NY Times: Fannie, Freddie Nationalization (aka Conservatorship) Imminent

Guess the powers that be were unwilling to risk playing chicken with the markets and losing.

So much for the theory espoused by some that the government couldn’t put the GSEs into custodianship absent a breaching of statutory minimums (technically, by being insolvent under the “fair asset” valuation method, Freddie is already on plenty thin ice). Nevertheless, this is quite a Friday night bombshell, particularly since the plan, as the Times appears to have garnered a few more details beyond the initial reports, is not minimalist (say an preferred equity purchase with no management changes). Conservatorship officially makes the GSEs wards of the state.

However, the rumors have not yet converged on the shape of the plan, The New York Times says that not only wouldthe existing chiefs and likely the board will be given the heave-ho, but that the preferred shareholders would suffer as well as the common equity holders (note the details of the recapitaliztion were not reported). That was surprising and may not be correct. Most observers had assumed that preferred shareholders would be spared, since many banks hold significant slugs of Freddie and Fannie preferred, and a big writedown would be a direct hit to the bottom line.

A report from the Washington Post gives a skeletal outline of the financial and legal arrangement; the Times has a more background (note the post has been updated to include the WaPo information and reflect the divergence of reports). Per the Times, a formal announcement is expected before the Asian markets open Sunday.

From the Washington Post:

The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.

Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company’s common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies’ losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

From the New York Times:

Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, that the government was preparing to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history….

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.

The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said…

Officials said the participants at the meetings included Mr. Paulson, Ben S. Bernanke, the chairman of the Fed, and James Lockhart, the head of both the old and new agency that regulates the companies. The companies were represented by Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac. Also participating was H. Rodgin Cohen, the chairman of the law firm, Sullivan & Cromwell, who was representing Fannie.

Officials and executives briefed on the meetings said that Mr. Mudd and Mr. Syron were told that they would have to leave the companies…..

he meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns….

With the possible removal of the top management and the board, it is no longer clear who would appoint new management.

Some interesting tidbits from Bloomberg:

The meetings come a month after Paulson hired Morgan Stanley to advise on any use of taxpayer funds to recapitalize Fannie and Freddie, and before the FHFA [Federal Housing Finance Agency] releases an assessment of their capital….

Mudd and Syron must approve of any government intervention under the law, unless the FHFA declares that either firm has insufficient capital. The legislation gave the Treasury the power through the end of next year to extend unlimited credit to or make equity purchases in the firms.

Given that this meeting with Mudd and Syron appears to have been a one-way communication. it seems likely that there was something due to be released that either gave James Lockhart, the head of FHFA, the smoking gun to intervene, or was sufficiently troubling to run the risk of an adverse market reaction, which would at a minimum raise the GSE’s cost of funding, which is already high enough to create worries that it might interfere with fulfilling their charter.

Update 11:20 PM. This comes via e-mail from James Bianco of Arbor Research:

As of this writing (Friday night, 10:14), it appears no one has a clue as to how the Fannie/Freddie Government bailout is going to work. I guess will have to wait for the now common Sunday night/Monday morning press releases to save the financial system from ruin….

If you’re are keeping score at home we had Sunday night/Monday morning “save the world” press releases in August 2007 (cut of the discount rate), December 2007 (TAF), January 2008 (ease 75 bps), March 2008 (Bear) and July 2008 (first Fannie/Freddie rescue) and now September. Anyone want to believe this is the last one (which will be the sixth in 14 months) will be the one that finally works and saves the world?

Bianco went further than we did above, and listed what the Times, Wall Street Journal. WaPo, Financial Times, and Bloomberg had to say. No convergence. Nada (looking at Bloomberg, it quoted WaPo on some matters and cited earlier “analyst opinion’).

It’s possible that inconsistent information is being leaked deliberately. The first time I saw that happen on a deal I was close to was on Goldman’s acquisition of commodities trading firm J. Aron. It may be that the powers that be assume they cannot prevent information getting out, and prefer to muddy the waters until an announcement is ready to go.

Update 12:05 AM. A key bit from the Wall Street Journal:

The meetings Friday were in part aimed at getting Messrs. Mudd and Syron to agree to the plan, though their approval was not necessary, these people said.

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  1. Steve

    Bberg and WaPo say dilution of common, no wipe-out of preferred. A happy-feet conservatorship.

    Not mentioned in those articles is that zeroing the preferred would tank a number of smaller US banks.

  2. Yves Smith

    Thanks for the quick catch. I found that out myself when I went to Google News to figure out which banks would be most affected, but who knows when I might have caught it otherwise. The post has been updated (and says so) and notes the divergence of stories. Presumably WaPo and Bloomberg are correct, tanking banks is completely unnecessary friendly fire.

  3. Anonymous

    Under what legal theory can taxpayer funds be used to protect the value of preferred shareholders?

    Also, Fannie and Freddie MBS are now Treasury securities with prepayment risk — nice little windfall for those in the know.

  4. Yves Smith

    10:37 PM, I have not read the enabling legislation passed last month. By all reports, it was pretty broad. The flip side is that the Fed encumbering taxpayers (contingently, but nevertheless, there is a risk a check will be written) is beyond its authority. Some central banking experts have also said the arrangement with BlackRock was also, shall we say, dubious. But no one has taken any action, and even the complaints have been few and far between. I was shocked that Congress did not try to reassert turf.

  5. Anonymous

    The first order of business will be to place ex-Goldman staffers in key positions of the new ‘conservatorship’

    Next, if the thrift ‘nationalization’ of the 1980s-1990s is any guide, the banks and investment banks will be all out to:

    1) take on the good assets of the GSEs onto their own books for some incredibly discounted price

    2) leave the toxic waste for the taxpayer

    3) use the GSEs as dumping ground for their own toxic waste. Wouldn’t be the least bit surprised to see LEH unload their garbage CDOs onto the books of the new entitiy via some kind of total return swap transaction (all advised by such netural parties as BlackRock, PIMCO and Morgan Stanley)

  6. RueTheDay

    Anything less than a complete wipeout of all common equity holders, a complete wipeout of all preferred equity holders, and a haircut for all debt holders is unacceptable in my book.

    And Congress needs to step up to the plate RIGHT NOW and address this legislatively. This is not something that should be decided by Bernanke, Paulson, and a handful of i-bankers in a backroom meeting on a Sunday.

  7. Mikey

    Agree with ruetheday. Not only that, but the first miniscule portion of the loss should be pulled out of Greenspan’s pension.

  8. Anonymous


    any ‘haircut’ on debt would trigger credit default swaps and cause much pain to the nice folks at GS, LEH, MER, C, JPM, and by chance MS.

    any failure to rollover their debt would have triggered those same CDS.

    Surely there was no conflict in the learned counsel provided Sec. Paulson from Newport Beach all the way to Wall Street.

    We certainly can’t have that, can we?

  9. Anonymous

    I can’t believe this is happening.

    I’ve realized tonight that I no longer have a country.

    Can anyone recommend a country with a liberal immigration policy (for Americans) that believes in personal freedom and responsibility?

  10. ruetheday

    Anonymous – Right. God forbid a CDS gets “triggered”. These were supposed to be nice steady income sources, the I-banks never thought they’d have to pay out on them. They’re not insurance companies fer crissakes. Privatizing profit and scoializing risk is the American way, anyone who thinks otherwise is a heathen commie.

  11. maung

    Hi Yves Smith,
    This weekends will be very interesting. If Gov rescue FNM and FRE, what will happen to other financial banks ( both commercial and investment )?

  12. ruetheday

    If this multi billion dollar bailout goes through and I hear another right winger talk condescendingly about “irresponsible borrowers”, I swear to god I’m going to punch them in the balls.

  13. Steve

    > The meetings Friday were in part aimed at getting Messrs. Mudd and Syron to agree to the plan, though their approval was not necessary, these people said.

    I haven't read the new GSE law, but I seem to recall that under the older statute a conservatorship DID require the agreement of the GSE's board of directors.

    Does anyone know how the new law reads?

  14. tom a taxpayer

    Yes, Anonymous at 10:55pm. The mob calls it a bust out operation.
    The following is a simultaneous translation of the WSJ article (Deborah Solomon & Damian Paletta Sept 6, 2008) on the plot to take-over of Freddie and Fannie:
    "The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter." [It's the week-end…time for the Wall Street/Fed/Treasury mafia to concoct another taxpayer scam.]

    "Precise details of Treasury's plan couldn't be learned." [Don't ask. We don't tell]. "The plan is expected to involve a creative use of Treasury's new authority to make a capital injection into the beleaguered giants." [We can turn water into wine].

    "The plan includes changes to senior management at both companies, according to a person familiar with the plans." [The rogue elephant CEOs will be tranquilized and shipped to the Serengeti plains of Africa.]

    "An announcement could come as early as this weekend."[We need to act before the Asian markets open on Sunday.]

    "On Friday, a series of high-level meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies' new regulator, the Federal Housing Finance Agency."[Fannie Mae and Freddie Mac will become "made" members of the Wall Street /Fed/Treasury mafia in a Friday night sit-down.]

    "Treasury has been working with bankers at Morgan Stanley to use its newfound authority, granted by Congress in July, to devise a way to prop up the mortgage giants, which have been pummeled by investors in recent weeks."[Hank 'the mole" Paulson has been scheming with the Wall Street crew to set up a "bust out" operation of the two tons of fun – Fannie Mae and Freddie Mac. The only detail remaining is who will be installed as a front men to run the bust out operation.]

  15. doc holiday

    Heck of a job, Jimmy, things have gone so well on your watch, we decided you could take on a little more (to screw up):

    James Lockhart, the head of both the old and new agency that regulates the companies.

  16. bg

    say what you want about ‘what should happen’. The government has been consistent at stepping in at each market tipping point and laying enough grease to keep the engine going. There is (likely) plenty of evidence to support a collapse in frandie, which is the only thing holding real-estate assets up (and thus most world assets). Panic deflation is going to be stopped by our elected officials, and that is probably right.

  17. Anonymous

    Are you kidding me? Nothing’s going to be able to stop the coming tsunami. All this does is further erode American economic output through a mis-allocation of resources. The next couple of years will certainly be interesting :-)

  18. bg

    no, not kidding. I am net short markets, so I am not an optimist. But the government is acting consistently, and has the resources to distort markets.

  19. Anonymous

    A fait accompli by the Bush administration? Weren’t they trying to raze the structures from the get go, starting with the summarily dismissal of the Clinton OFHEO head?
    Too bad it comes at a huge cost. Let’s hope the reincarnation is not a part private/part public one again as it seems that those deals only shaft the public and reward the private.

  20. doc holiday


    A: You know, if you go back a little bit in history, the fact that OFHEO was tough on Freddie and Fannie because of all their operational problems over the last two or three years turned out to be good. We did impose a 30 percent extra capital charge and we did cap their portfolios. Without that, they certainly could have been more at risk than they are at the moment.

    Actually, one of my concerns going forward is that those powers [to put on caps and raise the capital charge] really are only available because of their operational problems, and once they're remediated, those powers may go away if we don't have legislation. Then we could have potentially much higher systemic risk.

    Q: How do you respond to the calls for raising the caps and the conforming loan limit?

    A: We're sticking to our guns at this point on both the portfolio caps and the 30 percent surcharge. And, to the extent some people are talking about a conforming loan limit temporary increase, I agree wholeheartedly with [Treasury] Secretary [Henry] Paulson and [Fed] Chairman [Ben] Bernanke that it should only be done as part of an overall reform package for GSE regulators–with a new law not only for OFHEO, but also for the Federal Home Loan Bank Board combined. So, I think it needs to be part of comprehensive reform before the enterprises are given additional flexibility.

    CROOKS, FRAUD & CONSPIRACY; at this stage, this is TREASON!

  21. doc holiday


    In some states, companies can be placed under conservatorship, as a less extreme alternative to receivership. Whereas a receiver is expected to terminate the rights of shareholders and managers, a conservator is expected merely to suspend those rights.[2] Ramsey & Head advise that an insolvent bank should go into receivership rather than conservatorship to guard against false hope and moral hazard.[3] In July 2008, the failing IndyMac Bank was taken into administrative receivership by the Federal Deposit Insurance Corporation (FDIC) and its assets and secured liabilities transferred to a specially-established bridge bank called IndyMac Federal Bank, FSB which was placed into conservatorship, also by the FDIC.

    http://en.wikipedia.org/wiki/ Con…Conservatorship

  22. Richard Kline

    Zombies in chains. Ravenous, contagious, liquifying.

    With the quasi-public guarantee, GSE debt was, in effect, US sovereign debt. With a takeover, GSE debt is _in fact_ US sovereign debt. Which makes me think again of Reinhart and Rogoff, and the potential for a default on US ‘sovereign debt’ in the course of the asset deflation now in progress. (Not necessarily the same thing at all as a credit deflation, but that’s a wrangle which I’ll have to leave until I’m back from the edge [of the continent] on a mini-vacation.) If there is such a sovereign default, it may very well be through some subsequent writedown on GSE debt. Because Our Dear Country doesn’t have the dough to make good on all the claims these colossal zombies are staked to. Just doesn’t. Maybe some complex deal with other sovereign holders of GSE debt is worked out on a swap around, then everybody else in the pool loses a limb or two for the zombies’ lunch. Hmmm.

  23. mickslam

    Dilution can mean many things. While I think they should get something along Barry R. suggested amounts (0%, 25%, and 90% respectively, but with the debt at 100%), the dilution could be somewhere in the Bear Sterns range as well or effectively 0.

    And, as much as I hate this, it is better than letting them scramble for funding and possibly triggering CDS.

    This bailout makes it all the more clear we need to stop the privatization of gains and the socialization of losses…

  24. Richard Kline

    Regarding, in attempts to backstop catastrophic losses at either or both of the GSEs or the retail banking system, whether moral hazard is cozzened, better plans might involve this or that, firebreaks on losses might be drawn hither, yon, or on the trace of some particular last ditch, here is something to consider: There may well be _no_ solution to these problems which can be arranged by the intervention of the public authorities. It is a nice and good feeling to believe that by action we can affect our fate, but in the instance of this crisis that may not be the case. Not to sound either defeatist or cynical, but there simply may be no salvagable course, viable structure, least worst action, or tolerable recourse that we can purposefully effect.

    The issue to me is that the problems in the financial system are simply too interconnected to really stop collapsed. All these parties are too interlinked, and too unsupervised; this is the pass we have come to. Unintended and ancilliary consequences are huge in things such as the intent to bail out the GSEs. If we let Bear bust, say, or wipe out GSE preferreds the collateral damage knocks down another structural member of the whole edifice, causing further collapses elsewhere. ‘Bailing them out’ when we don’t really have the money to make good on such statements consolidates the problem in even more disastrous if very briefly delayed forms. Hmm.

    It’s strange to think that it might be better just to let things collapse, and then take the assets and capital which remains and start more or less from scratch on a re-build rather than attempt a work-around with infected, shattered, crumbling edifices. That won’t be attempted so the idea is moot: policy actors will act, even if they only push problems around and around amongst different hot spots. But really, we may just be fooling ourselves that our interventions are efficacious to a mid-term horizon, even if some few are saved in the near term. . . . We’re still at the ‘bargaining’ stage in our experience of loss(es). Hmmmm.

    Learn to play an instrument better, to write poetry, or teach a child something useful. That’s my only sage counsel of any real worth over the next six-twelve months.

  25. s

    note the action in the markets. 350down day then a measly 40 pt recovery into the weekend. one would have expected the markets to rally much stronger as shorts covered their position and profits locked for weekend. wa la 445 announcement leak.

    I am still unlclear how this move does anything for home prices. In fact it does nothng unless the GSE is turned into the bad bank and it baecomes the dumping ground which is possible. It was reported the other day that FRE hired two former GS bankers to chief risk manger and something else.

    Even if that is the case the markets will reprice the debt. problem no solved in the least

  26. Marcf


    There is always “money” to make good on such statements, even if it means creating it out of thin air. I was thinking this morning about the contrast between the ECB and the FED. On the one hand you have Trichet holding rates and declaring that “financial stability will never replace price stability” and putting a clamp on the originate to repo model. On the other the US doing exactly the opposite.

    Truth be told while I find the integrity of a Trichet remarkable I wonder if he is not mistaken. I a deflating asset environment, you free up the limits on the money presses and you may achieve both price stability AND financial stability by creating money to support the GSEs (although the numbers seem small in all honesty). On the other hand, short term price stability ala ECB may result in both financial instability and mid-term price instability (mostly deflationary ?). I muse about this at http://www.thedelphicfuture.org

  27. Marcf


    I agree that I don’t see how this truly impacts the prices of real estate.

    This treats the symptoms (GSE fail) rather than the cause (RE prices in free fall).

    However, if anything, it allows the GSEs to continue credit flowing in the system. In that sense this may help the root cause by making credit available for mortgages.

  28. Anonymous

    I would like to be wrong here. But as I think about the preferred shares problem, it seems to me by artificially keeping them at current value then in effect the whole bottom of the US banking system is being subsidized. And of course the whole top is already steadied by the Fed “windows”.
    So in effect the entire US banking system is on life support…at a free clinic

  29. doc holiday

    Recently I read a bit of Greenspan's, The Age Of Turbulence.

    In this, he talks about (Japan) deflation on page, 291:

    " … financial intermediation so vital to any large developed economy virtually dried up. Deflationary forces took hold. It was not until the long decline in real estate prices bottomed out in 2006 that reasonable judgments of bank solvency were possible.

    I love that: "reasonable judgments of bank solvency were possible."

    >> That period of denial between 1990 to 2005 was a matter of saving face and thus not allowing the reality of corruption and fraud to be accounted for. Essentially the Japanese allowed a financial cancer to mutate for almost 13 years. The matter of sorting out solvency is a matter between truth and lies, it's about corruption, collusion and the distortion of reality and the impact of chaos in a society. America is obviously, beyond doubt in the hands of criminals — the ubiquity of this cancer can be found easily by looking at the criminals sitting in every chair of The Senate and Congress! Where is their anger, pride or patriotism, where is their loyalty to The Constitution, to law or God. We live in a state governed by lobby groups that now are able to use The Treasury as a conduit for casino games and no one seems to get it or care!

    This Fannie/Freddie financial cancer has the same exact DNA from the monster in japan, but instead of America looking at corruption or illegal activity by corporations and individuals, we have a sympathetic Treasury and Fed that are going to spin this problem into a new form of synthetic denial that allows time to be bought for those that need to escape justice.

    This conservatorship idea is the trapdoor mechanism which helps avoid the harsher reality of receivership and thus linkage to providing accountability. This third-world collusion and mafia-like pact enables the crooks to continue repackaging the opium-like mortgage fraud into synthetic covered bonds, while taxpayers will now be in the loop to help fund the crooked insiders directly with a quarterly dividend. This is not absurd in what's happening here, it's called treason, and people involved in this coup should be hung!

    Greenspan also says the deflation issue in Japan was not economics but culture, i.e, a society in denial, which is what we have with The Bush Coup and Friends of Mozilla….

    Re: Senators Dodd and Conrad have been identified as “friends of Mozilla”. Their V.I.P. status and preferred rates from Countrywide was a drop in the bucket. Significantly, it did help reduce their monthly mortgage payments. However, I have to wonder if Country and Mozilla were not under such close scrutiny would those two trees stand out in the forest of senators and representatives? Some others may have received preferential treatment from mortgage lenders that also lost money during the subprime crisis and resultant credit crunch.

  30. Anonymous

    Has anyone noticed that Bloomberg’s often quoted “$500 billion bank loss to date” hasn’t increased for some time? Using my $6.99 calculator here’s my score: Add $100 billion in disclosed “financed sales” of toxic debt, another $150 billion of undisclosed on- balance-sheet of same, $500 billion of “off-balance sheet” really toxic stuff, and then say, in round numbers, a $1.0 trillion haircut on the collapse of Fannie-Fred. And the answer is…$2.250 Trillion. Bankrupt banks. Wonder who’s going to pay for that, as if I didn’t know? See you in the bread line.
    Earl L. Crockett
    Santa Cruz, CA

  31. Anonymous

    Re: Has anyone noticed that Bloomberg’s often quoted “$500 billion bank loss to date”

    That has been the on-going reported loss by media since at least january, so I guess NBER uses that as a baseline. It seems the loss decreases every time more writeoffs occur, so yes, this is odd and noted!

  32. S

    Mortgage rates will see perhaps a nominal impact. That said, the credit has continued to flow and the house prices have continued to go down. There is no solution to this deflation. There are band aids and deck chair shuffling. This is the later. The stench coming from treasury reminds me of driving past a garbage dump.

  33. doc holiday

    Extra, extra…

    The Housing and Economic Recovery Act of 2008, P.L.110-289, changes many laws that affect both the housing and mortgage markets. Included in the act are provisions to strengthen and to unify oversight of the housing government-sponsored enterprises (GSEs — Fannie Mae, Freddie Mac and the Federal Home Loan Banks). The Treasury is authorized to lend or invest an unlimited amount of money in any of the regulated entities in the event of financial or mortgage market


    FHFA also has broad regulatory powers over the FHLBs, and is required by law to recognize the differences between Fannie Mae and Freddie Mac and the FHLBs. For example, both enterprises must continue to exist, whereas the 12 FHLBs can merge, and FHFA can require FHLBs to merge. FHFA has all the powers of the FHFB, which formerly regulated the FHLBs, including conservatorship and receivership.

    The FHFA reviews and can reject acquisition or transfer of a controlling interest in a regulated entity. It can administer conservatorship or receivership through litigation without Department of Justice involvement. FHFA makes certain that the regulated entities operate in the public interest and that the entities remain adequately capitalized. FHFA is to establish standards for each regulated entity for internal controls,audits, and risk management. (Sections 1101, 1102, 1107, and 1108) The prohibition (in prior law) against excessive executive compensation is enhanced by permitting FHFA to take into account wrongdoing on the part of the executive, and to hold pay in escrow while a determination is made. (Sections 1113and 1114)

  34. doc holiday

    The act creates a new, stronger, unified regulator for Fannie Mae, Freddie Mac,
    and the Federal Home Loan Banks (the housing GSEs). As a result of various
    provisions in the act, the secondary mortgage market is likely to be broadly affected.
    For example, the Secretary of the Treasury is given (until December 31, 2009) the
    authority to lend or invest in the housing GSEs on whatever terms the Secretary
    determines to be appropriate.

    Treasury and Federal Reserve. In the event of a financial or mortgage
    market emergency, the Treasury is given the authority to stabilize the housing finance
    system by purchasing obligations and securities of the housing GSEs in unlimited
    amounts under terms and conditions determined by Treasury. This authority expires
    December 31, 2009. (Section 1117)

  35. doc holiday

    mporary Provisions

    Enhanced Authority of U.S. Treasury to Purchase GSE Securities. The Secretary of the Treasury has long had authority to purchase up to $2.25 billion in our obligations. The legislation provides the Secretary of the Treasury with additional temporary authority to purchase our obligations and other securities on terms that the Secretary may determine, subject to our agreement. This expanded authority expires on December 31, 2009. To exercise this authority, the Secretary must determine that such a purchase is necessary to provide stability to the financial markets, prevent disruptions in the availability of mortgage finance, and protect taxpayers. In connection with exercising this authority, the Secretary must consider: the need for preferences or priorities regarding payments to the government; limits on maturity or disposition of obligations or securities to be purchased; the company’s plan for orderly resumption of private market funding or capital market access; the probability of our fulfilling the terms of the obligations or other securities, including repayment; the need to maintain our status as a private shareholder-owned company; and restrictions on the use of our resources, including limitations on the payment of dividends and executive compensation.

    For a description of how this GSE regulatory reform legislation could materially adversely affect our business and earnings, see “Part II—Item 1A—Risk Factors” of this report.

    Federal National Mortgage Association

  36. doc holiday

    One last blast:

    If we fail to meet our regulatory capital requirements, we would become subject to significant restrictions on our business and use of capital.

    If we become undercapitalized (that is, we fail to meet our risk-based capital requirement but continue to meet our minimum capital requirement), we would be required to submit and implement a capital restoration plan to FHFA and would become subject to significant restrictions on our business and use of capital. We would not be permitted to make any capital distribution that would cause us to be reclassified as significantly or critically undercapitalized. In addition, we would not be permitted to increase the size of our mortgage portfolio or to engage in any new activity without the approval of the Director of FHFA. The Director of FHFA would also have the discretionary authority to take a number of additional actions relating to our business, including requiring that we sell assets, reduce our off-balance sheet obligations, acquire new capital, terminate certain business activities, replace our management or any other action the Director deems appropriate. If we become significantly undercapitalized (that is, under existing regulations, we fail to meet our minimum capital requirement, but continue to meet our critical capital requirement), we would become subject to significant additional restrictions beyond those described above. If we become critically undercapitalized (that is, we fail to meet both our risk-based and critical capital requirements), the Director of FHFA may place us into conservatorship or receivership under specified conditions, which would transfer control of the corporation to the U.S. government. Moreover, the Director of FHFA is required to appoint a receiver if he determines that, for the preceding 60 days, our debts have exceeded our assets or we have not been paying our debts as they become due.

    The Director of FHFA also has the discretionary authority to downgrade our capital classification if the Director determines that we are engaging in conduct that could result in rapid depletion of our capital, the value of the property subject to mortgages we hold or have securitized has decreased significantly or we are operating in an unsafe or unsound condition, or for other reasons. In addition, the Director of FHFA has the right, by order, to temporarily increase our capital requirements to ensure our safe and sound operations.

  37. Anonymous

    September 6, 2008
    Sorry to be dense “doc holiday”, but where in the hell do you think the Usury (sorry Treasury), and the “Federal No Reserve” is going to come up with the funds to bail out Fannie-Fred? As far as I can tell it will come right out of our hides with home prices falling in the 60%, or greater, range (gee I’m getting conservative), and the dollar turning to dust. So in the near term when the rest of the World finds out that Botswana might be a play, and the trade surplus “want-a-be’s” have forked over all their easily earned cash, we, you and I, will be left with survival gardens in our formally well manicured front lawns.

    I am considered by all that know me to be a blatant, incurable, but not blind, optimist. I only came out of my macro-financial hobbit hole near to the 1st of March, 2008 when Bernanke strongly recommended that his member banks begin reducing the capital amounts of their mortgages so that they were “more affordable”. I knew that I wasn’t in Kansas any longer and I quickly found my 1962 vintage copy of my business school “Money Credit & Banking” text book and burned it. What I then found from the facts, as I saw them is, what we’re now getting “in spades”, as my dad used to say. Wish it was otherwise, but it isn’t.

    I own no securities, thank god.

    Earl L. Crockett
    Santa Cruz, CA

  38. doc holiday

    Many sorries, I love to beat dead horses to pulp:

    I posted a thing here Aug 30th, and here are a few points I'd like to toss in here:

    § 321. General authority of the Secretary
    (a) The Secretary of the Treasury shall—
    (1) prepare plans for improving and managing receipts of the United States Government and managing the public debt;

    OK, that says public debt….not friggn jump in bed with Fannie and Bill Gross!

    (5) prescribe regulations that the Secretary considers best calculated to promote the public convenience and security, and to protect the Government and individuals from fraud and loss,

    Paulson, is not protecting American taxpayers from fraud, he is bailing out his buddies on wall street!

    (7) with a view to prosecuting persons, take steps to discover fraud and attempted fraud involving receipts and decide on ways to prevent and detect fraud;

    >> Where is Paulson in taking a hardass hardline against wall street crooks??? he remains in collusion with them!

    (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;

    § 331. Reports

    (a) The Secretary of the Treasury shall submit to Congress each year an annual report. The report shall include—
    (1) a statement of the public receipts and public expenditures for the prior fiscal year;
    (2) estimates of public receipts and public expenditures for the current and next fiscal years;

    (1) On the first day of each regular session of Congress, the Secretary shall submit to Congress a report for the prior fiscal year on—
    (A) the total and individual amounts of contingent liabilities and unfunded liabilities of the United States Government;
    (B) as far as practicable, trust fund liabilities, liabilities of Government corporations, indirect liabilities not included as a part of the public debt, and liabilities of insurance and annuity programs (including their actuarial status);
    (C) collateral pledged and assets available (or to be realized) as security for the liabilities (separately noting Government obligations) and other assets specifically available to liquidate the liabilities of the Government; and
    (D) the total amount in each category under clauses (A)–(C) of this paragraph for each agency.
    (2) The report shall present the information required under paragraph (1) of this subsection in a concise way, with explanatory material (including an analysis of the significance of liabilities based on past experience and probable risk) the Secretary considers desirable.

    (2) The Comptroller General of the United States shall audit the financial statement required by this section.

    § 3109. Employment of experts and consultants; temporary or intermittent

    (b) When authorized by an appropriation or other statute, the head of an agency may procure by contract the temporary (not in excess of 1 year) or intermittent services of experts or consultants or an organization thereof, including stenographic reporting services. Services procured under this section are without regard to—
    (1) the provisions of this title governing appointment in the competitive service;

    >> Now then, you say, what does this image of a stuffed goat have to do with Paulson and Bear Stearns and Maiden Lane LLC ( http://www.maidenlanellc.com/ ) ?

    FYI: Note: On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets. Payments by Maiden Lane LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of the LLC, principal due to the FRBNY, interest due to the FRBNY, principal due to JPMorgan Chase & Co., and interest due to JPMorgan Chase & Co. Any remaining funds will be paid to the FRBNY.

    Detail items affecting Federal Reserve Balance Sheet. Maiden Lane LLC has been reported as a Federal Reserve asset since July 03, 2008. Outstanding Principal is payable to the Federal REserve Bank of New York. Accrued Interest is payable to the Federal Reserve Bank of New York. Principal and Interest are payable to JP Morgan Chase & Co. Amounts are in millions of dollars.

    8. Includes the liabilities of Maiden Lane LLC to entities other than the Federal Reserve Bank of New York, including liabilities that have recourse only to the portfolio holdings of Maiden Lane LLC.
    Refer to table 2 and the note on consolidation accompanying table 5.


    Re: On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets. Payments by Maiden Lane LLC from the proceeds of the net portfolio holdings will be made in the following order: operating expenses of the LLC, principal due to the FRBNY, interest due to the FRBNY, principal due to JPMorgan Chase & Co., and interest due to JPMorgan Chase & Co. Any remaining funds will be paid to the FRBNY.

    Re: Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret. The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.

    If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect. This doesn't exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.

    Now that the Fed is taking on the risk of Bear Stearns's assets, though, the game has changed. And the Fed's rules should, too, at least for these particular holdings. Indeed, the Fed's Board of Governors can change the rules anytime it wants.

    Under its rescue plan, the Fed next week is scheduled to lend $29 billion to a Delaware limited-liability company that will hold a portfolio of illiquid Bear Stearns assets, which Bear Stearns valued at $30 billion on March 14. To put that in perspective, the Fed's total capital was $40.4 billion as of June 11. The portfolio consists mainly of mortgage-backed securities and other mortgage-related assets.

    JPMorgan Chase & Co., which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses. The Fed is on the hook for the rest. The central bank has hired an outside company, BlackRock Inc., to manage the sale of the assets over the next 10 years. The proceeds will go back to the Fed and then, if anything is left over, to JPMorgan after the Fed is paid.

    OK, >>>> What does Paulson not get about: § 3109. Employment of experts and consultants; temporary or intermittent

    (b) When authorized by an appropriation or other statute, the head of an agency may procure by contract the temporary (not in excess of 1 year)?????????????????

    Ok, enough already, but this pisses me off!

  39. Anonymous

    September 6, 2008

    OK “doc holiday”, being really pissed off is good in this situation.
    Two questions, one remaining, and one new:
    1. Where are the Treasury and the Fed Res (should have added the FDIC) going to get the money for their assumed to be generous bailouts?
    2. Do you have your rotatiller tuned, greased, and oiled, to do the traditional early Fall turning of soil so that your former front lawn is ready to receive the winter rains?
    Earl L. Crockett
    Santa Cruz, CA

  40. Anonymous

    From the updated NY Times article on Saturday evening:

    “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.”

    TWO YEARS?!! Are you kidding me?

    Is this some kind of joke? Or are the people responsible for this going to jail?

    Meanwhile, Barney Frank says he has no idea what Hank’s up to. He’s just waiting for a phone call or a news bulletin like the rest of us.

    Yes, we have no bananas. But we’re still a banana republic. Two freaking years! America number one!

  41. doc holiday

    This doesn’t tell us much as to where the cashflow comes from for this bailout:

    Funding. The FHFA is funded by assessments collected from the enterprises. Assessments collected from the Federal Home Loan Banks are to be used only for their supervision. (Section 1106)

    Housing Trust Fund

    Each enterprise is to contribute to the Housing Trust Fund 4.2 basis points (0.042%) of the unpaid principal balances of its total new business purchases. If this had been in effect in calendar year 2007 when Fannie Mae and Freddie Mac purchased $1.2 trillion in mortgages, the enterprises would have contributed $500.8 million to the trust. 14 The contributions can be suspended if they would cause severe financial problems for an enterprise. Each year, 25% of the housing trust fund goes to support a reserve fund for HOPE for Homeowners bonds.

    FHFA may issue subpoenas and cease-and-desist orders against a regulated entity, or a regulated entity-affiliated party (such as corporate officers), for safety and soundness reasons, but not for failure to comply with housing goals. FHFA may impose fines ranging from $10,000 to $2 million per day. In certain extreme cases, FHFA may suspend or remove regulated entity-affiliated parties and may also issue industry-wide suspensions; these actions may be appealed to the courts. Criminal penalties apply to anyone who participates, directly or indirectly, in the affairs of a regulated entity while it is under suspension or order of removal. FHFA may apply to U.S. District Court for an injunction to enforce cease anddesist orders, or anyother order. (Sections 1151, 1152, 1153, 1155, 1156, and 1158)

    Title I, Subtitle E — General Provisions.The act eliminates the five presidentially appointed members of the boards ofdirectors of Fannie Mae, Freddie Mac, and the FHLBs and reduces the size of theirboards from 18 to 13, or such number as FHFA establishes. (Sections 1162 and1202

  42. dh

    Anyone see this? A few weeks old, but just an FYI:


    On July 22, 2008, CBO transmitted an analysis of the Administrations proposal to provide temporary authority to the Secretary of the Treasury to purchase any obligations and other securities in any amounts issued by the GSEs. CBO estimated that enacting that proposal would increase direct spending by $25 billion over the 2009-2018 period. CBOs estimate for section 1117 of this legislation is unchanged from its estimate of the administrations proposal. That estimate reflects a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months, and nearly a 5 percent chance that such assistance would need to cover as-yet unrecognized losses greater than $100 billion.

    No doubt, $25 billion is a lot of money — but Fannie Mae and Freddie Mac are huge, they can readily absorb such losses over a decade. Moreover, there is no assurance that there will be ANY need for government funds — the “estimate reflects a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months.”

  43. dh


    Effective January 1, 2009, it also increases the FHA loan limit to the lesser of 115 percent of the local median home price or $625,500 with a floor for lower priced markets of $271,000, establishes a 12-month stay on FHAs proposal for risk-based premiums, sets the down payment requirement at 3.5 percent and prohibits seller-funded down payment assistance (both direct or through a third party).


    FHA Rescue: Creates a voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home. The lender would pay a 3 percent FHA loan origination fee. To qualify, the borrower must have a debt-to-income ratio above 31 percent on the original loan. The program is capped at $300 billion.

  44. Anonymous

    We are well on our way to a new world order. Will the rest of America be sold to these guys in the middle of the night and on the weekends? OMG! What is next? I see a few people are concerned but so few.

  45. Anonymous

    This truly underlines the sorry state of affairs in America ,concerning finance.
    many other banks are yet to fail,many
    more people yet to suffer.

  46. ryanshaunkelly

    Lipstick now Fannie & Freddie!
    Neocons or REAL Conservatives –

    nader paul kucinich gravel
    mckinney ventura
    perot charts

    Got honesty?

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