Fed Denies Talks with Fannie and Freddie about Discount Window

According to Bloomberg, the Fed just came out (after the close of trading of course) and denied that they had talks with Fannie and Freddie regarding opening the discount window for their use.

Reuters had a story in the afternoon to that effect, which sparked a sharp short-covering rally in Fannie and Freddie.

Personally we thought that they already had access to the Discount Window, considering who is bellying up to that bar already. If investment banks and Countrywide Financial, why not mortgage lenders?

But it just goes to show how these markets are. Today was some vicious trading, strictly a double black diamond slope. We loved it, but its really not a fruitful activity for the real economy.

Fannie and Freddie are Levered Up Like Hedge Funds (or any Wall Street Bank)

NOW he says something about it.

Snow Says Fannie Mae, Freddie Mac Followed `Hedge Fund' Model
By Brendan Murray

July 11 (Bloomberg) -- 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. (Yep, so did the big banks too. It was a real party and Greenie was supplying the moonshine and goofballs - Jesse)

``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 flagged when in office that ``the business model they were using was really the model of a hedge fund.'' (Then why didn't you do or say anything about it then you old fart-in-a-bucket? - Jesse)

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. (They will point the finger of blame at everyone except the real ringleaders, the Wall Street banks - Jesse)

``The most important thing is that the systemic risks that those institutions present get dealt with,'' Snow said. ``They play such an important role in the secondary mortgage markets, but it's coming at such a high cost in terms of potential blowup of the whole financial system.''

Paulson has urged Congress to pass legislation setting up a new, strengthened regulator of Fannie Mae and Freddie Mac. Senator Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said in a press conference today that he expects legislation including the measure to be sent to President George W. Bush for signing next week. (

`Not Be an Option'

Paulson said in a statement today he wants the companies to remain in their ``current form.'' Snow agreed that ``nationalization should not be an option.''

Snow, who served at the Treasury from February 2003 to June 2006, said because Fannie Mae and Freddie Mac operated under federal charters, there's an implied guarantee of their debt that shouldn't exist. He said during his Treasury tenure he pointed out the two were ``arbitraging their lower borrowing costs that came about because of the implied status as government entity.''

Fannie Mae and Freddie Mac make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default, implying the government will stand behind the companies' debt.

`Fundamental Problem'

``If I were in a public policy role, I'd be focusing attention on what has long been known to be the fundamental problem of risks to the balance sheet of the United States that are gigantic,'' Snow said.

In October 2003, Snow and Fannie Mae's then-Chief Executive Franklin Raines debated in a Senate hearing whether the Treasury should have the authority over new loan products. At the time, the government-sponsored enterprises were under scrutiny from the Treasury and other regulators to because of errors in accounting.

``Congress should not open the door for the regulator to prescribe, outside the necessities of safety and soundness oversight, how the enterprises conduct their business,'' Raines said. Snow said the new regulator was needed to ensure financial stability, adding that ``We don't face in my view any current crisis, but we never want to get close to the point where we would face that problem.''

Snow said today that ``even in the face of the scandals over compensation and accounting and the options and bonuses, we never could get Congress to cross the line.''

Fannie Mae and Freddie Mac ``have an enormous political organization, lots of reach into many congressional districts, and they had a storyline that at the time worked -- they were really promoting housing,'' he said.

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net

In Times of Crisis Remember the "Three L's"

Liquidity, Liquidity, Liquidity.

Your size makes you more 'agile' than the big players who will urge you to stay invested, to hold your ground.
Your weakness is that information is not being given to everyone in the market at the same time.

No debt. Liquidity. But where to keep it?

That's the challenge.

We like hard currencies, short term Treasuries, cash, and gold and silver.
The time to buy equities will be coming, but not quite yet.

But that's just our opinion, and we could be wrong.

Housing Bubble Collapse Deals a Serious Blow to Middle Class Retirees

'At this festive season of the year, Mr Scrooge,' said the gentleman, taking up a pen, 'it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.'

'The Treadmill and the Poor Law are in full vigour, then?' said Scrooge.

'They are. Still,' returned the gentleman,' I wish I could say they were not.'

'Are there no prisons?"

'Plenty of prisons,' said the gentleman, laying down the pen again.

'And the Union workhouses.' demanded Scrooge. 'Are they still in operation?'

'Both very busy, sir.'

'Oh. I was afraid, from what you said at first, that something had occurred to stop them in their useful course,' said Scrooge. 'I'm very glad to hear it.'

Sorry, we needed your Social Security taxes to bail out Wall Street.

Whiners.


Housing Market Meltdown Will Cause Massive Losses in Household Wealth
Plummeting house prices will leave millions of homeowners dependent almost exclusively on Social Security in their retirement

Center for Economic and Policy Research
July 9, 2008

WASHINGTON, DC- As Senators McCain and Obama fine-tune their plans for Social Security in preparation for the 2008 presidential election, a new report from the Center for Economic and Policy Research (CEPR) shows that, due to the collapse of the housing bubble, the vast majority of Americans have accumulated little or no wealth. This means that they will be almost completely reliant on Social Security and Medicare to support them in their retirement years.

The study, “The Impact of the Housing Crash on Family Wealth,” analyzed the wealth holdings of families in all age cohorts in 2004 and projected the wealth of these families in 2009. The findings are presented by income quintile under three scenarios- real house prices remain at current levels, real house prices fall by an additional 10 percent, or real house prices fall by an additional 20 percent. In all three scenarios, the vast majority of these families will have little or no housing wealth in 2009.

“This extraordinary destruction of wealth will have tremendous implications for millions of families,” said report co-author Dean Baker. “Coupled with a very low personal savings rate, this means that many people, especially those near retirement will only have Social Security and Medicare to rely on once they leave the workforce.”

The report projects that if house prices stay the same through 2009, the median household headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median household in this age group in 2004. These households will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median household in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004 while families in the 18 to 34 cohort will lose of 67.6 percent. If prices fall by 20 percent, the most pessimistic scenario, families in the 55-64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

This analysis should also prompt serious re-examination of policy proposals to cut Social Security and Medicare for near retirees. Baker commented, “policies that perhaps could have been justified at the peak of the housing bubble make much less sense now that tens of millions of near-retirees have just seen most of their wealth disappear.”

In analyzing wealth holdings for these families, the authors used data from the Federal Reserve Board’s 2004 Survey of Consumer Finance. The authors also used the S&P 500 and the Case-Shiller 20-City Composite Index to adjust for equity values and home price changes between 2004 and 2009.

Contact: Alan Barber, (202) 293-5380 x 115