Bye Bye Banks: Freddie and Fannie Preferred Holders to Take Big Hits?

The reporting on the main elements of the Freddie and Fannie rescue plan is converging as the content of official briefings leaks out.

The stunner, which contradicts preliminary reports, is that the preferred shareholders in the GSEs will take losses. The Wall Street Journal reports that dividends on common will be eliminated and those on preferred will be suspended (Bloomberg, Reuters, and the New York Times were less specific, but indicated that preferred shareholders would suffer).

Justin Fox summarized why this outcome, of wiping our or otherwise damaging the preferred shareholders, had been considered highly undesirable:

Lots of small and mid-sized banks in the U.S. have, with encouragement from regulators, built up big holdings in Fannie and Freddie preferred stock, which they use to satisfy their capital requirements. If Fannie and Freddie preferred shares become worthless, a lot of banks will become insolvent. Which, with the FDIC insurance fund already being depleted by bank failure, could end up costing taxpayers a ton.

Now admittedly, the preferred shares have already inflicted sizable losses to those who bought them when issued. For instance, Freddie Mac’s Z preferred was sold for $25 and has traded in the $10 to $14 range recently. But even at that level, its rich dividend (at these level, the yield is 15%+) is a support for the price. Adjustable rate preferred is trading at a bigger discount, 80+%. Where do they go once that prop is removed? Readers who can provide insight are encouraged to speak up.

In the meantime, let’s do some first-cut back of the envelope calculations. The face value of GSE preferred was $36 billion. While the market values have taken a beating with the bailout talk, most banks would have end of June prices reflected in their latest financial reports. Since I don’t have access to historical prices or the mix of adjustable versus fixed rate, let’s assume market value across all issues was $18 billion as of end of June. Even with the dividend suspension plan, the preferred will still have some option value. This is a complete stab in the dark, but say the shares fall to 1/4 their current price. So the incremental damage is $13.5 billion. Now that doesn’t sound all that bad across a whole lot of banks (boy, have we gotten inured to big numbers). But one can of course argue the contrary case, that an equity hit of that magnitude reduces bank lending capacity by roughly $180 billion.

Now to do this analysis correctly, not only do you need better numbers on 1) what losses have the banks taken already on Freddie and Fannie preferred and 2) how much more of a hit is likely, but you also need to know 3) which banks have a significant exposure relative to their capital. Even if the aggregate losses are not awful in a macro sense, they could have the effect of tipping a seemingly disproportionate number of banks over the edge.

Nevertheless, inflicting damage on the preferred sharholders was seen as so unlikely that John Dizard of the Financial Times devoted his last two articles to the merit of investing in GSE preferred shares. He regarded a cram-down as a non-starter (this is one reason we steer clear of discussing investment ideas here. You can do good analysis and still have your head handed to you. But in fairness, if you had taken his advice as a trade and gotten in and out fast, you would have made a very nice turn).

From the Financial Times:

In the now overcrowded world of investing in distressed securities, the standard strategy is to pick the “pivot” issue…that is the problematic part of the capital structure. Securities with seniority above that of the pivot get paid out, securities below that get wiped out or have their value seriously impaired. The idea is to buy the pivot at a good price.

In the past couple of weeks, it seemed that the entire US economy had a pivot security or set of securities: the preferred stock issued by the government-sponsored entities, or GSEs. Fannie and Freddie, the Sodom and Gomorrah of “public/private partnerships”, sold about $36bn of non-cumulative preferreds to the banks and the public, with the aggressive support and encouragement of the Treasury and the GSEs regulator.

Last week I wrote about these preferreds; my position was that if or, rather, when the Treasury had to recapitalise the GSEs with new, senior preferred issues, it would be a really good idea from the taxpayers’ point of view to leave the old preferreds in place while wiping out the value of the outstanding common stock.

I thought that saving Fannie and Freddie’s preferreds would support the entire asset class of preferred stock. The banking system needs to raise several hundred billion dollars of equity, and preferred stock is the lowest-cost way to do that in the public markets. While some sophisticated investors could distinguish between preferreds issued by a sound bank holding company, and preferreds issued by the overleveraged F&F, international investors and domestic retail investors would not have the data or analytics to draw the distinction.

The alternative, as I see it, to recapping the US banking system with preferreds is some form of direct government investing in the equity of banks or bank holding companies. That would be even more expensive to the taxpayers – as in at least 10 times more expensive…….

I called up Andrew Senchak, the vice-chairman and co-director of investment banking at Keefe Bruyette & Woods, which specialises in bank securities…

As he says: “It is true that there is no direct link between the GSE preferred issues and that of the banks, but they are in the same galaxy. Given that, there is almost no incentive not to keep the GSE preferreds in good shape. If there is a recapitalisation of the GSEs [by the Treasury], you can achieve the public policy end [of limiting ‘moral hazard’ by wiping out the value of the common]. I am not sure how much new bank equity has to be issued . . . it could be anywhere from $200bn to $400bn.”…

And yes, I agree that it is likely, if not certain, that if the GSE books were marked to market, the asset value would not be there to support the preferred issues. There is, though, a real value to clapping to keep Tinkerbell alive here: you get a banking system that can finance a recovery.

As a reality check I called Jim Grant, of Grant’s Interest Rate Observer, and the author of the forthcoming Mr Market Miscalculates . He comments: “The alternative to preserving the value of the GSE preferreds? Prayer? Remember that a lot of that paper is held by the same banks the authorities would love not to fail.”

So, with the market’s affirmation, and the agreement of one of the Street’s flintiest sceptics, I’m sticking to my position: the GSE preferreds should survive.

Narrowly, Dizard is 100% correct. The GSE preferreds will indeed be preserved. But if the news stories pan out, that will be cold comfort to their owners.

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  1. esb

    The problem here is that in recent weeks hedge funds and closed end funds (and other bond funds that can own preferreds) (think Bill Gross and his buddies) have been buying up tons of this paper, intending to be made better than whole by the public treasury.

    If the dividends are suspended and then the paper itself is compressed in value and eventually cancelled as a result of periodic infusions of more-senior debt, then that disgusting bet will fail.

    The last thing we want is to have players making moral hazard bets as late as, say Friday last, and having those bets pay off.

  2. Yokum

    The last thing we want is to have players making moral hazard bets as late as, say Friday last, and having those bets pay off.”

    HELLO? HELLO? This is freggin BERNANCKE AND HANK PAULSON WE”RE TALKING ABOUT HERE, NOT VOLCKER. If the preferred are hurt and Bill Gross loses money, I’ll eat my freggin hat. Moral Hazard = PROFIT!

  3. eh

    I have a hard time seeing even common holders coming out on the short end (not that the stock is worth much anymore). It won’t be hard to portray them as more or less innocent victims of bad management and mortgage excess if not outright fraud. Especially because up until very recently it was claimed all was not that bad at FNM and FRE, certainly not so dire as to require a takeover and total recapitalization so massive that common holders would be wiped out, maybe preferred holders too. Even BSC shareholders weren’t treated that way, and there was no ‘implicit’ guarantee there.

  4. Anonymous

    Eh, what's the problem with GSE preferreds held as bank capital? Saturday the NY Times reported that Fan & Fred were letting nonperforming loans age for TWO (2) YEARS before writing them off.

    So give the banks two years to write down their GSE preferred. Maybe it'll come back by then. Problem solved by regulatory prestidigitation!

    As Saddam Hussein used to say, "Anything is possible now, my brothers."

  5. ruetheday

    Wipe out the preferred stock. I don’t care if it’s primarily banks that hold it, that’s irrelevant. The “implicit government guarantee”, as ridiculous as that concept is, was always on the agency debt, not the equity.

    What’s the point of conservatorship if we’re going to preserve the equity holders? The government needs to make crystal clear to the market that these entities either ARE government agencies with a guarantee or ARE NOT government agencies and have no guarantee. A conservatorship with equity protection muddies the waters further rather than clarifying them.

  6. etc

    eh: "I have a hard time seeing even common holders coming out on the short end (not that the stock is worth much anymore). It won't be hard to portray them as more or less innocent victims of bad management and mortgage excess if not outright fraud."

    I'd bet the common shareholders get something, but very little. A number of factions in the Bush administration dislike bailouts, and didn't want Bear shareholders to get anything. I doubt these factions will tolerate common shareholders doing better than Bear shareholders, by receiving some token amount.

    I'm not sure what will happen to the preferred shareholders. The above factions might want to hurt preferred shareholders as well, or perhaps anyone that is not an FDIC insured institution. Along those lines, it is possible the administration might give preferred shareholders very little, and then give the regional banks some kind of backdoor assistance. For example, say the workout modifies preferred stock so that it loses dividends unless the issuer meets some speculative milestones (in terms of P&L or whatever), making the old preferred more like a warrant than preferred stock. Treasury could then say it'll accept all "old" preferred stock from regional banks that they acquired before some cut-off date — and value them at par value — in exchange for new preferred stock actually worth par value. This would help the regional banks, and no one else.

  7. Anonymous

    Suspended dividends =
    1. CDS triggers, so AIG, MER, LEH are in big trouble.
    2. Cascading bank defaults from writedowns.

    I don’t see how they suspend the dividends and avoid several more bankruptcies.

  8. Anonymous

    And another thing:
    Cutting off the dividends for (say) a year will drive the preferred to pennies.

    Nobody intelligent believes that the new administration will start up payments again. It’s just too easy of a political target to “sock it to the rich”.

  9. CTMM

    Um guys,

    Doncha think there’s a bunch of really angry phone calls being made from China and various OPEC nations to the State Department this weekend?

    No matter how bad the long-term consequences of this bailout might be, I suspect the political pressure from SWF and foreign banks will trump the political pressure from american taxpayers.

    (Don’t forget that many of us (like me, and I’m 32) have never lived in an America without massive National Debt and Budget Deficits. It’s just a normal part of the landscape. At this point, who cares about another $200 billion?


    (Cue Weimar Republic…)

  10. etc

    anon 7:58: “I don’t see how they suspend the dividends and avoid several more bankruptcies.”

    You lack imagination. The Fed and Treasury have a lot of authority. Treasury’s outside restructuring advisor Robert Scully, and whatever big name lawyer Treasury has matching wits with Fannie’s outside counsel Rodgin Cohen, can probably think of ways to use it to inflict pain on preferred shareholders without causing a system-wide crisis.

    But no doubt the machinations required to inflict selective pain like that will be complicated. It is hard to say whether the ideologues in the Bush administration who dislike bailouts in general, and Freddie and Fannie in particular, will think the machinations are worth the effort.

    cullen: No one is talking about hurting foreign central banks. They invested in mortgage backed securities issued by freddie and fannie, not preferred stock or common stock.

  11. Matt Dubuque

    Although I have been an avid follower of John Dizard for some time, as of late (say for the last 7 weeks), his columns have bordered on the worthless for me.

    For starters, his proclamation a few weeks ago (repeated last Tuesday) that we are in a new bull market is patently risible. He appears to have conflated a dramatic recovery in the monolines with an overall bull market. An extraordinarily fundamental mistake.

    Secondly, his extensive coverage of the benefits of preserving the value of the GSE preferreds, over repeated columns, seemed very much to this writer that he was talking his book, in a very big way.

    That didn’t sit well for me.

    Countless commentators have been continually stressing the need to “lance the boil” and “feel some pain” while condemning “bailouts”. Yet when the feasting classes are forced to take some REAL economic hits, they are all atwitter.

    The approach of the free market jihadis who worship the invisible hand and demand that others around the world do so as well at the point of a gun has continually been to privatize all gains and socialize all losses.

    This is going to change.

    One way or the other.

    And for the Fed, payback time is just beginning. As Paul Volcker, the central banker’s central banker recently said, the gibberish of using historical valuations in derivatives pricings and other heinous errors that brought enormous systemic shocks with numerous and intensifying sigma 4 events have UTTERLY failed the test of the market.

    It’s payback time for the Fed. Stay tuned.

    Matt Dubuque

  12. Anonymous

    Perhaps a wipe out of the prefered stock is what Wall St wants? What better way for the US banking system to be handed over to a few friends of Paulson?

    Goldman and their ilk could very well end up with thousands of local and regional banks.

    This is as much a dectective story as an economic one…Follow the money.


  13. Anonymous

    The muddy waters approach to the underwriting of agency bonds by Congress and our adminstration is a no show for buyers of agency debt.
    When this goes it has to be a very clear line that Uncle Sam covers these bonds, no preferred, no common etc. If we have a semi take over if all kinds of if’s and but’s then the agency debt market will still have a big spread sooner or later.

  14. doc holiday

    Re: “dividends on common will be eliminated and those on preferred will be suspended

    One thing which I think drives this, in my hillbilly opinion (IMHO) is the fine line being walked by Treasury, between usurping powers which they do not have and then creating mechanisms and illusion which appear to give them new discretionary powers.

    IMHO, to allow a dividend to be paid to private shareholders from Treasury would violate the intent of the following section, which formalizes the fact that Treasury is not a business for commerce or a bank that loans cash to private corporations, or an entity that uses taxpayer funds to pay dividends to private shareholders; any attempt to bail out shareholders would be a matter of trade or exchange. The road Paulson is on is very close to treason.

    (a) To manage United States cash, the Secretary of the Treasury may invest any part of the operating cash of the Treasury for not more than 90 days. Investments may be made in obligations of—
    (1) depositaries maintaining Treasury tax and loan accounts secured by pledged collateral acceptable to the Secretary

    § 324. Disposing and extending the maturity of obligations

    (a) The Secretary of the Treasury may—
    (1) dispose of obligations—
    (A) acquired by the Secretary for the United States Government; or
    (B) delivered by an executive agency; and
    (2) make arrangements to extend the maturity of those obligations.
    (b) The Secretary may dispose or extend the maturity of obligations under subsection (a) of this section in the way, in amounts, at prices (for cash, obligations, property, or a combination of cash, obligations, or property), and on conditions the Secretary considers advisable and in the public interest.

    § 329. Limitations on outside activities

    (1) The Secretary of the Treasury and the Treasurer may not—
    (A) be involved in trade or commerce;

  15. ruetheday

    I just watched Paulson and Lockhart on CSPAN (the other major news agencies all stopped their coverage right before the actual plan was unveiled). It came across as a half-assed series of half-measures to me. We’ll see how the Asian markets react.

  16. doc holiday

    Ok, I'm still getting up and missed this:

    Re: "To manage United States cash, the Secretary of the Treasury may invest any part of the operating cash of the Treasury for not more than 90 day"

    > Think in terms of Treasury holding taxpayer money, which is taxpayer operating cash, to be used for public good; Treasury is a like a fiduciary which holds common taxpayer money which is then managed for the common whole good, versus slicing off sections of taxpayer cash so that Treasury can reward private backroom deals between friends of lobby groups and wall street buddies.. From wiki:

    The United States Department of the Treasury is a Cabinet department and the treasury of the United States government. It was established by an Act of Congress in 1789 to manage government revenue.

    I challenge anyone to show that it is within the power of Treasury to administer dividend payouts to private shareholders. This is also a matter of antitrust law violations, which would have Treasury giving

    Re: The Sherman Antitrust Act (Sherman Act[1], July 2, 1890, ch. 647, 26 Stat. 209, 15 U.S.C. § 1–7) was the first United States Federal statute to limit cartels and monopolies. It falls under antitrust law.
    The Act provides: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal".[2] The Act also provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.

    Also see: Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.[2] The verb "monopolize" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition.

    >> Treasury is essentially granting itself power to help out one special interest group that demands profit in the form of dividends, , and then stealing that funding from public taxpayer cashflows.

    To look at this in a different way, how would this work, Treasury allows IRS to send dividend checks just to Fannie preferred shareholders, so that this group of people can report back to IRS that these dividends from Treasury are a capital gain from a public windfall. This is lunacy to contemplate that the vast majority of taxpayers would fund this delusion! Take a look at The Boston Tea Party and see how people feel about this type of tyranny!

  17. Matt Dubuque

    HERE IS THE FRAUD, which I, as someone who has passed the Bar, am convinced that any Attorney General of any state could easily obtain an indictment against any person connected with or who ratified the decision below.

    THERE IS NO RATIONAL REASON for this accounting change described below OTHER than to intentionally deceive the investing public for this accounting change. That’s a felony. Period. No exceptions.

    From Today’s NYT:

    “Finally, regulators are concerned that the companies may have mischaracterized their financial health by relaxing their accounting policies on losses, according to people familiar with the review. For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were TWO YEARS late. As a result, tens of thousands of loans have not been marked down in value.

    Matt Dubuque

  18. Elizabeth

    Conf call just finished.

    Initial thoughts:

    -Bye bye preferred. Holy catfish!

    -Govt will buy MBS? They are now a really leveraged hedge fund.
    -If they are going to buy MBS, I think it should be bought by the SS Trust Fund..
    -From what I know about govt accting and the “unified budget deficit”I think this should inflate the budget as the financing needs of the US govt will increase
    -Unsure about stock market reaction. Good for dollar – the arrangement where foreign govts buy our debt to finance trade deficit is secure. I personally wasn’t that assured by Paulson’s reachout to the little banks who own preferred…

  19. Elizabeth

    Next thoughts:

    If the government is there as unlimited semi-permanent backstop (until GSEs shrink to nothingness) yet they don’t officially wipeout preferred/ common holders, doesn’t that actually practically guarantee that common / preferred have some positive value? Particularly if govt is getting warrants doesn’t that mean that shares are still worth something???

    I don’t understand mechanism by which shareholders will actually take losses, other than giving up dividend for a couple of years.

  20. dh


    perfect competition <<<<

    Show me any example of any corporation in American history that has used The US Treasury to help pay its dividend to its private shareholders. If Treasury places itself into a position to enable dividend payments to private shareholder, that would be a violation of antitrust law. Furthermore, if these dividends are primarily intended to bailout foreign shareholders, that would constitute a threat to the security of the state, i.e, bailing out private foreign speculators that bought into a fraud filled casino is not my problem or an obligation that Im responsible for. The reality is, Fannie is responsible for Fannie shareholder dividends and so are the counterparties, but American taxpayers are not in the loop on this. This pisses me off to no end, because this sets the stage for bailing out every Enron that comes along and sets a precedent to use taxpayer cash to support casino bets from retarded speculators that have zero comprehension of how to manage risk — which is why this is referred to as moral hazard, because these addicts want more crack, more dope, more meth — but now, these drugged out zombies want their debts socialized like lotto tickets … ahhh, I imagine no one gives a crap …

  21. Anonymous

    So far I’ve seen exactly one comment about the $62 trillion in swaps written on the Frannies. Given that so much of that market is made in the shadows, does Paulson actually know what we’re in for? Does anyone? If BSC senior management didn’t truly understand their book, I doubt anyone knows about systemic exposure.

    Anonymouse internet coward

  22. Andy

    Only time will tell if this works. Monday should be a very interesting day on the markets.

    The one really good and decisive action that the government took was to replace the companies senior leadership and announce the appointment of 2 new and external CEO’s effective immediately.

  23. etc

    elizabeth: “I don’t understand mechanism by which shareholders will actually take losses, other than giving up dividend for a couple of years.”

    Each new round of financing from the USG will take the preferred and common closer to zero with more and more dilution, but they don’t quite get to zero. It’s like the paradox about how many times a turtle has to walk half-way to a wall before it gets there, and never quite gets there.

    Cumulation and compounding of dividends on the USG’s preferred will further dilute the old preferred and common.

  24. ruetheday

    Paulson ended on a good note by saying that:

    1. It is ultimately up to Congress and not the Treasury as to what role these organizations should play in the economy.


    2. The “implicit government guarantee” cannot continue. Either there is to be an explicit guarantee or no guarantee at all.

    Both statements are correct, IMO. Of course they could also be interpreted as meaning “in a little over 4 months, this will no longer be my problem”.

  25. etc

    anon internet coward (self-named no insult intended): “So far I’ve seen exactly one comment about the $62 trillion in swaps written on the Frannies. Given that so much of that market is made in the shadows, does Paulson actually know what we’re in for? Does anyone? If BSC senior management didn’t truly understand their book, I doubt anyone knows about systemic exposure.”

    I thought the CDSs referencing FNM or FRE debt had a credit event if there was a default on FNM or FRE debt, but not their preferred stock. If that is correct, there isn’t a secondary effect of causing a payout on CDS’ referencing FRE and FNM debt.

    However, I’d guess there is a tertiary effect of causing a credit event for some regional banks who held significant amounts of FRE and FNM preferred. I’d guess Paulson and his advisors ran the numbers and didn’t think the CDS’ referencing regional bank debt would cause a crisis. And given the public letters to treasury recommending wiping out FNM and FRE preferred, one can probably guess some of the shorts that make money off hurting these regional banks.

    And the fourth order effect of distressed space investors buying these banks assets on the cheap when someone sells them in a quick and disorganized fashion.

  26. Anonymous

    Surely this will simply lead to dollar weekness and a rise in 10 yr note yields as supply will go through the roof.

  27. maynardGKeynes


    With all due respect, the stunner is not about the equity haircuts, but that they didn’t explicitly guarantee the GSE debt. This suggest that the fear of a flight from Treasuries and a consequent dollar run is real. Moreover, it says that these fears are so significant that they trumped the very serious concerns about foreign CBs pulling out of GSE debt. In other words, VERY scary in terms of macro stability.

  28. Namazu

    The impact of a GSE preferred haircut (shave?) on the banks seems like a two-fer for the taxpayer: since we’re recapitalizing both sets of players anyway, we wipe out equity from the GSEs and failed banks, then spend the money on the banking side–making depositors whole and helping banks smart enough not to own GSE preferred take over their dimmer brethren. In the process, we give a much-deserved spanking to Bill “man of the people” Gross, whose media blitz now looks like a Hail Mary tantrum. OK, a three-fer.

  29. Anonymous

    HERE ! It’s in plain text for crying out loud;
    “By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.”
    This is from Paulson’s speech. It is NOT supposed to benefit tax payers, never was…..
    Pitchforks and torches will be the new currency.
    I’m f’in mad.

  30. Anonymous

    A simple dividend discount model will yield a very low value to preferreds and commom equity.

    First we need to look at how long the portfolios will take to liquidate at the 10% level. It will take 6.5 years for the portfolio’s to be 50% of their value. 66 years for it to be 0.

    in DDM, the terminal value has the largest value. The terminal value is equal to 0 in the instance.

    With the government first in line (and their annual fee being chared) and operating costs required to continue to run the book of mortgages, the value is 0. There was never any implicit gaurantee on the preferreds, just the bonds.

    Unfortonately, almost every value manager has bought the common or preferreds over the lat 6 months… This will hurt everyone!!

    The one positive is that their are now new opportunities to start a mortgage company!!

  31. CTMM


    Re: "cullen: No one is talking about hurting foreign central banks. They invested in mortgage backed securities issued by freddie and fannie, not preferred stock or common stock."

    I may be completely misunderstanding the consequences here. (I have no schooling or business experience in finance, but lately the econo-blogs are more exciting than football.) I assumed if Fan & Fred were allowed to go bankrupt, there would be some sort of mark-to-market event for all of their internally held mortgages, which in turn would call into question all of the "real" value of the securities they've issued, as well as devastating the national housing market, setting up a downward spiral in housing prices, security values, and forcing the pyramid of credit-default-swaps that everyone is afraid of.

    I assumed that the Fed and the Administration would rather risk a drop in treasury yields and a weaker dollar, than OPEC & China saying "screw you" and repricing in Euros.

    Am I way off here? Probably. (Given my net worth of $25.00, it's more fun to armchair quarterback for the doomsday scenarios. Or at least more entertaining.)

  32. dh

    Re: “perform their mission,”

    Has anyone here looked at what the mission is? As I recall, Fannie came about to help working people get a simple home, and then in these Bush years, we exploded MBS and Fannie pools into derivatives and exploded non-accountability and then promoted mortgage fraud by the wealthy speculators, who then played casino games with collateral, while the Pimcos of the world played along, as the government played dumb — and meanwhile the mission of Fannie has nothing at all to do with reality — but for God’s sake, let’s keep pretending this game is important, and then use taxpayers to bail out the crooks!

  33. eh

    If they are going to buy MBS, I think it should be bought by the SS Trust Fund.

    There’d be just that much more treasury debt for the market to absorb. I think yields go up from here; this effect will battle the perception of GSE stability and determine where mortgage rates go (personally I don’t think lower mortgage rates will help housing much in any case). Anyway the ‘trust fund’ is a joke.

    Can’t see how this is good for the dollar. But then the dollar rallied some earlier this year on the assumption that low US rates would stimulate growth (supposedly), which seemed absurd to me at the time. Rising dollar momentum is strong now so it may continue.

    Looks like the stock — common and preferred — will be allowed to seek its own level.

    Monday should be a very interesting day on the markets.

    To say the least.

  34. esb

    Also, this is the tell for how the GM and GMAC toilet paper preferreds (and exchange traded “debt” issues) will fare when the Treasury is forced to step in (next month, perhaps?).

    I wonder if Paulson was able to make a bathroom stop on his way from the GSE press conference to the GM/F/GMAC meetings.

  35. Anonymous

    “…but now, these drugged out zombies want their debts socialized like lotto tickets … ahhh, I imagine no one gives a crap…”

    Wrong. For my next quarterly filing, I’m going to send a photograph of the money I owe. They can make as many copies as they want.
    I am going to hedge too; there are miles of guard rails near me that I think I will scrap.

    Also, if I start sell drugs, what is stopping me from buying silver and gold with cash?

  36. Anonymous

    There is an elephant in the closet that no one seems to be pondering upon… since there are plenty of good reasons why the preferred’s divident should be maintained, did Uncle HAVE TO suspend it? If so, what kinds of hidden damage or hidden agendas might require such a desperate measure?

  37. Anonymous

    What about the average investor who relies on the preferred dividends for income? They are also taxpayers.

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