Fannie Mae and Freddie Mac to buy $40 billion a month of bad assets
Looks like they will be using these two GSEs to purchase these bad mortgages to help stem our real estate crisis. At this point we are so far over the cliff that it really doesn’t matter what they do. We are headed for a severe contraction in the world economy and the era of easy credit has come to an end for the foreseeable future.
News Piece:
Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of under-performing mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
Fannie, Freddie Seizure May Trigger Default Swaps on $1.4 Trillion of Debt
Is this the event that put us over the edge? $1.4 trillion is no small number. It looks like Freddie and Fannie debt were one of the most actively traded CDS contract and the market makers and major dealers are in conference on how to settle these contracts. In the article they discuss that is the bond were to rally and trade near par value then the losses could be minimal but I wouldn’t bet on it. This will be interesting to follow.
Article:
Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.
Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.
Government Sponsored Enterprise Credit Facility (GSECF) created to bailout GSEs & FHLB
The U.S. Treasury announced via a press conference hosted by Henry Paulson on Sunday afternoon. They laid out a four point plan to rescue the beleaguered GSEs’ Fannie, Freddie and FHLB institutions. Here is a link to the Bloomberg coverage and a link to the video on the press conference.
Near the end they discussed the new credit facility (Government Sponsored Enterprise Credit Facility (GSECF))that was created to give liquidity to these entities. Here is the link to the PDF on the new credit facilities and their intended operations.
U.S. Treasury to Bring Fannie Mae, Freddie Mac GSEs Under Government Control
After many rumors, this one comes true. We are bailing out our two largest GSEs Freddie and Fannie. After the market close on Friday the Treasury unveiled their plans to bring the two GSEs into government conservator-ship. Both CEOs have been removed from the jobs as they come under public control.
The New Yorks Times reported that in the scenario the common and preferred shareholders might lose sustaintial value in their investments. It will be interesting to see if they don’t actually bail out those shareholders as well. Any way you cut it this nationalization will be inflationary over the long run.
Article:
Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market.
Paulson met with Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to brief them on the decision to put the companies into a conservatorship, where they would be removed from their jobs, according to a person briefed on the discussions. A public announcement is expected this weekend, the person said.
GSE’s subordinated debt unlikely to trigger credit default swaps (CDS)
Could this be the hidden grenade that will start the CDS market to implode? Most likely not, but if you read the details, the government would have to step in at a point for it not to be considered a default under the credit default swap contracts.
What does this mean?
Most importantly it would mean more treasury printing to cover these payments which would in-turn mean more price inflation as we inject money into the system to cover these liabilities. Keep an eye out for any press about the CDS market, please goto out “About” page and email us if you think your find is news worthy and we will cite you in the post.
Release:
Sellers of protection on Fannie Mae subordinated debt are unlikely to be required to pay out on the contracts even if the mortgage finance companies defer interest payments.
Losses from residential mortgages the companies guarantee have created concerns Fannie and Freddie may defer coupons if capital levels fall below minimums required by regulators.
Bill Gross & Dan Fuss say new GSE deals need Treasury Support
I agree with Bill Gross of Pimco (world’s largest bond manager), I would also need government for any deal that involved funding our two troubled government sponsored enterprise (GSE). I am surprise this actually made news, I thought we all knew this was “implied“. Enjoy.
Release:
Two of the biggest U.S. bond investors said they would get involved in a capital raising by Fannie Mae and Freddie Mac as long as the U.S. Treasury participates in the new deals.
Bailout concerns slam Freddie Mac and Fannie Mae shares
More concerns on Freddie Mac and Fannie Mae capital situation have come to bear again. At the time of this reading, the Dow Jones has fallen 188 points. The article talks about how a nationalization is getting more likely as time passes and if this happens then shareholder value will be wiped out.
Article:
Investors dumped shares of Fannie Mae and Freddie Mac on Monday after Barron’s reported the increasing likelihood of a U.S. Treasury bailout that would approach nationalization of the two housing finance titans.
The weekly financial newspaper said such a move could wipe out existing holders of the largest U.S. home funding companies’ common stock. Preferred shareholders and even holders of the two government-sponsored entities’ $19 billion of subordinated debt would also suffer losses.