Times reports.
Under the terms of his employment contract, Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay, retirement benefits and deferred compensation, provided his dismissal is deemed to be “without cause,” according to an analysis by the consulting firm James F. Reda & Associates. Mr. Mudd has already taken home $12.4 million in cash compensation and stock option gains since becoming chief executive in 2004, according to an analysis by Equilar, an executive pay research firm. Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million, largely because of a clause added to his employment contract in mid-July as his company’s troubles deepened. He has taken home $17.1 million in pay and stock option gains since becoming chief executive in 2003. – NY Times
Gateway Financial and Midwest Banc have one-third of capital in Fannie and Freddie Preferreds
Freddie and Fannie are getting nationalized
Quote of the day: 27 Aug 2008 – China
Senator Bunning blasts Bernanke at Senate hearing
Moody’s Cuts GSE Preferred Stock Ratings
Fannie, Freddie to get $15 Billion from U.S. government
Fannie and Freddie: Washington Post articles back to 2005
Question: How is Fannie Mae a AAA company?
Also see all previous posts under the label GSE.
Paulson Engineers U.S. Takeover of Fannie, Freddie – Bloomberg
Paulson Statement on U.S. Action on Fannie, Freddie: Text – Bloomberg
Statement by Fed Chairman Bernanke on Fannie, Freddie Plans – Bloomberg
Treasury Extends Secured Credit Line to Federal Home Loan Banks – Bloomberg
Regulators to Help Banks With Fannie, Freddie Shares – Bloomberg
Fannie, Freddie Capital Concerns Prompt Paulson Plan – Bloomberg
Few Stand to Gain on This Bailout, and Many Lose – NY Times
Fitch Affirms Fannie Mae & Freddie Mac’s ‘AAA’ IDR; Lowers Pfd Stock; Sub Debt on Watch Evolving – Market Watch
Pimco’s Bill Gross on the Fan/Fred rescue: “We like it” – LA Times
Futures soar after U.S. takes over GSEs – Reuters
S&P, Fitch slash Fannie, Freddie preferreds to junk – Reuters
Fannie Mae and Freddie Mac: A Damage Report – Business Week
U.S. government seizes control of Fannie Mae and Freddie Mac – Times Online
U.S. steps in to rescue failing home loan giants – Guardian
Banks surge after Freddie, Fannie bailout – Sydney Morning Herald
Wall St set for frantic day after Fannie Mae and Freddie Mac bail-out – Telegraph
US-Regierung fängt Fannie und Freddie auf – Financial Times Deutschland