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Fannie and Freddie Getting Their Bailout?

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September 05, 2008 – Comments (10) | RELATED TICKERS: FMCC , FNMA

This is why I despire our needless, 7-day holding period on CAPS. I just wanted some quick points from a few days worth of long-side idiocy and FRE and FNM! Is that so much to ask? I gotta hold these dog dinners for a whole week, and BANG!

Now comes some kinda bailout plan, and unless it's unconsionable, it should whale on the common.

Sounds like Hankie and Bennie are hoping that a few high-level scalps will keep us natives from getting too restless. I don't like the sound of that, as it makes me suspect a bailout for equity and bagholding bondsmen like Bill Gross.

Plan Near for Fannie, Freddie

The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac. The plan includes changes to senior management at both companies.  4:47 p.m.

10 Comments – Post Your Own

#1) On September 05, 2008 at 6:11 PM, nuf2bdangrus (< 20) wrote:

I don't like the 7 day period either.,....this market is too fast.  I have puts on FNM, sold half at a small loss.  If they go to 0, it will help offset the drubbing I'll get on my SRS and new COF short.  Say bye bye for now to my PRSP puts and my RF puts.  They are lottery tickets now.

 

You should check in with Minyanville.com  they have been calling this.  

  You score is still WAY better than mine

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#2) On September 06, 2008 at 9:38 AM, TMFBent (99.82) wrote:

Ugh. According to the Washington Post, the plan would "dilute but not wipe out" existing equity.

Let's see just how much of a bailout Paulson and crew put together for their Wall Street bagholder friends who have been gambling on that common.

This is America. Can't have anyone lose too much money.

Sj

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#3) On September 06, 2008 at 10:16 AM, AntiRL (< 20) wrote:

I remember when this guy (Bill Gross) said what was going on with the housing market won't affect the economy too much.  I think I saw it on an article a few years ago in smartmoney where they ask 4-5 experts on their prediction for the economy in the upcoming year.  Supposedly he tries to keep a low profile but lately I've been seeing him in articles everywhere pretty much saying what we need to do to get the economy back on track.  I didn't know he was doing it in his self interest though but I guess they all do.

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#4) On September 06, 2008 at 1:07 PM, MKArch (99.73) wrote:

Seth,

 

Since this story has a certain moral bent (pun intended) to it, I thought I'd play a little devils advocate and throw the argument for maybe not wiping common shareholders out completely in the bail out.

Yes the GSE's veered from the straight and narrow and delved into some of the riskier stuff but didn't we the people sort of encourage them to help clear this stuff out as well?  I don't follow them closely but from what I understand it's not just the riskier stuff that's causing a problem it's also the stuff that was supposed to be safe that's seeing problems. I remember as the stuff was hitting the fan last year calls to the GSE's to fulfill their mandate, didn't we the people sort of ask them to put their shareholders at risk to benefit us? Everybody knew in 05-07 we were in a bubble and home prices were likely to correct at some point but it was the GSE' s mandate to buy all those mortgages. Did anybody realistically think they could have refused to buy mortgages that they had to know were probably going to go down in value at some point?

I've seen some arguments that the GSE's were at least in part set up to take this fall so I thought I'd play a little devils advocate here. Also I saw a Cramer article claiming the end result of all of this will be the government reworking mortgages at any cost to keep from foreclosing to sure up home prices. That sickens me a lot worse than the thought that Frannie and Freddy shareholders might not get completely wiped out.

Maybe it's just me but I'm pretty sure the financial sector learned their lesson about taking risks I don't buy the argument that a little government help here and there is going to encourage them to make the same mistakes again but I don't know if the American people learned any lessons. Bailing out a bunch of wannabe flippers who got stuck holding the bag when the bubble burst by blaming their plight on the evil lenders and doing everything in the governments power to make sure they don't pay a price for their greed worries me a lot more than the thought that Fannie and Freddy shareholders might not get totally wiped out.

 Anyway as I mentioned earlier I don't follow the GSE's closely which would make me not an expert on them but I thought I'd stir the pot up a little bit. Feel free to tell me I have it all wrong.

 

Mike

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#5) On September 06, 2008 at 2:50 PM, TMFBent (99.82) wrote:

Hey Mike,

The problem is that if the government doesn't let equity take the hit it deserves (and let's face it, that's losing everything here) the incentive isn't to avoid risk, it's to take on so much risk and to become so entangled that the government has to bail you out and bail out your bagholders. A little bit of trouble won't do. You have to get enormously entangled. Thus, the incentive here looks like it is (still) to take on as many, terrible risks as possible.

And yeah, Fannie and Freddie were Congresses way of getting socialist policies in mortgages (free money for as many people as possible) without having to do it honestly -- via the legislative process 100%.

The degree of revulsion we will have for Easy Ben and Hankie will have to depend on just how easy they go on equity, as well as the bond-trading bagholders who bought FRE and FNM paper as if it had no risk.

Hankie and Bennie inherited a complete mess, but they might as well remake the entire system for the better (let risk become real risk, rather than socialism for the rich, as they have been promoting) since they have unpleasant decisions to make.

The underlying trouble to me seems to be that neither one of them has the guts to do what's right, but unpopular. The history of credit bubbles proves that there's no easy way out. Bernanke is supposed to be a historian, yet he continues to try and replace a credit bubble with another credit bubble.

There is going to need to be some pain here before we find a cure. Anything that tries to mitigate the losses by hiding them or shoving them off to the future is bound to fail.

Remember, these are the same two knuckleheads who thought they could solve the bad SIV problems by creating that BS "superSIV" so the banks could sell themselves their own bad assets in order to get them off their balance sheets and have fak-ified capital levels.

Sj

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#6) On September 06, 2008 at 5:11 PM, MKArch (99.73) wrote:

Hi Seth,

 I'm a free markets capitalist kind of guy myself but realistically there is no such thing as pure let it be capitalism the government is always going to be involved to some degree so I don't have a big problem with Uncle Sam trying to soften the blow a little bit where they can.

 

I look at the current situation as two sides to the mess, lenders and borrowers.  I can't think of anybody on the lender side of the equation that can weigh the upside of the bubble years against the problems they have now and say you know what it was worth it and I'd do it again. In my humble opinion the lessons of making stupid loans has been hammered home on the lender side of the equation the main reason to not help if the government can there is vindictiveness. I don't think they need any more pain to get the point. Some regulations prohibiting loans to people without documentation or the abiltity to pay the loan and the memory of what happened the last time they did should be enough.

 

I look at the borrower side of the equation and see the government doing everything in it's power to shield the culpable from taking a hit. The evil lenders forced you to lie about your income to get a loan you couldn't afford gambling that you'd be able to flip the property before before the resets knowing the worst that will happen is you will have to wait a few years before anyone will be able to lend to you again.

 But this is America it's not good enough that deadbeat borrowers are going to make out like bandits we must have some one to pin this mess on. There must be a scape goat so that we don't have to feel like we had anything to do with this. So even if there are ways the government could help the GSE's out that would punish but maybe not wipe out shareholders we can't do it because we need fall guys.

 

Sorry for the rant Seth but I just think wiping the GSE shareholders out if it's not really necessary might teach the wrong lesson. It was all their fault. Maybe if borrowers could not just mail their keys in and walk away I could see letting the GSE's fend for themselves but I'm not sure any great lesson will be learned from making the GSE's the fall guys by wiping out their shareholders. In fact I worry that the wrong lesson will be learned.

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#7) On September 06, 2008 at 5:11 PM, MKArch (99.73) wrote:

Hi Seth,

 I'm a free markets capitalist kind of guy myself but realistically there is no such thing as pure let it be capitalism the government is always going to be involved to some degree so I don't have a big problem with Uncle Sam trying to soften the blow a little bit where they can.

 

I look at the current situation as two sides to the mess, lenders and borrowers.  I can't think of anybody on the lender side of the equation that can weigh the upside of the bubble years against the problems they have now and say you know what it was worth it and I'd do it again. In my humble opinion the lessons of making stupid loans has been hammered home on the lender side of the equation the main reason to not help if the government can there is vindictiveness. I don't think they need any more pain to get the point. Some regulations prohibiting loans to people without documentation or the abiltity to pay the loan and the memory of what happened the last time they did should be enough.

 

I look at the borrower side of the equation and see the government doing everything in it's power to shield the culpable from taking a hit. The evil lenders forced you to lie about your income to get a loan you couldn't afford gambling that you'd be able to flip the property before before the resets knowing the worst that will happen is you will have to wait a few years before anyone will be able to lend to you again.

 But this is America it's not good enough that deadbeat borrowers are going to make out like bandits we must have some one to pin this mess on. There must be a scape goat so that we don't have to feel like we had anything to do with this. So even if there are ways the government could help the GSE's out that would punish but maybe not wipe out shareholders we can't do it because we need fall guys.

 

Sorry for the rant Seth but I just think wiping the GSE shareholders out if it's not really necessary might teach the wrong lesson. It was all their fault. Maybe if borrowers could not just mail their keys in and walk away I could see letting the GSE's fend for themselves but I'm not sure any great lesson will be learned from making the GSE's the fall guys by wiping out their shareholders. In fact I worry that the wrong lesson will be learned.

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#8) On September 07, 2008 at 7:21 AM, cactusjake007 (< 20) wrote:

I own alot of shares of FRE and hoping this dilution of my shares doesnt kill my portfolio.

 I bought in at the low low price of $2.87 hoping the government would just bail them out and now take them over.... ive been making a killing for the last two weeks and was looking forward to my fat dividend payout..... well see how bad this hits FRE and perhaps they will wipe out the dividends.

Already the share price is down $1 a share (20%)..... im teetering if I should let it ride on monday or sell sell sell at the opening of the market.

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#9) On September 08, 2008 at 2:18 PM, maverickpl (74.23) wrote:

Not sure if it is still this way, but early on CAPS used real days as opposed to trading days.  If you time your speculative picks to coincide with US holidays then you're theoretically exposing yourself to less risk (4 trading days vs 5 trading days).  Obviously this doesn't help you now, but it's something to keep in mind come Thanksgiving in November.

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#10) On September 08, 2008 at 8:33 PM, maybe4less (99.27) wrote:

Seth,

Any chance the 7 day holding period for CAPS will every be eliminated?

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