As sound as the American Dollar

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Fannie bailout? Hold on a second...

The Fannie-Freddie bailout issue
August 20, 2008: The stocks are swooning, but the feds are understandably in no hurry to own the whole U.S. mortgage business.

The frenzied trading in shares of Fannie Mae and Freddie Mac seems to assume the government will soon ride to the rescue of the mortgage giants. But the cavalry is in no rush to get to the scene - because for the moment, federal intervention is unnecessary, not to mention tricky and politically unpalatable. "The government doesn't want to own these companies," FBR Capital Markets analyst Paul Miller said Wednesday on Bloomberg television.

Fannie and Freddie shares tumbled for the fourth straight day Wednesday, a day after Freddie paid its biggest premium in a decade to sell $3 billion of five-year reference notes. The companies' shares hit their lowest levels in nearly 20 years, dropping below the levels they bottomed out at last month in the panic that led Treasury Secretary Henry Paulson to propose a government-funded backstop that was later passed into law by Congress.

The selloff in the companies' shares and their rising borrowing costs have led to some talk that Paulson, just a month after proposing that the Treasury be authorized to invest in the companies, will have no choice but to recapitalize the companies. Given the terms of the government's mid-March rescue of Bear Stearns - shareholders ended up getting $10 a share for a stock that just a year earlier traded for 17 times as much - the widespread assumption is that any bailout for Fannie and Freddie would effectively wipe out common shareholders, and perhaps preferred shareholders as well.

More No sign of Fannie-Freddie bailout yet - Aug. 20, 2008

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Economy still strugglin' along...

Bernanke: Financial storm not yet over
August 22, 2008: Fed chief suggests problems in credit markets not yet over and are a threat to economy; encouraged by lower oil prices.

Federal Reserve Chairman Ben Bernanke said Friday that the problems in the nation's financial markets persist and still threaten the economy. Bernanke said that the financial woes, coupled with record oil prices and the weakening economy, had created "one of the most challenging economic and policy environments in memory."

In prepared remarks at a conference in Jackson Hole, Wyo., Bernanke also said he is encouraged by the recent oil price decline, which may signal that inflationary pressures are on the wane. "Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided," Bernanke said. "Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," he added.

Bernanke's comments seem to signal that the central bank will keep its key interest rate at 2%, rather than raise it an attempt to keep prices in check. "The commentary tells me that rates are on hold until they see some blue skies through this financial storm," said John Silvia, chief economist for Wachovia. The Fed cut interest rates seven times from September through April, but left them unchanged at its last two meetings.

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Oil: Biggest drop in 17 years
August 22, 2008: Crude prices fall by largest dollar amount since 1991 as investors fear the decline in U.S. demand could spread overseas as Europe's economies slow.

Oil prices plummeted Friday, erasing the previous session's spike, as the dollar strengthened and investors worried that a decline in demand will spread outside the United States. U.S. crude for October delivery dropped $6.59 to settle at $114.59 a barrel on the New York Mercantile Exchange.

The drop in oil was the largest single-day slide in dollar terms since Jan. 17, 1991, when oil fell by $10.56. On that day, President George H.W. Bush withdrew oil from the Strategic Petroleum Reserve ahead of the first Gulf War. But in 1991, oil was trading at just $32 a barrel, so the more than $10 slide in dollar terms represented a record 33% drop. Oil fell 5.4% Tuesday, which does not even crack the top 50 price declines in percentage terms.

Oil's second-largest slide on Friday comes a day after the second-largest gain on record. Crude futures soared $5.62 a barrel Thursday to rise above $121 a barrel. "We're trending towards a lot of oil price volatility on the direction of the dollar," said Peter Beutel, an oil analyst with Cameron Hanover. "There are huge amounts of money involved, and the large moves have been based primarily on dollar strength."

Dollar rebounds

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Housing rescue was too little, too late...

Paulson could be forced to act on Freddie and Fannie
Sunday 24th August, 2008 - The US market has expressed concern that Henry Paulson might be forced to further support government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac, whose shares hit new lows last week.

With the slow breakdown of the Fannie and Freddie companies, Paulson may soon have to act in the same way he did with Bear Stearns, with shareholders fearing a government bailout could render their existing shares worthless.

Shares in the two companies are down more than 90% over the past year and it has been suggested the only way the companies will raise enough money to soothe the markets is to rely on the government to see them through the housing bust. Fannie and Freddie are shareholder-owned, though they have been able to borrow at below-market rates thanks to an implicit government backing for their debt.

Paulson said last month he wants to keep the companies, which buy and guarantee around half of all U.S. home mortgages, in their current form to help ease the pain of the housing bust. But the companies' low-cost funding advantage has eroded, pushing mortgage rates up and adding to the pressure on house prices.

Paulson could be forced to act on Freddie and Fannie

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Trouble for regional banks: analyst
August 25, 2008: Sovereign, Westamerica and Gateway, large investors in Fannie Mae and Freddie Mac, could be hurt if government rescues mortgage giants.

Some regional banks with substantial holdings in Fannie Mae and Freddie Mac preferred stock could suffer from the uncertainty over the mortgage finance giants' fate and the possibility that the government will rescue them, an analyst said Monday.

A government rescue of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) -- whose share prices have plunged in recent weeks as they struggle with billions of dollars in losses from bad mortgages -- could be costly for scores of investment, banking and insurance companies that hold billions in their preferred shares.

Preferred stock holdings

Regional banks with the largest exposure to Fannie and Freddie preferred stock as a proportion of their capital include Sovereign Bancorp Inc., (SOV, Fortune 500) Westamerica Bancorp (WABC) and Gateway Financial Holdings Inc (GBTS)., Samuel Caldwell, analyst at Keefe, Bruyette & Woods wrote in a research note. Preferred shares usually pay a fixed dividend and have priority over common stock when it comes to dividends and bankruptcy liquidation.

While slightly riskier than bonds, which have the highest priority in times of trouble, companies often invest in preferred shares for certain tax advantages. Still, on Wall Street, Fannie and Freddie's existing preferred shares are trading like junk bonds, yielding around 17% to 19% instead of around their 6% dividend levels. The higher yield is an inducement to investors to accept the higher level of risk that the dividends won't be paid.

Source

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Review the old 235 Home Ownership program of the 60's and 70's and the resulting savings and loan debacle that resulted.

The subprime crisis is just a repeat of the failure of the 235 program, allowing those who wouldn't normally qualify for a home mortgage to qualify by "creative financing".

Problem bank list keeps growing
August 26, 2008: FDIC says list of troubled banks in 2nd quarter grows to 117 with $78 billion in assets - up from 90 banks, $26 billion in assets in 1st quarter.

The number of troubled banks on the government's watch list grew dramatically last quarter. The Federal Deposit Insurance Corp. reported Tuesday that the number of firms on its so-called problem bank list grew to 117 during the second quarter - its highest level since the middle of 2003. There were 90 banks on the problem list in the first quarter.

FDIC Chairman Sheila Bair expressed little surprise at the increase and warned that the number would grow. "More banks will come on the list as credit problems worsen and assets of problem institutions will continue to rise," said Bair in a press conference.

The number of troubled institutions has moved steadily higher this year - nearly doubling from 61 at the same time a year ago - as banks across the country struggle to cope with the fallout in the housing market and rising loan losses. Problem banks typically face difficulties with their finances, or are suffering through operations or management issues that pose a threat to their existence.

More Problem bank list keeps growing - Aug. 26, 2008

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New home sales rise, but grim news lurks
August 26, 2008: Sales pace of new homes in July grew 2.4%, due to a large downward revision in sales from the previous month. Unadjusted monthly sales fall to 13-year low.

The government offered more discouraging news about the housing sector on Tuesday, reporting that new home sales rose slightly in July only after revising the previous month's number sharply lower. Sales for July came in at a seasonally adjusted annual rate of 515,000, up 2.4% from 503,000 in the previous month, the Census Bureau reported. Last month, Census had put the June figure at 530,000. The change marks the fourth of the past five reports that Census has slashed the previous month's number. The trend worries economists who say a hoped-for stabilization of the housing market remains elusive.

"It's concerning because the pattern of revisions from the Census Bureau has been systematically downward instead of random as you'd expect," said David Seiders, chief economist for the National Association of Home Builders. "Chances are we'll see some downward revision when they put out the August numbers." The July reading on the battered housing market was below the consensus forecast of 525,000, according to economists surveyed by Briefing.com.

"The uptick is still good news, but we'll see if it holds," said Seiders. "The market could really use a boost." Even though sales for the month unexpectedly rose month to month, sales fell 35.3% from July 2007, when new home sales were on an annual pace of 796,000. The rise in new home sales is also deceptive because of seasonal adjustments. On a non-seasonally adjusted basis, the report showed only 43,000 new homes were sold in July, which marks the lowest level for that measure since December 1994.

Price and supply woes continue

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Management overhaul at Fannie Mae...

Management shake-up at Fannie Mae
Thursday, 28 August 2008 - A rise in foreclosures has added to uncertainty for US lenders

US mortgage giant Fannie Mae has announced a shake-up of top executives, in an attempt to restore confidence after a series of losses. Three executives have left, but the board said it remained committed to its chief executive Daniel Mudd. Fannie Mae and Freddie Mac are a key part of the US market, guaranteeing half the mortgages offered.

Stephen Swad, chief financial officer since last year, will be replaced by controller David Hisey. Peter Niculescu, head of capital markets, will replace Robert Levin as chief business officer. Enrico Dallavecchia, the company's chief risk officer, will also leave.

The changes "signal they are trying to correct some problems," said David Dreman, chair of Dreman Value Management, a Fannie Mae and Freddie Mac shareholder. "When you change risk management people, it has to be viewed as recognising problems, so it is mildly positive."

Feeling the strain

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Another bank goes belly-up...

FDIC announces 10th bank failure of 2008
August 29, 2008: Georgia's Integrity Bank is closed by state regulators. FDIC is named receiver and branches will reopen as Regions Bank.

State regulators shuttered a Georgia bank late Friday, marking the tenth bank failure this year. Integrity Bank, based in Alpharetta, Georgia, was closed by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation was named receiver. The bank had $1.1 billion in total assets and $974.0 million in total deposits as of June 30. The Federal Deposit Insurance Corporation approved the assumption of Integrity Bank's deposits by Regions Bank, of Birmingham, Alabama. The failed bank's five offices will reopen Tuesday as branches of Regions Bank.

All depositors of Integrity Bank, including those with deposits in excess of the FDIC's $100,000 insurance limit, will automatically become depositors of Regions Bank for the full amount of their deposits, the FDIC said in a statement. Depositors will continue to have uninterrupted access to their deposits and will remain insured by Regions Bank. "There is no need for customers to change their banking relationship to retain their deposit insurance," according to the statement.

Regions Bank will pay a portion of the failed bank's deposits and will purchase approximately $34.4 million of its assets. The FDIC will retain the remaining assets for later disposition. In the statement, the FDIC estimated that the cost to its Deposit Insurance Fund will be between $250 million and $350 million. Customers with questions about about the failure of Integrity Bank can visit the FDIC's Web site at FDIC: Federal Deposit Insurance Corporation, or call the FDIC toll-free at 1-800-523-0640.

FDIC announces 10th bank failure of the year - Aug. 29, 2008

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Gov't. bailout of Fannie and Freddie...

Feds to Take Over Fannie, Freddie
Saturday, Sep. 06, 2008 (WASHINGTON) — The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced. Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies' chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government's plan to put the troubled companies into a conservatorship.

The news, first reported on The Wall Street Journal's Web site, came after stock markets closed. In after-hours trading Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06, or almost 21 percent, to $4.04. Common stock in the companies will be worth little to nothing after the government's actions. The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

That confirmed what investors saw in Fannie and Freddie's recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets. Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.

While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount. Many in Washington and on Wall Street hadn't expected Paulson to intervene unless the companies had trouble issuing debt to fund their operations.

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Rescue cost: The big unknown
September 6, 2008: A government takeover of Fannie Mae and Freddie Mac can take many forms, and so could the cost to the U.S. Treasury.

If only it were the $64 million question. The taxpayer bill for rescuing Fannie Mae and Freddie Mac could turn out to be the $64 billion question. Or more - or less. The fact is: Nobody really knows yet. Until the housing market recovers, there's no telling how much an intervention in Fannie and Freddie could cost taxpayers. But if it costs anything, the cost will likely be in the billions, not the millions. Just how many billions depends largely on the structure of the rescue. The two firms, which were set up by the government to help stimulate and underpin the market for home loans, own or back $5 trillion worth of debt - half the mortgage debt in the country. Since last summer, they have suffered about $12 billion in losses.

At the same time, Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) have become virtually the only source of funding for banks and other lenders that offer mortgages. Their ability to buy up mortgages is crucial to the recovery of the battered home market and the broader U.S. economy. The thinking is that Treasury Secretary Henry Paulson - sometime before Sunday evening - will put Fannie and Freddie into conservatorship. That means the government will boot management out and run the two agencies until they get back on their feet.

Such a takeover, however, does not mean that the $5 trillion of loans and loan guarantees the two agencies have on their books get put on the balance sheet of the federal government. Fannie and Freddie would continue to operate as separate entities from the government. But should the companies' liabilities ever exceed their assets, it is likely the government would make good on its implicit guarantee to back their debt, said attorney Thomas Stanton, author of two books on Fannie and Freddie and a lecturer at Johns Hopkins University.

Managing the risk

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No guarantee of quick housing fix...

Mortgage takeover promises no quick housing fix
Sun Sep 7, 2008 - Washington's latest attempt to resuscitate the moribund U.S. mortgage business moves the housing market out of the emergency room and into intensive care but by no means cures the patient.

The U.S. government announced on Sunday it was seizing control of troubled mortgage finance giants Fannie Mae and Freddie Mac, which are vital to the U.S. housing industry and have posed risks to international investors.

The action should lend stability after a year of turmoil in financial markets, and is sure to be watched closely by other victims of deflated housing bubbles, such as the UK. But there is still a long way to go to right the U.S. economy.

"This is a slow process. This is a baby step in the right direction," William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts, said about the plan's effect on housing and the economy. Larkin added that "it is going to be a positive for our financial system."

Anything that puts U.S. growth on a firmer footing is likely to raise hopes for the struggling global economy, though it could raise risks of already elevated U.S. inflation if investors grow to view this as the government printing money to bail out the economy.

VITAL SUPPORT

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What rescue means for mortgage rates
September 7, 2008: Bailout of mortgage giants should result in lower mortgage costs and make credit more available. But lending standards will stay tight and risky borrowers will still pay extra fees.

Mortgage applicants rejoice! Sunday's federal takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit, experts said. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage.

"This could be good for would-be homeowners," said Tom LaMalfa, managing director, Wholesale Access, a research and consulting firm. "It would reduce the cost of financing at the new and improved Fannie and Freddie." The government bailout is aimed at making mortgages easier to obtain and afford. By shoring up the mortgage financing giants, they can continue buying mortgages from lenders and injecting much-needed cash into the system.

"Fannie Mae and Freddie Mac are crucial to turning the corner on housing," said Treasury Henry Paulson. "Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance. Our economy and our markets will not recover until the bulk of this housing correction is behind us."

But the news isn't all good. With Friday's report that foreclosures and delinquencies are at all-time highs, Fannie and Freddie are expected to maintain - if not ratchet up - tighter lending standards. And the fees they have introduced for borrowers with weaker credit histories won't go away anytime soon.

High borrowing costs

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Small banks gonna suffer...

Fannie, Freddie aftershocks: More bank woes
September 7, 2008: Government seizure of Fannie and Freddie could cause problems, even failure, for many small banks, even if it helps to stabilize the battered mortgage market.

The takeover of Fannie Mae and Freddie Mac is likely to cause big problems for hundreds of community banks nationwide and could lead to a new round of bank failures. That's because many smaller banks had a large amount of funds tied up in the preferred shares of Fannie and Freddie, depending on the dividends for reliable income, and the value of those shares to meet the capital levels required by regulators. Now the dividends have been scrapped and the share values are in question.

"For many banks it was a safe and steady income stream," said Brian Gardner, senior vice president and chief political analyst for Keefe, Bruyette & Woods, an investment bank that specializes in financial firms. "It's cutting off an important source of income for the banks at time when income is not easy to come by." The government took over the operations of Fannie and Freddie on Sunday and is keeping both the common and preferred shares in place, leaving it to the market to determine their value. But without the dividends, the already battered value of the shares could fall further, leaving banks that hold them without required capital levels.

Even before Sunday's action, the FDIC's watch list of problem banks and thrifts had jumped 30% from the end of March to the end of June, leaving 117 at-risk institutions. A year earlier, the list had just 61. This past Friday, the 11th bank of the year failed. There is still hope that the preferred shares will perform well. "Investors might be relieved that all they did was lose their dividend," said William Isaac, a former chairman of Federal Deposit Insurance Corp. "A lot of people were worried the preferred would be wiped out."

But there's a lot about Sunday's action that could further hit shares, which have already lost half their value in recent months. Treasury Secretary Henry Paulson on Sunday indicated that one reason the government had to take control of Fannie and Freddie was "based on what we have learned about these institutions over the past four weeks - including what we learned about their capital requirements." That suggests the upcoming losses are worse than previously believed.

Paulson also said "there is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form." Gardner said that means at the least there will be a lot of uncertainty about the future of the two firms, which generally is bad for share prices. "We've all known about problems for quite some time, but until there was a crisis there was no need to resolve it," said Gardner. "Well, crisis don't get much bigger than this."

Extent of trouble unknown

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Fannie, Freddie investors gonna lose bigtime

Fannie, Freddie: The biggest losers
September 7, 2008: Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday.

Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends. Common and preferred shareholders won't be outright eliminated, as some had feared. But while the shares will continue to trade, it may for investors be a distinction without much of a difference.

Under the "conservatorship" plan announced Sunday by Treasury Secretary Henry Paulson, common shareholders will also be stripped of their rights to govern the companies. Given that both Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) have posted billions of dollars in losses during the past year, and that billions more are expected while house prices continue their historic decline, it's not likely that the market will accord much value to shares that give holders no right to select board members or otherwise oversee management.

The list of big losers is long:

Bill Miller, the Legg Mason mutual fund manager, was Freddie Mac's largest shareholder as of July 31, with 12% of the company's stock. Others Freddie investors include Capital Research & Management of Los Angeles, with a 10% stake as of June 30, and AllianceBernstein and Pzena Investment Management, both of New York, with 6% and 5%. Holders of Fannie common shares include AllianceBernstein, with 12% of outstanding shares, and Capital Research and Dodge & Cox, of San Francisco, each with 11%, according to data from LionShares.com.

The government said it will recapitalize Fannie and Freddie over time by making purchases of senior preferred stock. The existing preferred shares will continue to trade, the government said, inflicting losses most notably on the regional banks that hold them. Treasury said banks should ask their regulators for help if they believe losses on Fannie-Freddie holdings cause their capital to fall below required levels - an admission that the prices of the existing preferred shares are likely to fall even from their already reduced levels. "The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac," Paulson said. "The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses...are likely to reduce their regulatory capital below "well capitalized."

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