Who will get bailed out next?

Take a load off, Fanny
And you put the load right on me

- "The Weight" by The Band

Now that Fannie Mae and Freddie Mac have been bailed out by the taxpayer at the cost of hundreds of billions of dollars that we simply don't have, we can now start the next round of the most popular game on Wall Street today -- which group of thieves will get bailed out next?

The Great Taxpayer Bailout is a wonderful game. For instance, Richard F. Syron, the departing chief executive of Freddie Mac who ran that company into the ground, will be getting a severance package of $14.1 million taxpayer dollars. Syron has taken home about $17 million since 2004.
Daniel H. Mudd, the departing CEO of Fannie Mae will be collecting $9.3 million taxpayer dollars on his way out, after destroying a 70 year old institution. Mudd collected about $12 million in pay since 2004.

Both of these guys were hired in the wake of massive accounting scandals in 2003 to clean them up. So how did they do?

In interviews this week, Falcon took issue with the companies' current accounting, saying they have taken only small writeoffs in relation to their billions of dollars of paper losses on mortgage-related investments. The companies have refrained from taking a larger hit on the grounds that they expect the investments to recover their lost value.

"At some point the notion that their assets are only temporarily impaired becomes a fiction and a fraud," Falcon said. "If we're not there, we're approaching it very, very soon."

Let's not forget former Bear Stearns CEO, James Cayne, who sold his stock options for $61 million around the time of the Fed-funded bailout. Of course that's nothing compared to Countrywide CEO Angelo Mozilo, who walked away with a cool $110 million when Bank of America bought out the faltering firm.

But let's not dwell on the past. We are looking towards future bailouts for fraud and/or incompetence now. So who's next?

Another Bush Administration bailout disaster

The most obvious candidate is a government institution - the Federal Home Loan Banks.
In a sign of how close this is, just yesterday the U.S. Treasury extended a secured credit facility to these government- chartered cooperatives.

The Treasury, which made similar credit available to Fannie and Freddie as the U.S. today took over those companies, received the authority to provide the credit in a housing law enacted in July. Like Fannie and Freddie, the nation's 12 FHLBs have been paying record yields over U.S. government notes to sell bonds in the so-called agency debt market.

The reason that these institutions needs these ultra-low loans from the taxpayer is because they lost $4.6 Billion last quarter, out of its $21 Billion capital reserve. You can do the math and see how long that can continue.
The FHLBs have about $1.34 Trillion in assets, and thus are about 1/4 the size of Fannie and Freddie.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

Of course this didn't happen by chance. The Bush Administraton changed the rules less than a year ago to expand the FHA into more risky loans. This increased the FHA's representation in the mortgage market from just 2% to 10%, with predictable results.

The FHA is suffering from the same problems as Fannie and Freddie.

FHA’s delinquency rate has been rising steadily since 2000-2001, and is now approaching critical levels. Consider that at 16.81% delinquency, more than 1 out of every 6 FHA single family borrowers are delinquent on their loan.

Da Boyz on Wall Street

When it comes to Wall Street investment banks, it's almost easier to list the ones that aren't in trouble rather than list the ones that are. Because of that, the FDIC is in trouble.

The next rumored deal involves a shotgun marriage involving Lehman Brothers, a Wall Street giant, to foreigners or whoever is willing to take it on with its debt problems. But perhaps the most worrisome is the possibility that the 150 banks on the Federal Reserve’s watch-list will all go under and, if that happens, the Federal Deposit Insurance Corporation will have to be bailed out.

It won't take 150 banks to push the FDIC over the edge. It'll only take one or two big ones. In fact, Sheila Bair, the chairperson of the FDIC, recently floated the idea of "tapping lines of credit with the Treasury for working capital," in her testimony before Congress.
The FDIC currently has $45 Billion to cover future losses.

As for who might be the next bank to be bailed out, the one at the top of everyone's list is Lehman Brothers.

There remains intense speculation that Lehman Chief Executive Richard Fuld might be forced to sell off its Neuberger Berman asset management division to help buoy the investment bank's ailing balance sheet...
However, an outright sale of the prized asset has been seen as harmful to both Lehman's revenue stream and debt ratings.

Lehman has recently been peddlinging assets all around Asia like a door-to-door salesman. The fact that they have failed speaks louder than words.
Lehman has cut about 15,000 jobs over the last year.

Lehman Brothers CEO, Richard S. Fuld made about $354 Million in compensation over the last 5 years.

Running a close second behind Lehman Brothers in the race to insolvency is Washington Mutual.
WaMu's CEO Kerry Kilinger was fired over the weekend. Then on Monday the Office of Thrift Supervision forced them to sign a “memorandum of understanding”.
What the OTC has done is put them on notice.

WaMu has $120 Billion of highly dubious mortgages on their books, and $40 Billion capital to support the bank. That's not a good combination.
WaMu could wipe out all of the FDIC's holdings just by themselves.

Washington Mutual CEO, Kerry K. Killinger made about $14 Million last year in compensation.

No list of failing banks would be complete without mentioning Wachovia.
Wachovia's losses have been of epic proportions.
Wachovia has eliminated over 12,000 positions.

Wachovia CEO, G. Kennedy Thompson made nearly $25 Million last year in compensation.

An honorable mention to this list would be Merrill Lynch.

I should note that a multi-billion dollar bailout for GM and Ford is already in the works in Congress, but I wanted to stick to financial firms for this article.

Comments

where's my free house?

That's what I want to know.

On CNN they reported that the Fannie/Freddie Lobbyists gave money to Chris Dodd, John Kerry, Obama and Clinton in that order.

I'm sure Bush Corporation received tons of money from them.

So, this all leads me to this question. We now have tons of reports on how Freddie and Fannie were too big to fail and it would have brought down the entire economy and so on...
but precisely how does this make it all better? How does this stabilize the market or turn bad debt into good debt?

How does this enable people to refinance to be able to even afford any house with the prices still being way above the average medium income?

Iraq is the ultimate budget buster so I cannot compare that expenditure to this but $200B dumped onto a ballooning deficit, in seemingly just one year is not chump change.

Has anyone read anywhere from any financial expert or economist precisely why this is such a great thing?

Explain it all to me someone.

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What the bailout means

This is what it means.

Contracts on U.S. government debt increased 3.5 basis points to a record 18 basis points, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 4 p.m. in London. Credit-default swaps on German government bonds cost 8 basis points and Japanese bonds 16.5 basis points.

"The bailout of Freddie Mac and Fannie Mae is weakening the balance sheet of the U.S. and that is causing a deterioration of credit worthiness," said Mehernosh Engineer, a credit strategist at BNP Paribas SA in London. "The market is anticipating there might be more bailouts."

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

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Export Substitution Industrialization

A recurring theme in these discussions of Fannie Mae and Freddie Mac seems to be that this collapse is going to push Chinese investment offshore.

Is that the case? Or will the Chinese decide to end portfolio investment in favor of direct investment so that they can go an asset stripping rampage if things turn to shit?

I keep thinking that both Ford and GM are looking awfully damn cheap right now, with Ford having a market cap around $10 billion and GM coming in a paltry $6.16 billion.

If one of these Chinese SWFs were to swoop in, and and make a move, they could go an asset stripping rampage taking the capital assets of the corporation back to China, and screwing over the American workers. And the most valuable assets are arguably the company's intellectual property (i.e. the brand names and the product designs)

China has an auto aftermarket industry, but the value added by that activity is minor as compared to what happens when you can put all those disparate parts together into the finished product.

Impossible? Just as impossible as some Indian firm buying out MG Rover.

But of course, in America we are an ownership society, so these companies are owned by individual American citizens.

Or not?

If you follow the links above on GM and Ford, you'll see that GM is 95% institutionally owned, and Ford 74% so.

While some of this is probably pension funds, how much of that is independently managed by the pension fund? And how much has been turned over to an investment firm that's going to have the power to broker a deal if they can get top dollar for their shares?

Now that we've broken the ice with the nationalization of these two financial firms, I think that it's time that GM, Ford, and Chrysler be brought into a type of conservatorship that sees them nationalized, reformed, and then partially privatized with the government retaining a minority share, and negotiating the sale of a second share to the UAW's VEBA that would give the two a controlling stake so that the industry can be kept in American hands.

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I agree on the foreign investment aspect

I could not find the reference, else I would have written it up in the Intapopulist that some middle east entity was trying to buy part of a defense contractor. I heard a little blurb on CNN and it wasn't even in the transcript.

But, beyond the foreign investment aspect, how is this going to stabilize the US housing market as they claim?

I mean are they just going to let more foreclosures go on...that's what is implied and the US taxpayer absorb the debt or ?

Is it fair to say without sounding CT that our government has now nationalized corporations so corporations are the government (officially)?

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I think that there is a way to take

this crisis and make an opportunity to reduce inequality in this country.

After years of privatization, the time has come for a transitory period of nationalization.

There are basic industries without which a nation loses sovereignty. Further, there are key industries that guide entire economic sectors. The Big Three are both.

We are facing the very real prospect that there may soon be no American owned auto industry. We live in a mechanized age in which heavy industrial capacity is a determinant of military power. The death of the US auto industry would be a body blow to US political sovereignty. If the Chinese (or Indians) strip the auto industry, do suppose that they'll be willing to sell us Hummers if we get in a fight with them? The loss of this industry would be a loss of sovereignty.

Second, government control of the auto assembly function would allow for the social direction of the entire auto sector while limiting the government footprint.

Finally, I'm not suggesting that GM and Ford should remain nationalized.

I'd like to see a three legged stool model in the long term

1/3 government ownership. Allow for social direction, but only in terms of the election of corporate officers and the vision that they bring to the company. Use the dividends as a government revenue source to take the burden off direct taxation.

1/3 worker ownership. Compose works councils at the companies that will give workers direction in the firm. Use the labor ownership stake to put labor directors on the board.

1/3 private ownership. Lassiez faire. Let ownership in this sector follow the rules of the market. Use it to send market signals to the firm without killing the company in the process of making the mesage clear.

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Bloomberg article

this quote caught my eye:

The objective of providing affordable housing isn't consistent with maximizing returns for shareholders, Ferlauto said. At the same time, risks the companies took to boost profits don't align with the companies' mission of serving the public

They are now claiming the CEOs were very talented and that it's all due to a flawed business model.

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Here comes the cost

Financial Times quotes the CBO:

Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.” The move blows the whistle on the US administration’s efforts to keep Fannie and Freddie off the books

It appears they are warning of a government default and that the costs of insuring against one are starting to rise.

I have a hard time believing that would cause a default in comparison to the Iraq spending.

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That's scary

Well, through years and years of having lobbyists write your bills, requiring our government to go on all of those jet trips, all of those parties....I'm not surprised on their own they have no clue how to craft legislation and policy written on behalf of the American people and national interest.

I don't know the tally but it sure seems like any bill, any amendment, pretty much anything not written by a corporate lobbyist or special interest group, even if it passes both houses, is stripped out by conferees.

Putin is one scary dude and when a nation goes into economic collapse that is assuredly when the Dictators have a window to rise to power because the people become desperate for someone to take the right steps at least on some issues.

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Seconded

At least Vladimir isn't afraid to crack a few heads to get done what needs getting done.

The position of labor in the Russian Federation has been tenous at best, but Putin has shown a willingness to take on corporate elites when he needs to. I have no doubt he's pocketing money, but no one can say that in economic terms the average Russian is worse off today than they were in 1999.

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Hamilton Project Strikes

once again.

In a move that should delight fiscal hawks, Democratic congressional budget lawmakers tapped Peter Orszag, a social security guru and former economic advisor to the Clinton administration, to head up the Congressional Budget Office.

A widely respected fiscal economist, Orszag is a senior fellow at the Brookings Institution, a think tank in Washington, and the director of The Hamilton Project, a sort of Democratic cabinet-in-waiting housed at Brookings.

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CBO

BTW, over in the bottom right column is the CBO RSS feed pulled into the site and today they shared...

CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP

The CBO goes further to say this massive deficit will slow economic growth and is coming to 3% of GDP.

CNN has more details in their report.

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A disturbing new development

I saw something about this from another source, so I know he isn't just making things up.

There will be a meeting today to discuss how this is going to all fall out... But here's some perspective on the situation... First and foremost, there's a question as to whether the gov't's conservatorship constitutes a "CDS event," which would force the settlement of the CDS contracts that are outstanding..Fannie and Freddie have roughly $1.5 trillion in debt outstanding... But that's chickenfeed compared to the notional amounts of CDS contracts that could be multiples of that $1.5 trillion!

If the gov't's conservatorship does constitute a "CDS event," there won't be enough debt to settle the contracts, which will lead to a need for cash... And that could lead to major problems, with the least of them being the holders needing cash might have to sell other assets to raise the cash needed...

I know this all is confusing, it took me a time or two before I fully understood these Credit Default Swaps... But in essence, they are simply an insurance policy, as it can be used by a debt holder to hedge or insure against a default under the debt instrument. This would be under the heading of "derivatives" that you've heard all about. When the "credit event" or "default" occurs, then these contracts get unwound, and Peter pays Paul, and Paul pays Robert, and so on... In other words... It could get very ugly out there! The association that governs the Credit Default Swaps, ISDA, will meet today to discuss how this will all come down or fall out...

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shit

God Damn it, are they determined to make sure the United States implodes?

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big 3 auto on hill lobbying for loans

Big Three CEOs to lobby Congress on auto loans:

now they want $25B and the CBO says:

Automakers had a setback when the Congressional Budget Office doubled their estimate of the cost to the government to insure against default to $7.5 billion, rather than $3.75 billion.

Any tie in to US citizens to get those jobs? Nary a word anywhere!

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