The U.S. government takeover of Fannie and Freddy

I am having a nervous breakdance

09-08-08

NEW YORK (CNNMoney.com) -- Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

The move, which extends as much as $200 billion in Treasury support to the two companies, marks Washington's most dramatic attempt yet to shore up the nation's housing market, which is suffering from record foreclosures and falling prices.

Whole story:

http://money.cnn.com/2008/09/07/news...ex.htm?cnn=yes

So, what are your thoughts about this? I mean, of course it sucks that the American economy as well as the World's economy is in bad shape. But the fact that this government is taking this drastic and, in some people's view, almost socialist move is pretty extraordinary.

Do you think it's the right move? Or should the powers of the market handle a crisis like this on their own?

I have lots of thoughts about this myself but I would like to hear what others, especially Americans, and double-especially what conservatives and republican supporters think about this.

and triple-especially what Chris thinks about this

__________________
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They had temporarily escaped the factories, the warehouses, the slaughterhouses, the car washes - they'd be back in captivity the next day but now they were out - they were wild with freedom. They weren't thinking about the slavery of poverty. Or the slavery of welfare and food stamps. The rest of us would be all right until the poor learned how to make atom bombs in their basements.

Swedish Chef

You're a Genius all the time

09-12-08

I have absolutely no opinion one way or the other about this. But, I will say that it has directly caused one of my best friends to maybe lose his sweet-ass apartment. For the past year or so, my friend has been working for a law office, serving legal papers to people who are getting evicted. And because of the sub-prime mortgage crisis, there were an epic buttload of people getting evicted. My friend was making upwards of $7,000 per month for doing virtually no work. He just drives around. But now that Uncle Sam has purchased Fannie and Freddie, a three-month moratorium has been placed on all foreclosures in the United States. That means there are no more legal papers for my friend to serve. He's pretty much out of a job.

So see, Bush probably thought this was a nice little quick-fix solution that will allow him to leave office with an upswing in the housing market. Well, guess what, Mr. President? You didn't take into account all the humble process servers who make a living telling people they're getting thrown out of their homes. Shame on you, Mr. President. Shame on you.

And when I tried to make my good friend see the inherent irony in the fact that he's going to lose his home, when he's spent the last year profiting off of people who are losing their homes, he told me to go **** myself.

7thson

AMC Ape

09-12-08

Originally Posted by Swedish Chef

I will say that it has directly caused one of my best friends to maybe lose his sweet-ass apartment. For the past year or so, my friend has been working for a law office, serving legal papers to people who are getting evicted. And because of the sub-prime mortgage crisis, there were an epic buttload of people getting evicted. My friend was making upwards of $7,000 per month for doing virtually no work. He just drives around.

He's pretty much out of a job.

And when I tried to make my good friend see the inherent irony in the fact that he's going to lose his home, when he's spent the last year profiting off of people who are losing their homes, he told me to go **** myself.

If one is making that much and does not have enough to at least weather a three month storm then well.....yeah.

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Swedish Chef

You're a Genius all the time

09-12-08

Originally Posted by 7thson

If one is making that much and does not have enough to at least weather a three month storm then well.....yeah.

Yeah, well, I think he had gotten used to a very comfortable standard of living. Of course, he was sleeping in my parents' basement up until about two and a half years ago, so I'm sure he'll be able to cope.

Last edited by Swedish Chef; 09-12-08 at 01:27 AM.

Yoda

Administrator

09-12-08

I don't have any strong opinions about this at the moment because, to be perfectly blunt, I don't think I know enough about it to hold any.

I will say, however, that I think it would be a mistake to think of this as a clear-cut government bail out of a private company. They had a unique status and, consequently, didn't really behave as private companies do. They were almost a de facto government agency.

Rescuing, them, is necessary. If there's a mistake to be learned from, it's in their initial formation.

7thson

AMC Ape

09-12-08

Originally Posted by Yoda

Rescuing, them, is necessary.

If there's a mistake to be learned from, it's in their initial formation.

I agree, but I think the upper leadership and the boards of these companies should be totally revamped as a requirement.

Swedish Chef

You're a Genius all the time

09-12-08

Yeah, but from everything I've heard, Fannie and Freddie were actually doing all right on their own. Like, I know the whole industry was in deep poop but, compared to the other companies, they weren't so bad. I mean, maybe they would have been in some trouble a few financial quarters down the line, but I wouldn't say the government "rescued" them. They "took over" them.

That said, I still never would've have thought that the government would actually do it, if only for the fact that a lot of those Washington types have been leaching off of Fannie and Freddie for years.

7thson

AMC Ape

09-12-08

I think the problem goes quite a few many years back, yes even before Bush I dare say. It is almost a national security problem if they are not bailed out.

Swedish Chef

You're a Genius all the time

09-12-08

Originally Posted by 7thson

I agree, but I think the upper leadership and the boards of these companies should be totally revamped as a requirement.

If I'm not mistaken, the CEOs of both companies were canned and there are brand-spanking new head honcho types in place of each Fannie and Freddie.

7thson

AMC Ape

09-12-08

Originally Posted by Swedish Chef

If I'm not mistaken, the CEOs of both companies were canned and there are brand-spanking new head honcho types in place of each Fannie and Freddie.

Yes, but the cuts need to go deeper imo.

Swedish Chef

You're a Genius all the time

09-12-08

Originally Posted by 7thson

I think the problem goes quite a few many years back, yes even before Bush I dare say. It is almost a national security problem if they are not bailed out.

Well, sure, epic amounts of people have been refinancing their homes, taking out numerous mortgages and investing in a buttload of those subprime dealies for years. The boom started in the mid -late 90's, but I don't think either Bush or Clinton is at fault.

Piddzilla

I am having a nervous breakdance

09-14-08

Nice to see some replies in this thread!

I can't see how any president's administration could be blamed for this crisis. These are (were) private companies and nothing that the government had any control over. The problem, if I've understand it correctly, is that Fannie and Freddie have loaned money to just about anyone. These people haven't been able to pay the money back and since the value of their houses have decreased enormously they gladly give their houses up instead of paying their mortage. And Freddie and Fannie lost enormous amounts of money.

I think the takeover is the right thing to do but it points out a big problem with private owned companies being allowed to act totally unregulated and irresponsible with the sole objection being quick and short-term profit.

I also find it very strange that more people aren't reacting more strongly against the fact that the government is backing private companies with $200 billion while people are losing their homes. Sure, I guess they are doing this so that hopefully more people will not have to lose their homes as well, but what kind of signal is the government sending to the market when they're bailing Fannie and Freddie out? That it is okay to act irresponsibly, the government will bail you out anyway? It would be nice if all those people losing their homes could count on their government in the same way.

mack

start with me

09-15-08

hmm.

two things.

1. they did it for the airline industry.
2. they're sending billions of dollars of my money to a war I dont fully support.

why not also spend billions of dollars of my money to buoy our floundering economy. . . the one that actually affects me?

ok. so, I too dont claim to understand economics and finance like many of you adepts out there - but alas, as happens often, I still have formed a lay opinion. now you, too, shall have to endure it (unless you skip this post

).

Since I already shared it before elsewhere, I'm just going to quote myself here - and I place all necessary caveats out there (like, yes I skipped a lot of stuff, and yes there are glaring loopholes in the argument, and yes, I'm aware that there is an opposing argument).

here you go!

the government bailout of the mortgage industry (prior to that the airline industry, prior to that...ad nauseum), it has to happen.

Here's (the dumbed down mack version) why: it takes money to get money. Ever hear of that saying in college about the job market - Fake it til you make it? Why? Because money attracts money. Ever hear that song by Billie Holiday called God Bless the Child? Everyone should listen to that song on principle alone. Because the principle alone still stands true.

Them that's got shall get
Them that's not shall lose
So the Bible said and it still is news
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own

Yes, the strong gets more
While the weak ones fade
Empty pockets don't ever make the grade
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own

Money, you've got lots of friends
Crowding round the door!
When you're gone, spending ends
They don't come no more

Rich relations give
Crust of bread and such
You can help yourself
But don't take too much
Mama may have, Papa may have
But God bless the child that's got his own
That's got his own

Mama may have, Papa may have
But God bless the child that's got his own
That's got his own
He just worry 'bout nothin'
Cause he's got his own

The mortgage crisis IS what is crushing the economy. Lending is at a standstill regardless of your creditworthiness - A credit people cant even buy homes. Companies with debt (all companies) are illiquid, because most businesses operate on lines of credit/warehouse lines of money from large banks/clearinghouses (e.g. JP Morgan). When those clearinghouse shut down the coffers and stop hemmoraghing money to companies shoveling money out the door to cover mounting debt - all of a sudden you have a lots of companies left holding bags of debt that they cant pay. They could pay it if the money was still flowing in, and they can make the money flow in if they have access to the warehouse lines (read: use money to get money), but without access to that money, they can no longer MAKE money. Suddenly, they are facing bankruptcy, or in the case of Freddie Mac/Fannie Mae and IMB, takeover/bailout by the government.

Their illiquidity is causing them to tank under THEIR debt. Banks are going under. When the banks go under, lending at a micro level ends. Banks lay off people, and suddenly, companies with lines at small banks are in a crisis. They, too, unable to find another lender, tank under their debt. They lay off people. The companies still in business are facing a lowered spending and a lean economy and even THEY are losing money. So they lay off people, and they definitely arent hiring. So. Unemployment rises as the companies close their doors (last I checked in April it was at about 20-40,000 people being laid off per month - much of it from banks/mortgage companies initially).

And slowly, this economic crisis ripples through every sector and trickles down to Everyman in random non-bank, non-financial sector jobs. All because you have to spend money to make money, and no one will spend. Furthermore, you can spend what you dont have.

So. In steps the government, the Fed, Congress, whoever, all of them, in tandem, attempting to arrest the decline of our economy by infusing cash into it. The Fed lowers interest rates (prime, lending, interbank, etc.) to incentive large companies to people to borrow; Congress "takes over" failing companies to manage their spending/debt; they also infuse them with cash - or give them money so that they wont tank.

Because I guarantee you if FM/FM tanks, that is a hugely BAD thing.

They did this with the Airline industry as well.

Why? Because the new restrictions we are placing on these companies will cause them to close, and many of these companies are some of the backbones of our economy.

It would be like Congress requiring all cars on the road as of 2009 to non-gas consuming cars. Anyone driving gas consuming cars as od 1/1/2009 will be placed in jail.

A good thing? An environmentalist would think so. Fair? Probably not. We may be working toward that end, but if we get there too soon - if we are too instant, we will cripple (or destroy) the entire infrastructure that we have in place right now.

And you dont destroy something without first having an alternative in place and ready to go.

We kinda missed that step.

*I'm no Finance degree person, so I'm sure I havent dotted all I's or crossed all T's in this explanation - maybe someone else can do better.

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7thson

AMC Ape

09-15-08

Originally Posted by mack

2. they're sending billions of dollars of my money to a war I dont fully support.

why not also spend billions of dollars of my money to buoy our floundering economy. . . the one that actually affects me?

You sure make a lot of money.

mack

start with me

09-15-08

Originally Posted by 7thson

You sure make a lot of money.

Aw man, 7th - you're messing up a perfectly good rant with your logic!

I wish I made that kind of money.

7thson

AMC Ape

09-15-08

Originally Posted by mack

Aw man, 7th - you're messing up a perfectly good rant with your logic!

I wish I made that kind of money.

Sorry I could not resist. You do make some very valid points, in particular the need for an alternative.

mark f

Bright light. Bright light. Uh oh.

09-16-08

This thread is quite prescient actually. Now, the fact that I'm an economic idiot is contributing to my family's reality that no matter how much more we invest in our future (in the stock market, outside of teachers' retirement and my daughter's college fund), we're basically going in the toilet. I have somehow arranged that my daughter's college fund WILL ALWAYS increase, but that's partly because everytime I spend a dollar, she gets at least a penny. As far as California teachers go, we may well have one of the sweetest retirement programs available because we're guaranteed a handsome profit no matter what. I just hope we aren't ripping everybody else off.

As far as Freddie and Fanny go, well, I suppose most of the world noticed that our stock market went in the crapper today. Yes, there were reasons, but most of them came from the Feds' bailout of the lenders. It was tied into the obvious collapse of other lenders today. The Feds, who are probably the worst mismanagers of money in this country, decided that to "try to save people from being kicked out of their homes" that they'd take over the "notes" (mortgages) of said unfortunate people and went ahead and made a totally predictable, yet totally ridiculous choice to try to buck up the country. However, I don't really see it as a "political" decision. Both the Democrats and the Republicans deserve as much blame as possible for this unfortunate situation, which may well never be able to be resolved. I already talked about Monopoly money in another thread; well, this bailout is 100% Monopoly money. It comes from nowhere and it leads to nowhere, but if any of our lenders decide to call in the notes, we will be left looking like a Trojan horse with no hatch to get out of. It's truly scary. Hopefully, this won't snowball into all the other problems already facing us, but the fact is that if you mortgage "liberty" to pay for "security", you have a good chance to lose both, to paraphrase Ben Franklin. I pray this isn't the case, but this is just about the scariest distortion of Reaganomics ever devised, if not in theory, at least in practice. And I had an older, "wiser" friend who jittered through eight years of Reagan, confident that the bombs would fly. I had to reassure him that he was overreacting, and I hope I'm overreacting now, but I don't know. So, yes, the current election is very important, so I hope everyone takes it seriously. I won't presume to tell you what to do about it, but do something. Please!

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Last edited by mark f; 09-17-08 at 02:40 PM.

Swedish Chef

You're a Genius all the time

09-21-08

Is it just me, or does Federal Reserve boss Ben Bernanke look exactly like Hank Kingsley with a beard?

Yoda

Administrator

09-25-08

Been delving into this a lot more, and I have a few thoughts.

Originally Posted by Piddzilla

I can't see how any president's administration could be blamed for this crisis. These are (were) private companies and nothing that the government had any control over. The problem, if I've understand it correctly, is that Fannie and Freddie have loaned money to just about anyone. These people haven't been able to pay the money back and since the value of their houses have decreased enormously they gladly give their houses up instead of paying their mortage. And Freddie and Fannie lost enormous amounts of money.

I think the takeover is the right thing to do but it points out a big problem with private owned companies being allowed to act totally unregulated and irresponsible with the sole objection being quick and short-term profit.

I do not think Freddie and Fannie can be accurately referred to as "private" companies. They have long been operating under special rules, and have had government backing, which obviously has a dramatic effect on their loan practices. It has largely resembled a government program, and its methods have been correspondingly sloppy.

In the 1970s Carter passed the Community Reinvestment Act, which was designed with the noble goal of increasing minority and low-income home ownership. To that point, banks had been lambasted for what was called "redlining" -- IE: issuing loans only in wealthy neighborhoods and the like. This was considered "greedy."

In 1995, the CRA was strengthened, and banks were threatened with low ratings if they refused to loan to enough minority/lower-income individuals. The government backed these loans by having Freddie and Fannie buy them up -- and they did, eventually holding 80% of the secondary mortgage market. Forced to issue loans they had theretofore chosen not to issue, banks were forced to raise the interest rates to compensate for the added risk -- these high rates were also considered "greedy." Banks were demonized and in some cases, lawsuits were filed.

In other words, this is a textbook example of the perils of government intervention. Of course, this hasn't stopped many politicians from seeking out the nearest podium and blaming the problem on deregulation. I guess that's to be expected, but it's amazing that they can do it with a straight face, particularly given that attempts were made to reform the institutions in 2003 AND 2005, and were shot down by some of the same people throwing blame around this week (Barney Frank, Chris Dodd, etc).

Originally Posted by Piddzilla

I also find it very strange that more people aren't reacting more strongly against the fact that the government is backing private companies with $200 billion while people are losing their homes. Sure, I guess they are doing this so that hopefully more people will not have to lose their homes as well, but what kind of signal is the government sending to the market when they're bailing Fannie and Freddie out? That it is okay to act irresponsibly, the government will bail you out anyway? It would be nice if all those people losing their homes could count on their government in the same way.

Well, as you said, the idea is to stop such things. If the government is responsible for Freddie and Fannie (and it is), it is unfortunately responsible for the domino effect which has followed. The mistake isn't in the bailout, but in creating the situation in which it was necessary.

This is SOP for government: intervene until a problem arises, and then use the problem as an argument for more intervention. Everyone wants to appear to be "fixing" something, and no one wants to look like they're twiddling their thumbs whilst Rome burns, so the result is that almost no one reazlies that the "fixing" is causing the problem.

Golgot