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Sunday, July 13, 2008 12:47 PM


Operation "Rescue Fannie" Underway - Paulson a Blatant Liar


On Friday Treasury Secretary Paulson Said Keep Fannie and Freddie in Current Form.

U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder-owned companies with federal charters.

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Paulson said in a statement in Washington.

Paulson's remarks indicate he wants to reassure shareholders they won't be wiped out by any government efforts to ensure the stability of the firms that own or guarantee almost half the $12 trillion in U.S. mortgages.
Yes, No, Yes, Maybe

The game playing charade was in full swing heading into the weekend. Watch the ping-pong ball.
Hedge Fund Model At Fannie, Freddie

John Snow stepped into the fray with a statement Fannie Mae, Freddie Mac Followed 'Hedge Fund' Model.
Former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

"Congress ought to be embarrassed" for years of delays in passing legislation aimed at strengthening regulation of the two companies, Snow, now chairman of New York-based buyout fund Cerberus Capital Management LP, said in a telephone interview. He said he suggested when in office that "the business model they were using was really the model of a hedge fund."

The government-chartered companies, which grew to account for almost half of the $12 trillion in U.S. mortgages, were able to borrow at cheap rates because of an implicit federal guarantee, Snow said. His opposition to a full government takeover echoes the signal sent today by his successor, Treasury Secretary Henry Paulson.
"Congress ought to be embarrassed"

Yes, congress out to be embarrassed, but Snow has the wrong idea. Fannie Mae and Freddie Mac should be set adrift. There should be no government backing of either.

As I said in Nature of the Fannie Mae Bailout, "Fannie Mae exists to expand affordable housing. Clearly Fannie Mae has failed its core mission. All government sponsored corporations fail their mission. The very nature of promoting housing makes prices go up, until the final blowoff top which we are now on the backside of, having reached Peak Credit."

Operation "Rescue Fannie" Underway

The TimesOnline is reporting US Treasury rescue for Fannie Mae and Freddie Mac.
US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.

Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.

The potential rescue comes as investors are braced for more bad news from the financial sector. Citigroup is expected to reveal further writedowns of at least $8 billion with its second-quarter results, and Merrill Lynch is forecast to reveal writedowns of some $4 billion.

Both banks are expected to post sizeable losses for the second quarter, and reveal plans to sell off billions of pounds worth of assets.

The capital injection would also see both lenders granted permission to use the Federal Reserve’s discount window - a short-term emergency funding source. Freddie Mac has a $3 billion short-term funding line that comes up for renewal tomorrow. The short-term debt is one of the hundreds of funding lines that the two agencies use.
Discount Window Pops Up Again

That last paragraph shows why the discount window keeps popping up. Putting two and two together it appears the Fed has been caught in a lie.

Freddie Mac's Next Hurdle: Raise Cash

The Washington Post is reporting Freddie Mac's Next Hurdle: Raise Cash.
Treasury Department officials were working the telephones yesterday to make sure that Freddie Mac, one of the nation's two troubled mortgage giants, will be able to sell $3 billion of its securities tomorrow in a previously scheduled sale that has now become a crucial test of investor confidence.
Since when in a supposedly capitalistic system should it necessary for the Fed and Treasury intervene in the markets on a day to day basis?

The Post article continues...
It would be only the latest in a series of unusual interventions. In March, the Fed extended a $30 billion credit line to orchestrate JP Morgan Chase's purchase of troubled investment bank Bear Stearns. The Fed then let other investment banks borrow directly from the Fed at favorable rates. And Friday the Federal Deposit Insurance Corp. seized control of California-based IndyMac Bank with plans to liquidate its assets at a cost that could wipe out more than 10 percent of the FDIC's funds.

"Someday this capitalistic economy, or what we used to call the capitalistic system, needs to get back on track and that means failure," said Lee Hoskins, former president of the Federal Reserve Bank of Cleveland. "You can't have risk-taking without failure."
To What Extent Did Paulson Lie?

Now we get to debate the meaning of the following
  • "Keeping Fannie and Freddie in Current Form"
  • "There will be no nationalization of Fannie and Freddie"
  • "A government takeover will not be necessary"
It seems to me that and injection of $15 billion capital into Fannie Mae and Freddie Mac and creating a new class of Government Owned Securities is most emphatically NOT in agreement with the above ideas.

Paulson Is The Great Pretender

Hell there is so much pretending going on it's hard to keep track. For starters everyone is pretending Fannie and Freddie are solvent. If they were solvent there would be no need for a $15 billion injection. Secondly, the government directly owning a new class of shares is not keeping Fannie in its current form.

The big concern is "Where does it stop?" Opening up a $15 billion dollar window will be the first of 10 such operations. This is likely the start of a U.S. Taxpayer Bailout of China. Disgustingly it is a U.S. Taxpayer bailout of PIMCO as well. Flashback May 23, 2008.

Bill Gross Triples Bet On Mortgages

The Financial Times reported Pimco's Bill Gross triples bet on mortgages.
Bill Gross, whose Pimco Total Return fund (PTTRX) is the world's largest bond mutual fund, has tripled his bet on mortgage debt, which now comprises about 61 percent of the fund's assets, the Financial Times said on Friday.

The chief investment officer of Pacific Investment Management Co said his decision to raise exposure in recent months stemmed from the U.S. government's implicit guarantee of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE), the government-sponsored mortgage financiers.

"Government policy is moving to sanctify the status of the government-sponsored agencies," Gross said, according to the newspaper. "It became a question of which institutions would be sheltered by the government umbrella."
"Operation Rescue Fannie" has now morphed into a taxpayer bailout of Bill Gross, China, and anyone else that levered into buying Fannie Mae garbage. It is a moral hazard to the highest degree, for bondholders to be made whole in this mess.

Paulson Is A Blatant Liar

It's now time to point blank call Paulson what he is: A blatant liar.

Flashback July 10th 2008 Paulson: Financial Institutions Must Be Allowed To Fail.
For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available," Paulson said. "For market discipline to effectively constrain risk, financial institutions must be allowed to fail."
Even though I called for it, this is extremely disgusting to see. I am hoping that bondholders participate at least partially over this, but I'm not holding my breath.

Addendum

Several people asked about the "inflationary" aspects of such a bailout. My reply is these bailouts cannot be looked at in isolation. The ongoing destruction of credit will dwarf this proposed bailout. The destruction of credit via defaults and writeoffs dwarfs the stimulus package and will dwarf the next one as well. I have repeatedly said there would be government attempts to contain deflation, just as there were in Japan. Those attempts will do nothing but prolong the agony.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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