Okay, here’s an overview of my take on the Fannie Freddie issue:
Do you think the Stock Markets like the Fannie Freddie Bailout?
Uh, that would be a classic example of an initial elation followed by the let down that comes from looking at the details. I’m not going to get into the details of exactly what was offered, but to focus more on the big picture instead.
So here’s the big picture (in my opinion):
1. The government has acknowledged officially that Fannie and Freddie are financially in trouble.
2. They have also indicated that they are not going to let Fannie and Freddie fail.
3. The Treasury got out their bandaids and have attempted to put a bandaid on the situation.
4. As part of their bandaid solution, they are essentially obligating the entire government and therefore the tax payers, to pay for Fannie and Freddie’s losses.
The markets initially said, “Yeah! The government isn’t going to let Fannie and Freddie fail! Our worries over!”
Then the markets looked at the details and said, “Uh, wait a minute, I’m not sure this is really going to work….”
The government is going to be able to prop up “publicly traded companies” by buying stock in them? Under what rules?
What really happened at IndyMac bank? Are there really 10,000 people who are going to lose money in a bank? What’s that going to do to the rest of the banks?
If we’re going to bail out Fannie and Freddie, what impact is that going to have on the Fed’s financial position? What’s that going to do the overall borrowing costs for the government? How much of a hit are us taxpayers going to take for all of this? These are all of the questions that are circulating out there.
Are there any solid answers? There’s probably only one solid answer. Ben Bernanke has done a huge amount of studying of the Great Depression and he firmly believes that the 1927 real estate crash caused the depression. You can be certain that he’s going to do everything in his power to make sure that doesn’t happen again.
Will there be pain? Yep, will there be adjustments to the financial sector? Yep. Will we get through it? Yep.
It’s not over yet. Call or e-mail me if you want to talk about it.
Tom Vanderwell (616) 292-7559
Bob in San Diego says:
July 14, 2008 — 11:22 am
Tom Vanderwell says:
Bob,
Well said. Letting the chips fall where they may could end up with a lot of people standing in a field of buffalo chips.
Tom
July 14, 2008 — 11:48 am
David Shafer says:
The real issue is the reserve requirements being so low. They should have upped that a decade ago. With the bonds unabled to be valued correctly, then it is just an accountants guess as to potential losses and reserve requirements. Bernanke is just making sure if things go bad they have access to capital to increase those reserves. Unless everyone is lying about the portfolio, a possibility, then the bonds will continue to perform as they have in the past, the crisis will subside. If the portfolio is worse than being reported then we are in for a tough ride.
July 14, 2008 — 12:09 pm
Bob says:
I think Bernanke already thinks things are going bad.
July 14, 2008 — 1:46 pm
Sean Purcell says:
Tom,
I’m going to piggy back off of what David is saying. Assuming that the portfolio is being represented relatively accurately, Fannie & Freddie should ride out the current real estate mess alright. I think the Fed’s move was designed more to reassure than to actually save anything. Which point is the one place I must disagree with you. The Fed did not acknowledged officially that Fannie and Freddie are financially in trouble but actually quite the opposite. They said that both GSEs were financed above the required amounts and weathering the storm. As you well know, perception is much more important than reality when it comes to financial markets. I don’t think Fannie or Freddie will need to be bailed out (irresponsible letters from the likes of Sen. Schumer not withstanding). The Fed is lifting perception not preparing to bail water.
July 14, 2008 — 1:46 pm
reno homes says:
Tom,
This is a very interesting, I haven’t heard this one before:
‘Ben Bernanke has done a huge amount of studying of the Great Depression and he firmly believes that the 1927 real estate crash caused the depression. You can be certain that he’s going to do everything in his power to make sure that doesn’t happen again.’
The 1927 Crash causing the depression… that’s worth a second look.
Thanks for the take on the subject. The questions you posed here have been wandering in my head ever since last week’s beating of Fannie and Freddie.
Being in the real estate industry and being a tax payer is breaking me into two pieces concerning this issue!
July 14, 2008 — 3:03 pm
Bob in San Diego says:
Bernanke made the following speech while a governor of the Fed in 2004, which explains his position on the subject of the Great Depression:
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
July 14, 2008 — 3:35 pm
Mike Farmer says:
More than likely it was the Fed that contributed most to the Great Depression.
July 14, 2008 — 10:39 pm
Tom Vanderwell says:
“The Fed did not acknowledged officially that Fannie and Freddie are financially in trouble but actually quite the opposite. They said that both GSEs were financed above the required amounts and weathering the storm.”
Sean,
I think in one way, you are correct, the fed did not OFFICIALLY acknowledge that they are in financial trouble. They SAID that things are fine. BUT if things are fine, why are they taking these steps to essentially set things in place to nationalize Fannie and Freddie?
If Paulson had said (with apologies to BawldGuy), “Oh my goodness, we’re all going to die! Fannie and Freddie are going down! Abandon ship!” What do you think would have happened? People in his situation (along with Bernanke) can’t tell the truth about institutions that are struggling because it would kill them.
Does that make sense?
Tom
July 15, 2008 — 5:14 am
David Shafer says:
The New York Times had a good article this morning. Apparently, according to the times, the main concern was that the auction of Freddie Mac debt securities on Monday would go badly, forcing thousands of institutions (all banks, pension funds, money market funds, mutual funds, etc) to devalue their holdings, causing reserve crisis and contagion throughout the financial markets. Can you imagine if all the banks had to come up with more reserves right now and money market funds went below par (yes it can happen). So in fact this was as much about perception as any reality of how these companies are actually doing.
July 15, 2008 — 5:41 am
David Shafer says:
Mike,
Yes, Friedman and Bernanke think this. But it was their failure to act to protect the “small banks” that they critisized.
July 15, 2008 — 5:56 am
Tom Vanderwell says:
David,
Interesting. Thanks for the insights. I sincerely hope that I’m wrong and that Fannie and Freddie are indeed in better shape that it appears.
Appreciate your contributions to the discussion!
Tom
July 15, 2008 — 6:20 am
Sean Purcell says:
I sincerely hope that I’m wrong and that Fannie and Freddie are indeed in better shape than it appears
Your lips to God’s ears.
The really interesting question for me is this: what will they do going forward? More banks will surely fail as the weight of their portfolios reveals the atrophy in their underwriting muscles. Fannie & Freddie will become the only game in town. Will they tighten guidelines in response to those failures and the backlash of superficial analysis? Or will they feel the political pressure from above to loosen standards and help get the real estate market on its feet? Or will they keep their own counsel and possibly change little? Going to be an interesting 3rd and 4th quarter.
July 15, 2008 — 9:05 am
Tom Vanderwell says:
Going to be an interesting 3rd and 4th quarter.
I think that would be an understatement…..
Tom
July 15, 2008 — 9:09 am
Melina Tomson says:
Tom, thanks for the post and link. I was having a discussion on another forum with someone about this issue.
Once you are in the cycle it is tough to step out. Credit tightens, people can’t buy things, businesses go under, people lose jobs so they can’t buy things. Government loses tax base with loss of business taxes and income/property taxes, on and on…
What the best solution is? Who knows, but I don’t see how it can’t get continue to get uglier.
If Fannie and Freddie aren’t going to be able to weather the storm, I have no idea where that money will come from. You can’t tax people who aren’t making any money, and are eating into their budgets with high food and gas prices.
Did I say that I agree that it’s going to get uglier? My husband and I also agree that we are glad Bernake has studied the great depression in depth.
July 15, 2008 — 12:56 pm
Jim says:
“it’s going to get uglier?”
I found myself, as I watched the late innings of the MLB All Star Game, picking on the unfortunate NL 2nd baseman whose last name is Uggla. “That was an “Uggla” play!” I know he was better than it appeared, else he would not have been at the game or in it. It seems that our politicians, lenders and other leaders have made some “Uggla” plays also! We are paying the price.
July 16, 2008 — 2:30 pm