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FED to rescue Fannie Mae?


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Mortgage finance company Fannie Mae sold $US7 billion ($A8.76 billion) in two-year notes at prices that showed investors' fears about the company have subsided since the government took over the company last weekend.

 

Fannie Mae said it was the largest-ever sale of such debt, indicating strong interest from investors now that the company is firmly in government hands.

 

The sale on Wednesday may put further downward pressure on mortgage rates, which have fallen to about 5.8 per cent on average for a 30-year, fixed-rate loan from last week's 6.25 per cent, according to Bankrate.com.

 

Fannie Mae's two-year debt was auctioned Wednesday at a yield of nearly 2.9 per cent, or almost 0.7 of a percentage point above comparable Treasury notes.

 

When companies issue debt, prices are often compared with those of similar-length Treasury bonds. Treasury yields are a benchmark because they are considered the safest investments since they are backed by the government. The wider the spread between corporate debt and treasury yields, the riskier investors deem the corporate debt.

 

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QUOTE (flower @ Tuesday 19/08/08 07:05pm)

Hi flower,

 

I made a post on another forum the other day about what I thought was happening here, so rather than retype it all I've posted it here. Sorry if it doesn't make 100% sense, it was posted in regards to a question on Fannie Mae and Freddie Mac.

 

...six months ago I would have said without blinking that the bailout would be highly inflationary, that it would be adding billions and billions to the money supply and that you should consider running to hard assets such as gold, etc. Now I'm not so sure (even with the response this post will take).

 

Basically the Fannie Freddie announcement only resolves the ST uncertainty that had been building in the market over the past couple weeks as to what was going to happen to them - nothing else. Thats about as positive as I could see. As a negative it is highly likely to continue to be a constant source of negative news for the markets as further and further losses are announced, and more and more money is paid across from the US Treasury to these entities. Remember the initial estimates for the Sub prime crisis last year? No more than 100-200bn?!?! I hold the current estimates for the costs of saving these two entities in similar regard as those intial estimates.

 

Now previously as I was saying I was pretty sure that such blatent injections of $ into the system would be highly inflationary - now I'm not so sure. I've been trying to grasp why the AUD has plunged so precariously from where it was and line it up with what is going on in the market.

 

Could it be a flight to safety? But I figure with the state of the US economy it would be akin to rowing back to a sinking cruise ship simply because the waters are too choppy for a comfortable ride in the life boats.

 

Could it be an orchastrated action by the central banks? The EU has long been squealing about the high USD and the impact, so this could be a credible answer. Although we never tend to find out about such actions until after they have occured I don't discount it - however I suspect they would no longer be involved given the dramatic and sudden collapse/rise we've seen.

 

Could it be a fall of in demand for commodity currencies? Possible, and no doubt it partially explains the movement. China's and India's growth is still strong, but definately showing signs of weakening, so no doubt from a forward looking perspective this would be neg for commodity currencies.

 

But the other news that is out in the market and caught my eye recently was the tremendous decline in the M3 money supply growth rates. In the US it has plunged from near 16/18% to close to zero, even it goes negative than it could even be worse. Falling money supply is often a precursour to much slower growth and price increases. It happens when people start to sell assets and repay their loans - it is also something of a leading indicator as to the general direction that prices could move a year or so out.

 

My pet theory for why the USD has risen so hard and so fast isn't because the world has suddenly realised that the US economy is going gangbusters and all is going to be okay in 6mths. It is because of the huge amount of loan liquidation that is going on at the moment. At a Macro level, between huge Co's, Banks and nations, most loans are priced in USD. When people start wanting to repay their loans there is going to be a large demand for USDs to repay them. This fits with the rapid and sudden appreciation of the USD and the overal pattern of deleveraging that is occuring.

 

( http://www.telegraph.co.uk/money/main.jhtm...cnusecon119.xml )

 

(I am sure that a decrease in demand for commodity currencies could be part of the factor, but when you compare the size of the global debt markets to the size of the global commodity markets, the commodity markets are tiny in comparison. Thus even a partial liquidation of debt could have a far bigger impact on currencies than a huge liquidation of commodity positions - it would also explain why the USD is rising across all currencies).

 

The end play is theoretically the trend will continue until all assets are sold and loans repaid, or more likely until the overal level of global leverage has returned to the median/average over the past 20 years, with either a slight overshoot added in or something like excluding the past 5 years of leverage from the historical average.

 

Sorry to take this thread a little away from your original question, but I have had this on my mind for a while now (I don't know if I read it somewhere and I am merely subconciously regurgitating it, so apologies if I have blatently plagerised it from some other website or author).

 

Back to your question on Fannie and Freddie - I believe the positive reaction to the announcement over the weekend is going to be short term, most likely we've already experienced most of the benefit. LT it is probably going to be a continued source of bad news. It is going to undoubtably result in more money entering the system, but for reasons I've noted above that may not be a bad thing.

 

Oh and the kicker under my pet theory is that we should all probably short the market, or at least stay out of it until the USD stops appreciating. This would indicate the deleveraging has ceased.

 

The logical next question to ask is what would be the state of play then? You would have a fundamentally very overvalued currency, in an economy that is still plauged by fundamental problems, etc, etc, with real assets everywhere else depressed as a result of the sell off.

 

There would be little leverage left in the system so little reason to be left holding USD (cash), after a short pause you could be just as likely to see as complete snap back and collapse in the USD as you are seeing an appreciation in it at the moment. During that short pause between the USD's accent and it's subsequent decent would be the time to get back into the very depressed sold off real assets, shares, gold, etc. (I think something sort of similar happened in the 1970s, credit crisis in 1974 destroyed a number of UK banks - look what happened to the sharemarket, gold price during that period and subsequently).

 

The key is to watch the USD. Just a theory that is amusing me for the moment... until the next theory comes along to debunk it or capture my attention.

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QUOTE (cooma @ Thursday 11/09/08 05:19pm)

Hi Cooma,

 

Chris's article was an interesting read. Certainly reinforces my opinion that the credit crisis is probably intensifying as opposed to abating. I saw the reference and the graphs referring to "St. Louis adjusted monetary base has increased by 7.15%". This doesn't necessarily invalidate what I was saying about broad money supply.

 

From what I can make out the St Louis adjusted monetary base that he is referring to is the narrow definition of money or M1

 

QUOTE
The adjusted monetary base equals the sum of the monetary base and a reserve adjustment magnitude (RAM) that maps changes in reserve requirements into equivalent

 

http://ideas.repec.org/p/fip/fedlwp/1996-004.html

 

with the pure monetary base being defined thus:

 

QUOTE
The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.

 

http://www.answers.com/topic/monetary-base

 

(Please let me know if I have got this defintion wrong as I am only trying to understand it myself !! )

 

Essentially M1 (or the St Louis monetary base) is the narrowest definition of money. Broad money base, or M3, includes lots of additional concepts of money

 

QUOTE
M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money and is used by economists to estimate the entire supply of money within an economy.

 

http://en.wikipedia.org/wiki/Money_supply

 

A large scale liquidation of broader M3 is still possible without necessarily resulting in a reduction in M1 - on the contrary, it could actually result in an increase in M1 as less liquid forms of money are liquidated and turned into cash. Resulting in the 7% increase that has been reported.

 

Anyhow, I have been reading about the reduction in M3, or broad money from a number of sources. I've reposted the news article below that I was referring to:

 

http://www.telegraph.co.uk/money/main.jhtm...cnusecon119.xml

 

If you can find other articles contradicting this I would be keen to find out, as I would happily discard this theory. As I said, it was only a theory and one where I was trying to understand interplay between the credit crisis and the appreciation in the USD.

 

Thanks again for Chris's article, it was an interesting read.

 

Cheers

 

DS

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In reply to: cooma on Thursday 11/09/08 02:19pm

Pity the article didnt encompass why the USD index has gone from 71 to 79 in the last few weeks

 

I expect Chris and his dad would be hoping the fed has to inflate and gold/oil will go back up again

 

QUOTE
To fund the bailouts and economic stimulus packages the Treasury is going to have to issue more debt. Sources of buyers will either be domestic or foreign investors and the Fed through debt monetization.

 

 

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In reply to: Brierley on Thursday 11/09/08 07:14pm

Read Doug Caseys article of Sept 10 ," The biggest bailout of all times " on the the same site where he calls it short covering which will not last. I have read elsewhere it should top at 80 [ just checked it has just gone through 80 ] and then head south into the 50's when the currency crisis really hits.

 

 

 

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  • 5 weeks later...

This is an interesting article from the NY Times in 1999 describing the new tact Fannie was taking and the potential risks. I'm sick of all these talking heads on TV saying "How could this happen? We never knew"

 

QUOTE
FANNIE MAE EASES CREDIT TO AID MORTGAGE LENDING

By STEVEN A. HOLMES 


Published in the New York Times on September 30, 1999.

Printer-Friendly Version


In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

  Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.


''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''


Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

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QUOTE (Danville @ Saturday 11/10/08 08:51pm)

Danville: If an ordinary retiree worked out ten years ago what was going to happen, it sais something when the experts claim they have been taken by surprise. Even an idiot knows that banking doesn't function in a negative effective interest rate regime.

 

However I'm somewhat heartened to see sections of the better informed press at last laying the blame where it sqarely lies. This a section from a Bloomberg report.

 

--------------------------------------------------------------------------------------------------------

But let's turn to happier subjects. Finally, Alan Greenspan is getting beaten up in the press.

 

More than any other man - living or dead - Alan Greenspan bears the blame for the intensity of the current financial crisis. Booms and busts are inevitable, but the former Fed chief made this one much worse than it should have been. This he accomplished by acts of omission as well as acts of commission.

 

As to the commission, he almost single-handedly caused the great real estate bubble by lending money far below the inflation rate. The housing market is extremely sensitive to changes in interest rates; Greenspan's "emergency" low rates hit it like a shot of whiskey on an empty stomach. Within months, bulldozers were scraping new roadsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦and thousands of nail guns made the suburbs sound like a battle zone.

 

But it was the omission that the New York Times thought was important:

 

"Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient," said "the maestro" in 2004.

 

Greenspan was talking about derivatives - the complex financial instruments that are now blowing up in accounts all over the world.

 

The NYT:

 

"George Soros, the prominent financier, avoids using the financial contracts known as derivatives 'because we don't really understand how they work.' Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential 'hydrogen bombs.'

 

And Warren E. Buffett presciently observed five years ago that derivatives were 'financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.'

 

"One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives - exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. 'What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so,' Mr. Greenspan told the Senate Banking Committee in 2003. 'We think it would be a mistake' to more deeply regulate the contracts, he added.

 

"The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

 

"If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted."

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In reply to: flower on Saturday 11/10/08 11:52pm

Adding to the problem was in April 2004 , Paulson and the other heads of the big 5 investment banks persuaded the SEC to increase their levereage limits from 10/1 to 40/1.!!!! As we know recently 2 have changed status and must return to their original 10/1[ over time I think, 9 months ]

 

Have a listen to Donald Coxe on this weekends FSN 3rd hour. EXCELLENT listening.

 

 

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In reply to: cooma on Sunday 12/10/08 06:52am

Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets

 

By Dawn Kopecki

 

Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming 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.

-----------------------------------------------------------------------------------------------------

 

Whats another USD480 billion a year when youre already bust!!!!!!

 

 

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