Friday, September 05, 2008

Government set to seize Fannie and Freddie, wiping out shareholders; taxpayers will bail them out

The Bush administration and Federal Reserve reportedly have told Fannie Mae and Freddie Mac that the government has plans to remove the current boards of directors and eliminate most shareholder value. The two pseudo-companies would be placed into federal conservatorship.

The breaking story is in The New York Times, by Stephen Labaton and Andrew Ross Sorkin, and is titled “U.S. Rescue Seen at Hand for 2 Mortgage Giants”, link here. The story should appear on the front page of the Times and other major papers Saturday Sept. 6.

Under this plan, taxpayers would make up the losses on mortgages underwritten by the two companies.

There is talk that these moves were politically motivated, because the administration did not want to see a spectacular weekend bailout closer to the general election in November.

The Associated Press has a similar story late this evening by Alan Zibel, link here. It also appears on Yahoo! finance. After hours trading on these two stocks this evening had melted down already.

CNN says that Freddie and Fannie back up 50% of the nation's mortgages. They don't originate loans; they buy mortgages and package them for investors, while "backing them up". A Wall Street pro said late Friday afternoon "something wicked this way comes." It seems as thought they are much more important than FHA and VA in insuring loans in practice. The government believes that this action is necessary to get credit markets working again.

I have a friend who worked in information technology for Fannie Mae in the early 1990s, and found it to be a sweatshop.

Also, in Nevada, state regulators have today taken over "Silver State Bank" which will become "Nevada State Bank" (CNN).

Update: Sunday Sept. 7, 2008

David Ellis, CNN finance writer, reports "U.S. seizes Fannie and Freddie
Treasury chief Paulson unveils historic government takeover of twin mortgage buyers. Top executives are out," link here.

This is a potential $200 billion liability. This is much larger than Bear Stearns. Fannie and Freddie are "GSE's" or "Government Sponsored Enterprises." The companies package mortgages and issue bonds. But China and Russia have been dumping the bonds.

Common stock shareholders are not wiped out, but they're last in line to collect. Mutual funds may be exposed, and 401K holders could be affected indirectly. However, in many cases, individuals will know if their funds had major exposures to Fannie and Freddie because their values have already dropped drastically during the past year. Major investment banks and some regional banks can be affected, and it is possible for more regional banks to fail.

Political activities for Fannie and Freddie will stop immediately to avoid conflict of interest, and charitable activities (like Freddie and last year's adoption expo) will be reviewed.

CNN Money also has a detailed analysis by Colin Barr: "Fannie, Freddie: The biggest losers: Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday", link here. The article gives details on major shareholders, especially of the particularly vulnerable preferred stocks. I notice that my IRA has PIMCO which has lots of FNMA bonds, according to what I can find on Yahoo! for free on a weekend. The bonds (not the stocks) would seem to be OK according to the way I understand this Treasury action.

I do welcome comments from those who understand what is happening.

Who's next? General Motors? Who is too big to fail?

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