Freddie Mac/Fannie Mae bailout: Guess Who Wins

The bailout of Freddie and Fannie has just been announced by Hank Paulson, with supporting words from Bernanke. What's interesting in what's proposed, as usual, is what's unsaid. This would seem to be an incredibly ambitious gambit: a nationalisation, an attempted bailout of ALL the banks, and an open-ended commitment of taxpayer money to save the financial world.

Treasury Lays Out Fan-Fred Plan

WASHINGTON -- U.S. federal regulators outlined their bailout for Fannie Mae and Freddie Mac Sunday morning, including a takeover of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock.

The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.

The Treasury said its senior preferred stock purchase agreement includes and upfront $1 billion issuance of senior preferred stock with a 10% coupon from each GSE, quarterly dividend payments, warrants representing an ownership stake of 79.9% in each firm going forward, and a quarterly fee starting in 2010.

That's the nationalisation bit: it's a slow motion version: there's a small upfront commitment of funds ($1 billion is small change for these companies: even if it represents roughly 10% of their combined market value today, it's less than 1% of their announced equity), but the main part if the warrants, which are rights to buy shares exercisable in the future. This is consistent with the announcement that public funds would be injected over time, as needs arise. But no amounts are given there yet.

What seems apparent is that this is good news for the other owners of preferred shares, which are regional US banks and a lot of foreign governments (which used these shares as a proxy for US Treasuries, with somewhat better remuneration) - they are not going to be wiped out. The preferred shares not being wiped out allows to avoid bankruptcy risk for the banks owning them, and to avoid pissing off a lot of foreign creditors, so it's a reasonable thing to do.

The FHFA, which regulates the two government-sponsored enterprises, will act as conservator of the two firms, taking control of the companies' day-to-day operations. The agency said in a release that there is "no exact time frame" for when the conservatorship may end, and that the powers of the firms' stockholders will be suspended until the conservatorship is terminated.

As expected, as the government takes over, the normal shareholders are wiped out, something that will allow the Bush administration to claim that they are being tough and not bailing out investors, but we'll see that this claim is fundamentally false.

This whole side of the package will allow the government to claim that the bailout has a minimal cost: $1 billion only for now, a highly disingenuous claim (the warrants will most likely need to be exercised - but only next year, and there is the rest...)

The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.

This is huge. This is the federal government taking over the "toxic waste" in a way that will have an impact not just on Freddie and Fannie, but on the whole market. By "buying" mortgage-backed securities instrad of taking them as collateral, the Treasury does two things at the same time:

  • it takes off the assets and liabilities off the balance sheet of the two companies in a definitive way (rather than temporarily) and assumes, for sure, the associated risk;
  • it sets a price on these securities. This has been the biggest problem to solve the credit crisis: nobody has been willing to set a price on these assets, because of the uncertainty on the real value of the underlying assets (or because everybody could see that they were falling by the day). By setting such a price, the government creates a highly significant precedent - and, in all likelihood, provides a floor to these prices, ie an implicit commitment (or at least the expectation of a commitment) to buy more such securities.

In doing this, the government is boldly trying to call the end of the financial crisis, set a total price to it, and agree to pay the difference if the cost is higher in the end. This, to me, looks like a full governmental guarantee to the whole banking sector. Of course, a lot will depend on where the price is set to purchase these mortgage-backed assets, but this is still a take-over of the toxic waste by taxpayers, at aprice that may or may not (and, frankly, is highly unlikely to) be right.

But it's even worse than that: by providing an additional lending facility on top of that, the government is saying: we're putting our money (well, yours) where our mouth is - providing further liquidity to the companies and, I presume, expecting them, once the toxic waste has been cleared from their books (which can happen now that there is a floor price), to lend to the mortgage markets again.

It's the usual solution of the Greenspan bubble: as soon as one bursts, we blow another one to cover it up and keep the party going a little longer.

Of course, the goal here is simply to create a boost that lasts until November, and given the kind of weapons used, it's likely to succeed in that short term goal. Saving the US economy is another thing, given that its fundamental problem is spending beyond incomes - more debt does not cure that, rather the opposite. The twin movements of growing spending and stagnant incomes have to be brought back together. Boosting spending via debt cannot work this time; incomes have to be raised - and for the right people.

This plan is not about this, it's about bailing out the financiers that played and lost with other people's money, and give them a chance to try again. Par for the course, of course.

Here is another angle from Calculated Risk

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth.
With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

So are preferred shareholders bailed out or no? Hurricane occupied minds want to know....

Bloomberg adds that the warrants on preferred stock will amount to up to $100 billion:

The FHFA will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Also, I should add that the new preferred stock will be senior to the existing one, which will not have much of an impact in the first year, but will do so as warrants are exercised - yet another hot potato dumped on the lap of the next administration, as it threatens to wipe out the regional banks that have a lot of capital tied up in there, and the foreign centrla banks that help such securities as Trasury proxies.

Isn't this the first step to monetisation, where no real asset is used apart from debt?
While I'm sure some of the mortgages are good, does anybody really know the number that aren't!!
monetisation - establishing something (e.g. gold or silver) as the legal tender of a country

Jerome wrote,
"Also, I should add that the new preferred stock will be senior to the existing one, which will not have much of an impact in the first year"


"Fitch has also downgraded FNM and FRE's preferred stock to 'C/RR6' from 'BBB-'. The downgrade of the preferred stock reflects the subordination of the preferred to any Treasury interest and interest payments are unlikely to resume in the foreseeable future. Thus, any recovery is expected to be minimal. "


Fitch Affirms Fannie Mae & Freddie Mac's 'AAA' IDR; Lowers Pfd Stock; Sub Debt on Watch Evolving
Last update: 4:28 p.m. EDT Sept. 7, 2008

This is an immediate hit to the market value of the preferred. All financial institutions holding these preferred as part of their capital will take an immediate hit.


U.S. watching Macs' preferred shareholders

WASHINGTON, Aug. 23 (UPI) -- U.S. Treasury officials are watching Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE)'s preferred shareholders -- which include many banks -- for signs of panic, sources say.

Citing sources close to the department, The Washington Post said Saturday that Treasury Secretary Henry Paulson is looking to avoid wider financial turmoil by making moves that would prompt the preferred shareholders of the troubled mortgage finance companies to sell their shares.

Paulson is said to be keeping a close watch for any sign of panic among those institutional shareholders as he decides whether to inject government money into the two companies, the Post said.

The value of the shares, estimated to be worth $36 billion, has fallen recently, with Fannie's dropping 26 percent and Freddie's falling 36 percent in the last week.

Analysts say the situation may reach a moment of truth in early September when the two Macs will seek to refinance about $225 billion in mostly short-term loans that are coming due. Any sign of a sell-off by the preferred shareholders will likely persuade Paulson to act to inject the government funds, the newspaper reported.

yes and no. The hit is immediate, because the likelihood of future warrants being exercised is high, but they haven't actually been exercized yet. It's just the diffrerence between an event that has happened, and one that has not, but is highly likely to. Both will get a similar rating, but the event has happened in one case and not yet in the other.

The preferred stock will be widely held within the US, including being held by regional banks (those least affected by sub-prime???). Those banks must now write down their stock holdings.

I don't know if this conservatorship will qualify as nationalisation, but if it does, and I see no reason why not, then it will triger default on any FMFM CDS (credit default swaps).

Previous interventions have had the effect of boosting the stock market for a while, not permanently since there are no real changes to the business practises.

This won't help anyone struggling to meet their mortgage repayments. IMHO it is a bail-out for investors in the bonds most notably the non-US investors who were threatening to dump these bonds.

Where are we going to get the money? Next year fiscal deficit will be about 500 Billion. These guys are nut -- I am sick of passing all the debts to the next generation.
Paulson is helping his friends out in this bailout. Too many bankers are heavily involved with the toxic mess that created the current crisis and yet they got the pat in the back. Sheesh -- what a democrazy we have here.

Democrazy is an apt description, but kakistocracy works as well.

"Government under the control of a nation's worst or least-qualified citizens."

If you read past the pin factory in Adam Smith's WEALTH OF NATIONS, he ultimately says that the business class is the least qualified to run the government because they will ultimately tip all of the rules to their own profit. Sounds familiar.

Good point!

And Founding Father Thomas Jefferson believed that farmers were "the most precious part of a state," "the chosen people of God," and the only ones who could be trusted with governance, because they were self-reliant. For Jefferson, landholding and working the land kept a man honest and virtuous. The purpose of farming was not to generate excessive wealth, but to permit a decent independent lifestyle, and government’s role was to protect the freehold farmer. Through technological improvements—and not the slave labor and large farms that characterized commercial agriculture—ordinary men could “escape the tyranny of their social superiors.”[ii]

They're going to borrow the money. This isn't a taxpayer bailout because nobody's talking about raising taxes to pay for it. This is a bailout through inflation so the people who are really paying are savers and holders of U.S. dollars around the world.

Once the government can no longer borrow money from foreign creditors at reasonable interest rates the Federal Reserve will begin to monetize the debt by just creating new money out of thin air. Welcome to the hyperinflationary depression. I think we'll call it The Greater Depression.

This is along the lines I was thinking. The government is "printing" the extra money needed for these banks. Through this additional injection of money into the system I'd expect the dollar to weaken and inflation to continue to increase, unless demand is somehow curtailed at the same rate that money is being created.

It would be helpful to talk in terms most people can understand. So my question is: What does this move do to the purchasing power of an American family with about the median income over the next few months to few years?

What does this move do to the purchasing power of an American family with about the median income over the next few months to few years?

no matter whoever takes whatever moves, either the income will be diminished (through the massive unemployment and diminished economic activities brought on by the deflation) or the purchasing power of the income will be diminished (through the inflation).

...hyperinflationary depression.

Yeah, that's what I think. That's two catastrophes at the same time. But you're leaving out one more: war.


I know what a balloon going up is like and I know what it is like when it goes down but going both directions at once sort of stretches the imagination. Our pretty balloon has a hole in it and unless hydrogen in equals hydrogen out we can only have a uppy or downy balloon.

Now show me how that equilibrium will come about. Housing down, markets down, big bucket bailouts, ... Could be this moon but while I think the guys got the sentiment right thier direction is 180 off. I think they hadn't quite got the last of this out of their imagination.

You have to wonder why Japan and other nations have lent us so much money, already. There has to be a hidden political element to this.

In the case of Japan, maybe it's that we have our mitts on the oil spigot, and so they have to settle for a crappy return and ultimately take a currency loss.

Of certain oil producing nations, we protect their rulers and they buy our Treasuries, knowing that they must never, ever cash them in.

Hyperinflationary depression...exactly. John Williams called it back in April and so far it looks like he's been right on the money: Shadow Government Statistics HYPERINFLATION SPECIAL REPORT

Just for context the Japanese National debt is around 188% of GNP, and their population is due to age rapidly and fall.
I haven't got a clue how that compares to the various off-budget items and so on in the US, or what the off-budget items are for the Japanese.
When they had their crash in the early 90's they spent huge sums on public works programs, with perfectly smooth roads to nowhere.

What the heck is going on, and who is more broke than who I have no idea - but I suppose that is the point for those carrying out the shell game.

Dave, One also needs to consider unfunded liabilities when looking at a country. Americans have 5 times the amount of federal government unfunded liabilities than we have in federal government debts. Financial models that do not consider the growth-stunting effects of Peak Oil already show huge financial problems developing due to an aging population and unfunded entitlements. Former US Comptroller David Walker likens this problem to a fiscal cancer.

I laugh at McCain and Obama trying hard to get elected because either one of them is going to see this problem grow much larger on their watch as the Baby Boomers start to retire. Whoever gets elected is therefore going to be unpopular.

Yeah, but a lot of those unfunded liabilities will simply not be honoured - this is particularly true for intergenerational transfers.
Most of the liabilities for pensions and health care will either be inflated away to nothing or defaulted on.
International obligations are more difficult, or your credit rating goes, but Gramps may find himself with a much reduced life expectancy.

The size of the debt is a large problem but there's one that compounds that problem. The largest problem that NOBODY talks about is HOW WE FINANCE THE NATIONAL DEBT. The average maturity of the national debt is about three years. That means we have to repay half of the debt every three years by refinancing it with new debt. (Balance transferring from one credit card to another.)

If this was like the 1970's when the national debt was financed with 30 year bonds there wouldn't be so much need to worry. Just like if your home has a 30-year fixed rate you don't care how high rates go, you don't need to refinance. But if you were required to refinance your home every three years you'd be in deep trouble.

The current debt is almost 10 trillion dollars. (This doesn't include unfunded liabilities which is another HUGE problem I won't go into.) If the average interest rate paid is 3% the annual interest cost is $300 billion. If short term rates rise to 9%, then three years later (after refinancing half the debt) the average interest rate will be 6% therefore doubling the interest paid to $600 billion dollars per year. That's the MOST IMMEDIATE FED GOV FINANCIAL EMERGENCY IMHO.

It's worse than that. There is a short-term finance crisis as well as long-term.
Ronnie Reagan financed the arms expansion by issuing 30 year bonds.
For the last Iraq war the finance came, in an act of genius, by the issuance of 10 year bonds.

So of course they all mature within the next few years, creating a huge spike in financing.
I did not bother keeping the reference, as we are screwed anyway, but 09, 10, 11 and 12 are the years they mostly mature from memory.

Congress voted in July to raise the national debt ceiling by 800 billion dollars to 10.6 trillion basically to pave the way for Paulson to do this.

So those foreign countries which buy up our debt will finance it for us until our great grand kids pay it off. China loves to buy our debt, The bank of China is the top foreign preferred stock holder...

So we're borrowing from them to pay them... among others...

Based upon information available, preferred stock owners are not beng bailed out - but they may sustain huge losses, as their shares are now subordinate to US government shares. The bill passed by Congress didn't allow a preferred stock bailout, and I frankly couldn't understand why at late as yesterday the WSJ said they still may be bailed out.

Paulson seeks to provide some type of help to those banks left holding the bag from going under, which means many banks may suddenly find themselves in a position of having to sell more stock soon.

In practice, given the warrant structure used, that question will really be decided by the next administration. The structure is in place to wipe out other preferred stockholders (as they will fall behind up to $100 billion of new senior preferred stock), but right now it's not yet happening as only $1 billion has effectively been put in place.

This is about kicking the can further down the road - to the next administration, and at least to beyond November.

You are, of course, correct.

Since the concept of conservatorship does not follow conventional accounting rules, it's not clear if those accounting rules for bankrupt companies would apply. If they did, F & F would have to realize huge losses for assets such as tax credits which no longer have value, and it would also have to write off other assets that are similarly worth less - or worthless.

Although they could kick the writeoff can down the road until just after the end of third, these losses will be coming. To put it bluntly, preferred stock will eventually have no value (unless Congress intervienes) - but meanwhile holders will still be able to sell the shares for something

Like all the other Fed/Treasury bailout gigs of the past year, this is radioactive with Moral Hazard. Expedient today, tomorrow will take care of itself. At some perspective, cynicism and desperation start to merge together.

As usual, the bell rings on a weekend.

What passes for strategy in the Bernanke/Paulson cadre is the HOPE things will get better all by themselves. All this bailout can possibly accomplish is to buy some time (at enormous cost).

Will the government guarantee the mortgages that underlie all the questionable securities? Why doesn't the Treasury write all Americans ten-million dollar checks so we can run out and buy Ferraris?

Time is not the issue. The real issue is whether the distributed risk financial model that Fannie and Freddie used has any relevance. Even in the best of times (low interest rates) the GSE's struggled. See Paul Volcker's remarks:

An even bigger issue is whether the suburbia-sprawl paradigm that Fannie and Freddie supported for so long is viable in a Peak Oil environment. If suburbia is 'DOA' then capital needs to be conserved for constructing a replacement. The expensive support of a useless shell is pointless, but in the modern world the appearance of a thing is more important than the thing itself.

Without the distributed risk financial model, the reason for the GSE's existence vanishes. This GSE's product has been tested in the (stock) marketplace; Fannie and Freddie could not raise capital. Precipitating this crisis was their near worthlessness on the equity markets. Their capital bases are lies. The People (the one's who matter, those who 'invest') have spoken.

(This transaction) ... sets a price on these securities. This has been the biggest problem to solve the credit crisis: nobody has been willing to set a price on these assets, because of the uncertainty on the real value of the underlying assets (or because everybody could see that they were falling by the day). By setting such a price, the government creates a highly significant precedent - and, in all likelihood, provides a floor to these prices, ie an implicit commitment (or at least the expectation of a commitment) to buy more such securities.

They've cleared a market. It's doubtful this will translate into a recovery of the larger market for securiized instruments. Why? Because the Treasury is on both sides of the deal! The sock puppet on the left hand sez, "We'll buy all this so-called toxic waste from you guys!" and the sock puppet on the right sez, "We now own both enterprises so we'll be happy to sell to you!"

Good Grief!

On the plus side, the Conservatorship will replace large numbers of overpaid knuckleheads with civil servants who will do the same job for far less. An aftershock will be felt in Northern Virginia where many of the GSE management bought or built enormous McMansions and stuffed the garages with Hummers and BMW's. I expect an effect on the local real estate market.

Simply liquidating the companies and recreating any number of viable successor businesses out of the ruins would have made more sense. As it stands, the Fannie and Freddie Zombies will be hanging aronnd taxpayers' necks, bleeding money for years and years to come.

The current regime seems to feel 'Creative Destruction' is an unnecesary burden to be avoided at all costs. It will be interesting to see how this plays out. It seems hardly likely that the Fed/Treasury Duo has the bsse money available to socialize any more private companies. From this point onward, what Americans and their overseas creditors will see is the printing press. Welcome to the Weimar Republic.

You said it-and this is just the appetizer.

Welcome to the Weimar Republic.

I suppose to the extent that they are thinking long term, their plan (hope) is that they can patch things together until circumstances improve (or until someone else is in office), but what if we continue to see an accelerating decline rate in the volume of exported oil worldwide?

In any case, even the deflationists concede that the end point is hyperinflation, after foreign creditors pretty much stop lending money to the federal government. Aren't we headed that way at rapid speed? And won't the buyer of last reort be the Fed, i.e., massive monetization of federal debt?

I suppose to the extent that they are thinking long term, their plan (hope) is that they can patch things together until circumstances improve (or until someone else is in office), but what if we continue to see an accelerating decline rate in the volume of exported oil worldwide?.

The first rule of real estate is to sell your problems to somebody else. This is the Fed's/Treasury's strategy. They hope circumstances will improve without having any clue what the improved circumstances would be ... or how to get there.

This is a Homer Simpson problem. Oil export issues complicate matters; a number of geopolitical 'situations' can turn into affairs with little upside but budget- annihilating risk.

In any case, even the deflationists concede that the end point is hyperinflation, after foreign creditors pretty much stop lending money to the federal government. Aren't we headed that way at rapid speed? And won't the buyer of last reort be the Fed, i.e., massive monetization of federal debt?

Of that, I am not so sure. There are limits to monetization. Someone has to accept the tranactions at face value for monetization to work. In other words, monetization is a loan, nobody can compel another to borrow. Monetization works (cough, cough) in Zimbabwe because the citizens of that fine country don't have alternatives to the local currency, nor can they express displeasure to their government. We canny capitalists in the west have many alternatives and many feedback loops available. People recognize debasement when they see it. There are limits. This is why I believe the Fet/Treasury is at the end of the line for 'bailouts'. An expansion of base money would be felt in the bond market. Rates would jump. Since the Federal Government borrows hundreds of billions (and is set to borrow another half-trillion this year) that jump in rates would be prohibitive.

Some derivates markets are too large even for the combined resources of the world's major economies together to bail out. The CDS market comes to mind; I don't think the Fed would even try. They would work around the edges like they did with Bear Stearns. I think if the CDS market were to implode ... the end point might be a new US currency. We would devalue, of course. Even though this would be 'inflationary' on the surface, there would be a lot less of the new money (the Obama?) in circulation the effect would be deflationary. If people hoarded - not trusting financial institutions - the outcome would be depressionary. This would be the case ... even if the Treasury printed its head off! The Treasury would lend the money to banks ... that nobody in their right mind would go into. The banks would go broke waiting for people to come in and ask to borrow.

In fact, if things got to that point, the public would not be able to borrow, anyway! Nobody would be creditworthy above what capital they already possessed; if they had a hundred Obamas, they could borrow a hundred, provided they give their hundred to the bank as collateral. This is what happened in the 1930's, all across the country.

Since all modern money is credit, I tend to lean toward deflation. A lot of money/credit is being created by the Fed/Treasury ... it goes to banks, thence to hedge funds, finance companies and commercial banks ... where it disappears. For instance, capital that is being raised by finance companies is being used for 'balance sheet' purposes. This is money thrown into the furnace. Credit is being destroyed on Wall Street -and NYMEX and in the Bond Market and on currency spot and swap markets and in real estate- faster than it is being created. Evidence of this is the decline in asset prices across the board; real estate, stocks, oil, gold ... some of the loss is actual. Ask a sheik how much less his oil is worth today compared to a couple of months ago. More of the loss is in the collateral value; the money/credit that could be created from that collateral that could be used to generate more money/credit. Here is a general tightening of credit. Easy money/credit inflated the values of these asset classes, now the reverse is happening.

The 'Niewe Deadbeats' are on their own. It will interesting to see what happens when the next 'too big to fail' institution ... fails. Who will it be? GM? Amerian Airlines? Citigroup? Merrill Lynch?

A sign to look for is when Americans start accepting other currencies. The 'Gold Bugs' are already out of the woodwork, never a good sign ....

I agree Steve. Creating liquidity when confidence is gone is a non-starter. As you say, any money created disappears into a black hole where it is hoarded, as banks are already doing, even before circumstances really deteriorate.

I see the bailout of Fannie and Freddie as a desperate double-or-nothing attempt to reflate a rapidly deflating bubble. As such it is doomed to fail. Hank Pualson said that if he carried a bazooka in his pocket then he wouldn't have to use it, but the market called his bluff. Now he's taken it out and is conspicuously waving it around, but I think he's still bluffing. He's hoping that if he can reduce transparency far enough, while loudly talking up his intentions to stand behind the mortgage market, then confidence will eventually return and a crash will be averted, avoiding the need to spend the sums he has promised. Personally, I think the market will call his bluff again.

You are right that no one has deep enough pockets to bail out the derivatives market, and a meltdown in the CDS market is inevitable IMO. Counterparty risk is huge and growing, and the coming firesale of assets will reveal the extent of that risk. Whatever central bankers or treasury officials do is likely to be overtaken by events they cannot control.

I am a deflationist, as readers know. If we do eventually end up with hyperinflation, it don't expect it to be for a very long time. Deflation supports depression and depression supports deflation in a vicious circle of positive feedback. This dynamic will be self-sustaining for a long time - my guess is at least 10 years, if not longer. That fact that it will be global makes it likely to last even longer.

For as long as we have a bond market, and an addiction to international debt financing, any serious attempt to inflate (even one doomed to fail anyway) would be met by sharply higher interest rates. Government action can really only make things worse at this point.

For as long as we have a bond market, and an addiction to international debt financing, any serious attempt to inflate (even one doomed to fail anyway) would be met by sharply higher interest rates.

I never understood this part of the deflationist argument (which I understand is the core one).

First how can increase in money supply lead to more expensive credit? At least in the short term the opposite should be the result. The only way it could result in higher rates would be after the extra cache has been absorbed by the economy, resulting in higher nominal prices, only then the investors may demand higher returns on their bonds. But all of this takes time and all of this assumes full transparency of the money supply, reliability of the reported CPI, honest government.... how many of these assumptions take hold?

The bottom line: IMO it is true that the US gov will not hyperinflate. But it will definitely try to inflate - meaning the press will be working only as much as it can without anyone "noticing". In this context the supposedly doomed delaying tactics for saving the overleveraged credit markets make absolutely different sense. In the end it will still be inflation taking care of the credit bubble, though it will not be with a "Bang!" but more like a "Psssst..."

Creating liquidity when confidence is gone is a non-starter.

what's the definition of liquidity? money circulation? what's the confidence about? money or tangible assets? if the confidence in a fiat money is gone, what will happen to the liquidity? will the money circulation slow down, stop or speed up?

Deflation supports depression and depression supports deflation in a vicious circle of positive feedback. This dynamic will be self-sustaining for a long time - my guess is at least 10 years, if not longer. That fact that it will be global makes it likely to last even longer.

For as long as we have a bond market, and an addiction to international debt financing, any serious attempt to inflate (even one doomed to fail anyway) would be met by sharply higher interest rates. Government action can really only make things worse at this point.

how can an international debt financing market go on for that long when the whole world is in a deflationary depression?

I frankly couldn't understand why at late as yesterday the WSJ said they still may be bailed out.

Easy. They still had positions to close out.
The financial press is there to talk their book, not to provide information.

Here is the statement from FHA's Lockhart (pdf)

For comparison, here is how they carried out the scam, er, I mean actioned the rescue plan at Northern Rock in the UK now that some of the details have emerged:
Northern Rock Crisis: Old and New Solutions - Seeking Alpha

It is clear that normal procedures were scraped, that the likely bill was consistently and deliberately lied about, that excessive lending continued, and that the people who had bankrupted the company were paid off with vast 'bonuses'.

It looks as though this FF rescue follows the same pattern.

Well this certainly explains Paulsons move from head of GS where he was instrumental in implementing much of the creative "financial engineering" that got us into this mess, to head of Treasury where he is now implementing stage two of the PLAN.

What ever that plan is it's hard not to see it as one.

You have to admire the sheer nerve of the guy-meanwhile the USA public is worrying about Sarah's hairdo.

Hello, Buon giorno, Beau jour, Guter Tag, my European
This debacle in America will effect even you. Markets
the world over purchased these instruments and will
likely suffer some fallout as well, albeit not to the extent the American tax payers will suffer.
The vast majority of Americans are unaware that in the
USA, 1000 million equals 1 billion and 1000 billion
equals 1 trillion.
Of course its a bit different where you are. Even the
word "Color" is different in the English speaking UK and is spelled (Colour). Please accept my apology for
Americas government and the American peoples allowance
of the goverments actions.
Don't expect apologies from any other Americans to be isnt likely and I dont expect it.
I would endeavor to ask forgiveness for so many things
that have accured in the last 8 yrs, but bandwidth is
a factor.......Ciao

I'd like to apologize as well.

Oddly, the American government seems to exist in an impenetrable bubble.

"We the people" are allowed to pretend to participate in sham elections, but the minute we demand real change, we get cops in combat boots and riot gear as a response.

I would also like to point out that when we say that American taxpayers will pay for all of this, we mean primarily the working poor.

Wealthy Americans continually receive tax beaks and loopholes and subsidies which will ensure that they will pay little if any of the cost.

Don't we just love "The Free Market" and Corrupt Crony Corporatist Capitalism and The Corporatist Welfare State?

Who are the Welfare Queens, Mr. Reagan?

Oddly, the American government seems to exist in an impenetrable bubble.

Not really. The event that will show the bubble is burst is one that will please Alan. You'll see the leadership class using rail based transportation - they'll leave town covered in valuable tar, covered in feathers, and tied to the rail-based transport.

Oh, if only...!!!

There are plenty of things that the US government could improve. Hopefully something REAL will improve in the next administration VS feel good bandaid/short term/emergency 'solutions' that seem to be par for the course. If I was in charge my sincere hope is I would do a better job; however I am an idealist and treasure honesty...these two traits might disqualify me from being effective in politics. I know I would be very annoyed at inefficency and dishonesty in government if I were involved; for my sanity I try to not let it piss me off;) defence of government becuase I see dualities and shades of gray not absolute truths
If it pisses you off that the government is slow and inefficient; consider the alternative, just WHAT would it take to make the government FAST. Wouldn't a fast government be frightening? Fast good decisions=good, but fast decisions also include fast idiotic decions....
Consider a government that ALLWAYS trys to be moral, honest, environmentally freindly, care for the poor. Consider this unrealistic saint of a government; even in this case OTHER governments would probably be basterds and dangerous and dishonest...fighting dirty is probably more effective than being a saint RE dealing with other governments. My point is that much as I dislike the concept it might be better for the US government to be an ***hole than a saint. Not an ass ALL the time but when that is effective to accomplish something worth doing. The same applies to the governments citizens; if the government is a saint and there are still criminals I think there would be problems. I am sure someone more elloquent than me could add similar points and even an entire book on the tradeoffs inherint in government choices.

Crossing my fingers *please be better than Bush!*
We'll see what the next administration accomplishes.


Just what is one to do then? When the choices for election are 'worse' and 'worser' or you might say 'Dumb and Dumber'.

The politicos are clearly 'gaming' the system and those of us who feel different(say Real Conseratives) really have no voting power since the city folk and yuppie folk have the upper hand. The 'I want it now' generation of Xers and whatever.

Out here in the vast 'flyover' things are not as what the web portrays us to be. Ignorant hillbillies and rednecks. Out here I know of many who are hard working. Who would like to see change. Who are living on wages that are close to starvation. Who can't afford medical care and so on..

Do the politicians care about us? Nope. They go to where the masses of sheeple are congretated.

Yet we are sitting on the nations food supply and in fact creating it. The one thing that will be left when the soccer mom's cellphone go dead and Lance and Muppy have no more gas.

We out here will still be living but again it won't matter.

Apologize? No me. I didn't make this mess. The webhounds and those who let the Execs/Ceos/Mgmt take out jobs and shipped them out.

Out here in this flyover we don't apologize. We just keep on working and making the best of what our city cousins have visited on us.

They are the ones who have the voting power. Out here if you want to work you get minimum wage and have to take the metal outen your face. Tattoos mean you are at the bottom of the hiring heap. Shaggy clothes get your laughed at.

America isn't just what the Telly sez it is. Their is a vast underclass who is feeding the rest of the lazy azzes. A underclass that has almost zero voting power. The forgotten Merkuns that is as I am wont to call them.

The ones who leave to go do the dirty rescue work in New Orleans or Mississippi. The ones who don't mind getting their hands dirty. The ones who fight your wars for you. The ones who work during spring and fall from sunup to sundown for a pittance and somehow make it thru.

Nope I won't apologize for my lazy city cousins who whine and bitch and do zipshit.


PS. Nephilim translated Hebrew means more or less 'those who will fall' or 'the fallen'. Yes, men of renown but still to 'fall'.
Joshua and others finally 'fell' them. As well as the Aquimin(sp?).
Many references relate it so.

The politicos are clearly 'gaming' the system

Well duh. It is like it has always been. Some times are better than others. But if you know of politcal model that prevents 'gaming' the system, I'm all ears - and so are alot of others seeking the same.

Out here in this flyover we don't apologize. We just keep on working and making the best of what our city cousins have visited on us.

'city cousins'? Is this codeword for lobbyists who are paid for by corporations? Or something else that you can't quite figure out?

With a 'united' "fly over" population - if "you'all" just stopped working and feeding the beast of corpgov - that beast would just die off. Oh, if only things were as 'united' as you are claiming.

and those of us who feel different(say Real Conseratives)

Oh, so 'you' are a 'real conservative'? Nice that you think you are somehow more 'real'. Is your 'more real' status because you 'lack' "shaggy clothing" and "metal in your face"?

Or is it that your opinion is right - and everyone else is wrong. Such a POV reminds me of the Yuppie opera. Goes something like (octave up) "Me, Me, Me, Me" (octave down) "Me, Me, Me, Me." (octave up) "I'd don't care" (octave down) "about you."

really have no voting power since the city folk and yuppie folk have the upper hand. The 'I want it now' generation of Xers and whatever.

Blah Blah Blah. Tell ya what, come on back when you can 'show' your claim is true VS yet more pandering using emotive buzzwords.

Nope I won't apologize for my lazy city cousins who whine and bitch and do zipshit.

Say - Mr. "real conservative" - how's your effort to have accountability for the 2+ trillion the Pentagon can't seem to find in their accounting system? How about the 27 million spent to ship $80 thousand worth of LP gas?

What's that? You've not written or gotten your congress-kritter to do anything on such matters? Now, why was that? Strikes me that you too are doing 'zipshit'.

Blair as always....Blaring away..

I have visited my congressman three times in as many years in DC. My son worked there ya see?

I also go to town hall meetings when time permits. So your wrong as usual.

nough said...I dismissed you long long ago.


maybe it's an exception, but these people are making a difference.
a lot of them went directly from burning man to the gulf coast after Katrina hit and some
of them were down there helping rebuild for many months.


I didn't make this mess .. We just keep on working and making the best of what our city cousins have visited on us.

It's rural America that visited us with 8 years of disaster under Bush/Cheney, by 59% in 2000, and 63% in 2004. It's rural Americans that keep alive the divisive "culture war" again being fomented by the Republican Party.

I've fought for my country, got my hands dirty plenty of times, and I live in the city. My neighbors works as hard as anybody, and they don't bitch or whine. So stop your bitching and whining, please.

My thoughts exactly!!! The rural center of the US is the part of the country MOST responsible for this political mess. You cited it perfectly with the election totals. And there are countless other statistics to back this up.

This poster obviously doesn't understand that our Electoral College system and Congress are greatly skewed to give proportionally MORE power to smaller states, not less. And let's think for a moment, at the beginning of each political season, which states are given 99% of the airtime, TLC and 'thought leadership' which sets the stage for the whole Presidential election mess that follows? That would be Iowa and New Hampshire. Not exactly big city coastal states now are they??

The last group that it is still ok to beat up is rural areas and people. You can rural bash with hatred where you'd lock your lips over made broad generalizations of other groups of people.

Besides, you paint a picture that doesn't hold true in this rural area. We are the heart of agrarian populism. Farmers Union. Democratic Farmer Labor party.

So take your wide brush and paint elsewhere than rural heartland America.

Big difference between the rural North such as Minnesota (home of the Democratic Farmer Labor party), Michigan, Ohio, Illinois etc and states such as Utah, Nebraska, Oklahoma, Texas, and the rural South. The Farmers Union was founded in Texas in 1902 when the state was Democratic and more progressive. It has since fled to Colorado. So the "broad brush" applies here as the majority of rural states have supported the Republican agenda for America. (There are many liberals and progressives in rural America, just not enough to make a difference.)

This poster obviously doesn't understand that our Electoral College system and Congress are greatly skewed to give proportionally MORE power to smaller states, not less.

Being from California, I can relate to the discriminatory effect of the Electoral College system on larger states. In every election, the millions of California voters over the 50% mark are essentially disenfranchised as our votes do not count toward the outcome of the election. (This applies in all states in lesser degrees, but in California it means millions of votes and it would often make the difference in who is elected if the Electoral College system were not in place.)

A big serving of class/generational warfare here (Non sequitur snide remarks about tattoos, body jewelry, 'shaggy clothes' [whatever that means] and those rotten lazy city folks).

I am not sure what the point of those remarks were, how they add value to the discussion, except to show that you judge books by their covers and like to assign scapegoats instead of talk issues.

At least you didn't go after the Gypsies.


Airdale: My people came from the country side. Coal miners and potato farmers, shetland ponies to haul the coal from the drift mine, made their own shoes, corn and oats to make chop for the chickens. Had a frick ott #2 saw mill that still runs today, maple syrup cabin that still boils sap today, pigs and cows.
True salt of the earth people. My Grand fathers name was Celestina, it means heavens.
My Nephilim name is from a certain group of celestrial
being who decided to leave heaven and descend to earth
to take themselves wives from the daughters of man, seeing they were fair. They chose for themselves whom-
so-ever they desired. "A man desires a women....but a
women wants only a mans desire"
I give you something that looks of little value and
its up to you to descern what it is and how to use it.

The animosity you hold to those who dwell in the land of towers of Babel will give you no reward. the story
of Cain VS Abel yesterday, is the story you tell me today. Ones gift not accepted and ones acceptable.
Hunter VS gatherer it was, Meat herder VS vegetable
farmer it has always been. I know many from your neck of the woods called the land of Nod, I realise that
many hold your views.

If I told you the truth about the place I was born, how it was desolate, void, save for an abundance of wouldnt believe me, or life could begin
Shalom La Chaim


This is entirely off topic and I am not looking to start a controversy but I can't help but be a bit curious about your understanding of Nephilim. My understanding comes from a mention or two in the old testament, but primarily from the "apocryphal" book of Enoch. This book was considered a canon of early Christian church scriptures up until, entirely from memory, about 300-400 AD perhaps the council of Antioch?

The book of Enoch describes a group of heavenly beings who enter a pact to disobey God and have intercourse with women. I'm sure the feminists would have a field day.

The Nephilim as disobedient angels are, to put it plainly, devils. Enoch goes on to describe how the offspring of this union were the Giants of old. The Nephilim being found out petition, Enoch "the scribe of God" to write a petition for mercy which is rejected. They and their offspring are condemned. The unrestrainable violence of the ancient giant offspring of the nephilim leading directly to the flood of Noah. Enoch (the grandfather of Noah, unless I am mistaken) also being most notable for being, along with Elijah, the only two described in scriptures as having never died.

While it is way off topic, Nephilim is a pretty precise term and I am just curious if there are other descriptions, writings about them that I don't know of. If you haven't already you might read the book of Enoch, it certainly relates to your moniker.

Respectively, please, religious issues do not belong on this blog. I am sure there are more appropriate places for posting the same. Thank you. Bio1

Marxist-Leninist interference in a free-market society.

What free market?

The GSEs were setup by the government. Their sole purpose was to inflate the housing market, forcing prices up, in order to generate huge mortgage fees for the banks (ie. Wall Street).

Now that bubble is popping and threatening their debt holders (ie. Wall Street). So Wall Street's agent in Washington, Paulson, engineers another enormous transfer of wealth from the taxpayers to his buds on Wall Street, all while claiming to have the taxpayers' interests at heart. To top it off, he puts Lockhart in charge of running the newly nationalized companies. This is the very same Lockhart who went in to clean up the books of the GSEs and, in March of this year, pronounced them not only clean but financially healthy and, indeed, reduced their capitalization requirements because they were so healthy.

There is no free market anywhere in this equation. It's all a giant scam to transfer billions of dollars (possibly trillions) from taxpayers to rich bankers. And it's been operating for decades.

Lets see if I've got this straight:

One set of tidy fees are dropped into deep trouser pockets when a mortgage is originated.

Mortgages are more often than not sold on to third parties, that also more often than not consolidate multiple mortgages into securities called Collateralized Debt Obligations (CDO's).

Nobody really looked at the components of CDO's to differentiate the good from the toxic waste (sub prime and high risk mortgages) - making the job of ratings agencies more or less impossible. Rather than admit to talking out their ass, the ratings agencies and the investment banks, carried on and sold the toxic waste as if it were top shelf material.

When the people that were supposed to make the mortgage payments started to default resulting in foreclosure - the mortgage holders repossess the properties and also turn to Freddie Mac and Fannie Mae to collect on some kind of insurance that guarantees repayment on some part of the mortgage.

It turns out that Freddie Mac and Fannie Mae are insolvent and did not adequately re-insure to cover themselves.

So now the USA taxpayer, in addition to paying their own mortgages, is having a [future trillion dollar] debt foisted on them to ensure that big-finance can own millions of homes and at no cost to themselves - (sarcasm) its fucking magic!

I have 3 initial thoughts to this announcement:

1)This is just the details of a plan announced 6 weeks ago - it should hardly be a surprise (other than the implicit bid for toxic securities) but certainly 'feels' like one. (kind of a queasy, car-sick sort of feeling)

2)This will cause an instant pop in Americas (and probably the world's) GINI coefficient, though no ecological economist will likely have funding to prove it.

3)The last 7 times that a bank or brokerage firm announced worse than expected writeoffs/losses, the financial sector inexplicably rallied. So after this seemingly bullish news (the plan offers a bid to financial companies still holding 'mark-to-model' securities).... it will probably inexplicably sell off....;-)

There is more discussion at Naked capitalism - it seems that the preferred shareholders will now be junior (i.e. their price will trade down).

The final bubble is the bubble in US Treasuries (UST's). Over the past year, a ton of capital has rushed into UST's on a flight to safety, caring little--nay--caring not at all that buying a 10 Year Treasury with a yield of 4.00% or lower was a doomed, long-term investment. This was on top of the enormous amount of capital already hiding in UST's, largely from the build up this decade of reserves in many foreign nations. (it's all so much more complex than this but I'm trying to keep it short).

Today's Fannie and Freddie deal removes two ongoing underpinnings, that would encourage capital to continue hiding in Treasuries. 1. It removes systemic risk. It doesn't remove recession risk, or further downward price risk in real estate. But it does remove systemic risk. Why? Because this is a paper-money system, and the deal bolsters the credit transmission system and sets up a vehicle to keep the credit flowing. It then changes very much the risk position of all the other credit players in the market. That's a big deal. There is a multiplier effect here on "risk" in the system. What Bill Gross was telling you (and, again, I don't want to get into the very complicated relationship HE has to this situation)--was that if he has "less" risk on this portion of his portfolio, then everyone else will have less risk on theirs. Which will enable him to buy more credit, of varying kinds. And everyone else can buy more credit. All different kinds of credit. So, there is magnification here. And as a result, alot of money hiding in treasuries can now exit. 2. It seems immpossible to me that macro managers, economists, and strategists will be able to avoid pricing inflation risk back, into the global markets. Managers are simply going to have to take their UST weightings down, and buy something else. They could go to cash or they could go to the shorter duration part of the curve, buying credits and Treasuries only going out 3-5 years. The result is that the yield curve is probably going to steepen quite dramatically, as money comes out of the long end, and either exits the market completely, or goes into the short end. This is going to liquify the short end, and liquify other assets like stocks and commodities, as the yield curve sends a classic "growth" signal. I understand that word "growth" will sound perverse to many, at this juncture, but that's what I see. in counterpoint, you could make the argument that a steepening of the yield curve at this juncture signals only inflation risk, not growth. But, we won't really know if it's one, the other, or both for some time. The steeper yield curve will also be "good" for banks. And, as I said, it will be a strong signal to cut, cut, cut exposure to UST's of maturities 10 years or more, and buy risk assets.

It's fairly classic, I must say, that this is all coming down just as the USD and the price of Treasuries have both risen dramatically over the past two+ months. Those would be the last assets you'd want to buy, right now. I'd expect the selling in both to commence almost immediately. Though, if you believe the chatter that there has been intervention to prop-up the dollar in advance of this FRE/FNM bailout, I suppose you could assert that will continue. That said, the notion that one would freely want to go long the dollar from current levels, on the back of the most massive re-inflationary government action probably taken in the last 60 years, does not strike me as sound.


Gregor I agree with many of your thoughts - thanks. But there is a difference from 'freeing up credit' to invest in riskier assets and 'actually buying' riskier assets. I think peoples appetite for risk has gone down at least as much as this opens the spigot, and if yields rise on the long end that will be bad for stocks a)dividend discount NPV models b)higher borrowing costs c)at some point those rates will become attractive. And who will want to buy industrial commodities (other than food and energy) with economic depression on the horizon? ( near term you could be right -but there are large deflationary forces at work and I doubt this does more than a cortizone shot). This is about all they could do - the bone was the implicit bid for mark-to-model debt from other banks. But how banks and brokerage firms are going to make money going forward is the real question.

Yep. The sentiment situation bears watching here, however, because we have to be cautious about pricing in economic depression when so many are calling for it and have been calling for it for some time. The 1987 crash merely interrupted the Nikkei's bull market advance, and the Asian Financial Crisis and Russia/LTCM did the same to the Tech bull market. The global markets, in my view, are very nearly "all in" on the economic depression thesis--less so with the fact that global equities are down "only" 20-25% but moreso with the gargantuan amount of capital hiding in global government bonds. While the current bust may be larger in magnitude, I do recall how convinced everyone was in the coming economic horrors of those past debacles. While I agree that deflationary forces have arisen, I remain somewhat firm in my view that we are still in an inflationary paradigm, and it would take much more imo before we tip into paradigmatic deflation. Over the years, I have constructed this distinction, because my view is that we are always oscillating between inflationary and deflationary pressures--which are subordinate to the paradigm. But, the question for me is always where we are in the paradigm. Commodity action, over periods of 3-4 months, can give very wrong signals on deflation and inflation--as they are so volatile, and have been so this decade. So, I never bought into the idea that oil going from 100 to 147 was inflationary, or the recent trip downward as the opposite. Copper, also, has been making moves like the current move the whole decade. I can barely count the number of times there were calls for a copper crash and then also a copper "event" (higher) over the decade. It's made me wonder if Dr. Copper really exists because he has been all over the map and generally a poor forecaster.

I don't know how the banks or the I.B.'s are going to make money. I have got some ideas for them however! And you're right, nothing can make market participants lend or buy risk assets if they don't want to. But if the risk perception shifts again to inflation, then the inflation trade will be back on. My view is that the deflation trade has only been on for about 2+ month now. These deflation scares in this decade have been relatively short. Greenspan met the last one with 1.00% FF. Now we have 2.00% FF and a historic re-flationary plan. Sorts makes Greenspan look minor.



u'r thoughts re the recent couple months of deflation scare are the same as jim puplava's [ the 'street of dreams' part]:

awfully strong coincident that we might need a rate cut soon!

wellput info/thoughts!

rate cut won't do diddley. real rates already negative. credit and borrowing situation are not improved by 50 basis points lower in funds rate. (reference Japan)


it's the bout a stimulus package instead!

i agree in the short to medium run; but in the very short run it'll keep the public & wall street's eye off the ball til election & increasingly more banks start failing.

according to Mish, the real rate is positive - the housing cost adjusted CPI is only 1.3%.


Game Plan: Time for a Rate Cut?

There is a new J K Rowling book due for release:
'Barak Obama and the Curse of the Poisoned Chalice'

Unfortunately it is not for children.

You're absolutely right. That's why I waited until the jobs report to short treasuries at 3.57 and as of now they've popped to 3.82 and rising.

Tomorrow I'll close the rest of my long positions with a much smaller loss and hold the TBT. It's been a beautiful year for investing, if you're a pessimist that is.

And who owns securities in Freddie and Fanny which the US Treasury/tax payer is backing up---China!

The final triumph of globalization and the humiliation of the American people.

I think that the assumption that "tax payers" --- aka wage earners --- will be on the hook for this is essentially false. The reason being that we have long left the point that taxes from American households could conceivably be used to cover government expenditures. To raise federal taxes here in the US would seriously put a damper on household spending and debt service. The turnip simply cannot give more blood. What is true for the boomer mess (yes this is a problem the boomers created as they came of age in the late 60's and 70's and dominated US national politics for 30 years) -- is even worse for the generations that follows as these have fewer numbers and lower potentials for income gains over their working lives than was the case for either the boomers or their parents.

Simply put ... the productive (aka working) part of the US population is tapped out and will only become more stressed financially in the years to come. I see no chance for the "taxpayer" to be on the hook for any of this --- "deficits don't matter" (Richard Bruce Cheney). The effect of the exponential increase in national debt means less national services and ultimately the end of the national government in its current form.

I think we are looking at the first half of the end of this era of complexity. The project of large states or "national" governments is surely near an end. And the collapse of this sort of social complexity can be quite rapid.

I see no chance for the "taxpayer" to be on the hook for any of this

The project of large states or "national" governments is surely near an end. And the collapse of this sort of social complexity can be quite rapid.

Doesn't this mean the taxpayer was on the hook? Going from stability to instability sure sounds like a public cost to me...

My interpretation of tedman's post:

The taxpayer, (i.e. those tax-payers who pay significant amounts of tax and significant percentages of their incomes as tax) are maxed out. Sure, Federal and State governments can increase tax rates but it is not going to result in higher tax collections (at least from those that are paying the bulk of those monies right now).

Rather, there will be severe economic consequences of raising those rates. If the governments in question were able to broaden the tax net (e.g. tax cheats {google zapper}), tax exempt individuals and entities - that could raise additional revenue. I do not believe that that is the goal.

The current turnip is white. There is no blood in it - so go ahead and tax away, there is nothing more to squeeze.

That said, I expect substantially higher tax rates on those investors who are unfortunate enought to be liable for taxes, from an Obama administration. He has made that part of his policy and has also said that he does not care if it results in less revenue. The goal is to ... (punish?, prevention the middle class from making a few bucks???)... preclude competition for Wall Street Professionals and Tax Exempt Foundations.

IMO, it will result in less revenue; but enhancement of tax revenue is not the goal here, so that is acceptable to the incoming administration.

Corollary: If revenue collection from taxes is maxed out, by definition any new bailouts are not coming out of tax payers pockets (interpretation of tedman from above )

This is exactly why they run continual and increasing deficits-the public demands it. There appears to be little comprehension that spending the money and borrowing more is not a solution. Don't worry-Sarah might still win this one (she's looking really good).

It is amazing then that things were going swimmingly back during the Clinton administration, you know, when taxes were higher. Shrub cut these taxes and went to war to provide his bread and circuses to the sheeple, and now we flipped a year-by-year surplus to a mounting deficit. Hey, throw a bone to the old folks to get re-elected with Medicare Part D, damn any way to pay for it but issue dept to the rest of the world! These last 8 years of Shrub and his puppet masters have left us on the ropes. The only robust industry the U.S. has left is the Defense industry. Oh, wait a minute, that entire industry is entirely dependent on government contracts...corporate welfare, industrial policy, socialism at its worst! News Flash: On top of the FF actions, the so-called American used-to-be 'Big Three' are now demanding $50B in federal loan guarantees to stay afloat. Watch that figure inflate to $100B later. Hey, I bet if we wouldn't have frittered away trillions on the war machine we could have had some basic universal health care and our industries could have had lower costs and been more competitive and had more money to invest on R&D....naaah, they would have blown their profits by going on acquisition sprees, paying big dividends to drive up stock prices and make themselves look good to shareholders quarter-by-quarter, and upped the top management's compensation including retirements and golden parachutes!

You don't understand-Sarah is such a babe. Drill baby drill! When she is sworn in she is going to do some baton tricks from her parade days.

A dozen years ago, I summarized the Gingrich Contract With America: It's not less government, it's WHITE government.

This is what it looks like in full bloom.

They are on the hook, but like a brain dead fish they won't know it. What they will see is that their fancy US dollars won't go quite as far as they used to, and they will wonder why. Like Dick says, deficits don't matter (to the connected).

I think that the assumption that "tax payers" --- aka wage earners --- will be on the hook for this is essentially false.

And I'd say that, by hook/crook that yes the US population will be on the hook. Unless there is a full on repudiation of the debt.

The 'worth' of the US Dollar is based on the 'assets' of the US of A. Some of that is material things like what can be 'farmed', some of that is mineral, some of that is expressed of energy capture and processing. But most is the people and their labor.

Tax payers (assumed to be anyone who labors in exchange for the goods of others) will be backing those dollars one way or another. Because if they don't, the collapse will be un-pretty.

And the collapse of this sort of social complexity can be quite rapid.

Is not such a collapse a form of payment?

I think the U.S. has the guns to hold to the heads of other nations that will enable it to demand a full repudiation of the debt in the long run. Uncontroversially, they can blow any nation of the earth except Russia and China into oblivion with military impunity.

More controversially, they can even blow China and Russia into oblivion with military impunity. The latter assertion was cogently argued for in the March/April 2006 issue of FOREIGN AFFAIRS by Keir Lieber and Darryl Press, in an article on U.S. nuclear primacy.

The current goings-on in Georgia, Poland, etc., need to be seen in part in this light, I think. The U.S. is trying to muscle itself into a military position where a nuclear first strike capability against Russia is assured. Since China is much less advanced than Russia both quantitatively and qualitatively in terms of its nuclear threat, U.S. nuclear primacy vis a vis China would almost seem to follow a fortiori.

An obvious motive for U.S. belligerence is to secure control over world energy supplies. A less obvious motive, in my estimation, is to secure the ability to repudiate its debt by holding a gun to the head of the rest of a helpless world.

Are you even aware of the topic of this thread and what Paulson's action did to secure the Chinese investment? I guess if you only have a hammer everything looks like a nail.

More controversially, they can even blow China and Russia into oblivion with military impunity.

With impunity? No. By necessity, such a conflict would have to be nuclear, and no one would be left unscathed.

Here's the link to the Lieber and Press article:

I find it too depressing to read at the moment.

Do not be too depressed as their thinking is wrong headed. Both China and probably Russia have nukes in orbit or can get them there rapidly. China sort of let the world know this when they took out one of their own satellites a year or so ago. They don´t have to deliver a nuke directly to the U.S. They can blow them up over the U.S. at about 50 to 150 miles up. The EM pulse will fry all the electronics except those that are very well hardened. If you think the U.S. has money problems, imagine all the U.S. computer chips melted and non-functional. No modern anything left in any home, factory, bank or hospital. Number of nukes is not an important feature. MAD only requires getting one or two big ones to go off more or less in the approximate continental address. All that technology to deliver a precise nuke is nonsensical. We have been spending money in that area based on the wrong paradigm. Making more nuclear weapons is just a money scam for defense contractors. What would our military do if all of the GPS satellites stopped working? There is the idea of asymetric warfare on the nuclear/economic level.

Forgive the completely naive question, but how does one 'harden' electronics?

shielding, SOI (silicon on insulator), etc. all the chips on satellites are radiation hardened to certain extend.

venturing further afield from fannie mae, what % of electronic is shielded? Is it purchased that way or can people do it themselves? Or is it a top level military secret? (I'm worried of course, because I don't have hard copies of my 104 oildrum posts...)

A simple IP lookup reveals that is hosted by a company called Colospace, which is housed in six data centers around NH and Mass. Depending on how The Oil Drum is hosted, there may be some redundancy there. Also, most colocation companies employ at least some degree of physical "hardening" of their facilities, including multiple power and Internet grid connections, kevlar-lines walls, subterranean data centers, etc.

Short answer: maybe an emp will take out your 104 posts, and maybe not :-)

The good news: emp will not harm your tomatos.

I was kidding about my posts. And I never heard of Colospace - in SuperGs realm.
But if this is possible (I'm sure it is - just not sure whether it's 10% or .00001%), we should invite an expert on the topic to do a post -my dad was just informing me that in the next few hundred years that the earth could reverse polarity (i.e. north becomes south) which also would wreak havoc on electronics. But he's only a bone surgeon so it might have been BS.

the next few hundred years that the earth could reverse polarity (i.e. north becomes south) which also would wreak havoc on electronics.

Err, how exactly would that happen?

A rapidly collapsing field, sure. But a few 100 years?

no it would instantaneously reverse, SOMETIME in the next few hundred years. Apparently its happened dozens of times in planetary history, but I am the last person that should be 'splainin.

Magnetic polarity does indeed reverse regularly across geologic time. There are symmetrical magnetic polarity bands spreading out on either side of the mid-ocean ridges where new ocean floor is formed.

no it would instantaneously reverse,

Instant in geological time, or instant as in less than a second?

To collapse the field quickly would require removal of the energy that has created the field or would have to reverse the generation method to collapse the field quickly.

I don't see how the field would collapse or reverse quickly enough to matter.

basically a metal box w/ ground for the box.

"The cages block the electromagnetic waves that skew data and could damage radio telescopes. Pulsed high-voltage experiments also use such Faraday cages to protect sensitive electronics from the experiments' electromagnetic pulses. In this context, the cages are often called "screen rooms".

Do not be too depressed as their thinking is wrong headed.

Sure it is.
Unfortunately though the guys in charge are only too ready to swallow it.
They have already proved themselves to be deluded fantasists in Iraq - at least McCain has some grasp of military realities, as he showed when he wished to allocate adequate forces for Iraq - so hopefully he might have some grasp of the complete insanity of fighting Russia and China.

All the plans to encircle Russia showed that they were willing to grasp at any straw to support their delusions - it's called the 'Let's invade Russia' syndrome.

Actually, Dave, McCain was as clueless as the rest of the hawks during the run-up to the Iraq War.

In the period leading up to the war, McCain sounded, at times, less like a straight-talking maverick and more like the neoconservative former Deputy Secretary of Defense Paul Wolfowitz. "It's going to send the message throughout the Middle East that democracy can take hold in the Middle East," McCain said about the war on Fox's "Hannity & Colmes" on Feb. 21, 2003. He seemed to think Iraq would be a cakewalk, predicting that the war "will be brief."

He also sounded like Wolfowitz's boss, Donald Rumsfeld, as far back as late 2002. Despite all his talk now about more troops, as the war drums built toward a crescendo, McCain argued that better technology meant fewer troops were going to be needed in Iraq. "Our technology, particularly air-to-ground technology, is vastly improved," McCain told CNN's Larry King on Dec. 9, 2002. "I don't think you're going to have to see the scale of numbers of troops that we saw, nor the length of the buildup, obviously, that we had back in 1991."

Of course, he now likes to paint himself as some sort of oracle, but he only got religion after the insurgency began in earnest.

Water and food I can live without but if all the pr0n gets fried then we are facing a new Dark Age.
EMP pulse was a big feature in the BBC Nuclear War drama 'Threads' in 1984. Faraday caging works well enough.

EMP/Geo-magnetic reversal - either way its all about the idea of 'resetting the machine' - has no one seen the movie fight club? No records = no more debts - or credits for that matter. Start all over again. The other option is to dump the dollar and go with a new currency under the NAFTA umbrella - similar to the emergence of the Euro (that saved the EU economies?). Americanas anyone? Not that any amount of geo-political/financial engineering will postpone the inevitable demise of oil. Instead society will revert to the coal (or what ever other sources can be found - especially slave labour) Victorian model of industrial wealthy elite and majority impoverished negligible-wage slaves.

On the lets get the nukes out argument, I don't doubt for a minute that many extremely intelligent and rational (if albeit deluded) people have discussed these scenarios in the bowels of the Pentagon...


society will revert to the coal (or what ever other sources can be found - especially slave labour) Victorian model of industrial wealthy elite and majority impoverished negligible-wage slaves.

We've been there since Reagan.

I think the U.S. has the guns to hold to the heads of other nations that will enable it to demand a full repudiation of the debt in the long run.

Don't need no 'full repudiation'! One only needs to selectively repudiate a small part of a small part of a small part of an obscure corner of the debt. Do that and everyone else will rush to make any sort of deal ... See Hjalmar Horace Greeley Schacht; this was how Germany was able to escape its obligations and finance Hitler's war preparations.

Don't even need to do that; just buy back the Treasuries with Dollars (printed, of course.) The problem with monetization (inflationary) is that the counterparty has 'feign ignorance' as he must take the (bad) money for the (good) note. Ignorance ... or a suspension of disbelief. Under a 'default' scenario, exchanging Treasuries for debased dollars might seem like a the 'Deal of the Century'.

OR ... the US could make a three way deal with one of its trading partners to swap US debt for debt denominated in another currency ... for a fee, of course. With Trillions of debt, the fee ... to England, for instance, might be inducement enough to subscribe to this. It's insane, but ...

No country has to go to war to not pay its debts. It simply has to not pay. Usually, there is 'capital flight' but @ the default line, flight is 'flown'. That capital is leaving is no longer an issue. Russia was broke long before Yeltsin's ruble collapsed.

The US's problem is not paying its obligations; debasement is taking care of that. The issue is getting more credit ... in excess of the finance charges ... which the rest of the world so far is eager to provide. Debasement is tolerable as long as the costs can be managed ... or made to disappear. See 'suspension of disbelief' ... the lenders are happy to fund the Treasury even if the return is below the rate of debasement. The issues of debasement are weighed and a judgement is reached. Even with a 'grand mal' increase in money supply from the Fed, and a massive, exponential increase in US Government obligations (60-70 TRILLION dollars!!!) individuals and countries - both - are eager to lend up money.

It's Morning in America Again!

This will likely continue, even if the economic wheels come off here. The US is important in the industrial scheme of things. We are collectively 'too big to fail'. Everyone is going to cut us a lot of slack.

I think that should read 'It's mourning in America again!'

. The US is important in the industrial scheme of things. We are collectively 'too big to fail'. Everyone is going to cut us a lot of slack.

What does the US make industrially that other nations don't? Big guns/planes?

Slack to be cut for making Disney movies? Sales of Bangcock Dangerous to the rest of the world?

What happens if the reverse - the people/nations with the products opt to say 'the US Dollar is no good here' - ie you can't use the Dollar to buy goods.

What happens if the reverse - the people/nations with the products opt to say 'the US Dollar is no good here' - ie you can't use the Dollar to buy goods.

Then those people end up having their country overthrown in a CIA coup. And all the talking heads in america convince the general public to believe it was the boogeyman that somehow caused it to happen.

Said by eric blair:
What does the US make industrially that other nations don't?

Although not industrial, food is an important one. "Nuclear reactors, boilers, machinery, etc.; parts" is the largest by dollar amount at 17.1%. The world would not be able to build nuclear power reactors as quickly as they would like if we did not sell them the parts.

You can generate a list of exported items at:

So us regular folk are on our own, deemed responsible for any miscalculations regarding possible mortgage rate increases and crystal ball forethought as to possible future economic downturns, however the lending insitutions have immunity.

I must have missed the Survivor episode when communism was annointed as appropriate for bailing out big business, but capitalism was set firm for individuals.

communism was annointed as appropriate for bailing out big business, but capitalism was set firm for individuals.

That must be the city cousins VS the 'real conservatives'.

Given whats happening with the GSE's any proposes solutions for a viable economy post peak should be robust enough to work in a Depression environment. The chances of our economy even making it to the point that peak oil becomes a serious issue become dimmer by the month.


Is the US government forcing a 'come to Jesus' moment? i.e., Hey banks and other institutions -- time to come clean and mark everything to market.


Joint Fed Press Release:

All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.

Statement by Secretary Henry M. Paulson:

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses.

My analogy would be: a drug dealer has a customer who has lost everything including his job because of his addiction, thus he cannot pay for his meth. The dealer is going to front him enough meth to provide the energy for him to get a job to pay for his meth-no plan beyond that IMO.

Maybe it is having this effect. Link

I'm not a knowledgeable about this level of finance, so could be way off.

The question I have is: How will this affect the price of oil?

a) you'll never know, because 18 other things are impacting oil right now (1 - some hedge fund blow ups, 2 - mutual funds getting short their energy bogeys due to slowing economy, 3-Hurricane Gustav impacts, 4-Hurricane Ike shut ins, 5-Hurricane Ike potential damage, 6-OPEC announcement (cut?) 7- Elections, etc.

b)if the dollar sells off and/or there is larger appetite for non-treasury holdings oil will rally.

Short term, with all their manipulation, who knows-long term this is very bullish for everything denominated in dollars, including oil.

It is absolutely bullish for oil in terms of dollars but not in terms of real value. Peak oil will bring about the real value changes.

unless america or another nation(s) has a huge sum of money hidden somewhere the only tangible asset that can fund this bailout is oil. i suspect its price will begin to rise immediately if things have reached the extreme stage. otherwise right after the elections.

maybe will we see the superspike many predicted a few months ago.

All the financial machinations can't restore the housing bubble. The only way nominal prices of houses could be restored would be a massive inflation to drive up prices of everything else. So any rescue scheme that depends on stopping mortgage defaults by increasing mortgages issued isn't going to work.

I think the main goal of this Fannie/Freddie bailout is to reduce the number of other financial institutions that fail. But they can't stop the crisis from developing because prices still haven't returned to historical pricing patterns. A look at historical price-to-rent ratios in housing shows just how far the market still needs to go to correct.

Second assessment.

Ok I've had time to read the documents and talk to some folks. I think the major goal here is to lower mortgage rates in an effort to kick start the real estate market - other than PIMCO no one has really stepped up to buy 30 yr mortgage agency debt in recent weeks - this paper tightened about 50 bp Fri afternoon after the Wall St journal story and should continue to tighten tomorrow. But even if they tighten another 100 bp, treasuries are trading down sharply tonight (1.5points on 10 yr) so the absolute rate a borrower would pay would be a wash.

Regarding the preferreds, it looks like this is not a pari passu situation - that the existing prefered holders WILL probably lose money -though the notional is only 36 billion and they are trading at a value of 20 billion or so. At least this wasn't a complete Monty Hall campaign.

The dollar and treasuries selling off tonight, and most commodities sharply higher - also SP up 35 and nasdaq up 38. This (of the many bailout attempts and discussions) is the first that attempts to reduce systemic risk, by forcing GSEs to reduce the size of their mortgage holdings starting in 2010. So it IS a better long term solution than was envisioned, if this situation gets to the long term (e.g. new administration, different and harder challenges on horizon). I expect in the end this will do little for the economy and is like a bandaid on someone that just got Lyme disease. But what else could they do?

From the article,

Of course, the goal here is simply to create a boost that lasts until November, and given the kind of weapons used, it's likely to succeed in that short term goal. Saving the US economy is another thing, given that its fundamental problem is spending beyond incomes - more debt does not cure that, rather the opposite. The twin movements of growing spending and stagnant incomes have to be brought back together. Boosting spending via debt cannot work this time; incomes have to be raised - and for the right people.

What Jerome is forgetting is that debts can be renegotiated or repudiated entirely. Private citizens and corporations generally cannot renegotiate or repudiate debts, the law stops them. But states can, since they are the law. By taking private debt into the state's hands, the government sets it all up to say to the world's creditors, "time to renegotiate the debt - you can get back some of the money, or none of it, as you choose - you cannot get back all of it."

A significant number of debts in world history have basically been written off by states. The US built its intercontinental railway system with loans which it later repudiated and wrote off. Third World countries repudiate debts on a regular basis - see Argentina for a recent example where it was done unilaterally, and where it was done with negotiation, well the examples are legion - Iraq, Afghanistan, Ghana, and so on.

I don't know for sure what the ultimate scam on this one is, but a lightbulb went off reading your post (apologizes to all who view this as obvious). With the taxpayer backing Fannie/Freddie, there is no need for a viable business model or no thoeretical limit to losses. To take an absurd extreme, you could juice the housing market right now by forgiving all the loans held-just slap it on the national debt. All those free former borrowers are now able to borrow a similar amount or more all over again-voila-housing market has wings. Forget no money down-start paying anyone $20000 to take out a no money down loan-get the securitization scam up and running again by having the taxpayer explicitly back all such operations by Wall Street banks-happy days are here again. God help us if this is how they are thinking on this one.

You silly boy you think this about saving the homeowner.

No the plan is to allow a lot of people to refinance clearing the banks books and sticking the GSE with the garbage now full backed by the US Gov.

Banks get rid of their garbage and as these people get foreclosed upon the US taxpayer pays.

I doubt its about making real new crappy loans. Even more probable is what will happen is the GSE's will simply buy up all the crap loans outstanding right now.
So however its done the pressure will be on for the GSE's to save the banks by buying up rotten level3 assets at price to fantasy first.
It will be a while if ever that this will finally turn to helping out the homeowner. So I really doubt we will see them reignite the bubble.

So my best guess:

So what you should see is a double standard new loans will be strict and probably refi's but they will buy up a bunch of junks from the banks.
Once the GSE sink in the morass thats created then the Government will disband them and let the bank do the house lending but with a healthy money injection. This probably includes the banks picking up all remaining mortgages that are still performing in a few years from the dead GSE to "help" restart lending.

So although the banks will be happy with the bail out you can be sure once the garbage has been identified they will want the good stuff back however little this may be.

In fact I could easily see this trading of bad mortgages into the GSE in exchange for good ones starting fairly quickly. Banks would get to pick the best in exchange for garbage. Hell probably on a monthly basis.

Memmel: The homeowner's needs are irrelevant so you misstate my post. Your scenario (housing market deflationary) is also possible-who knows? What I do know is that when the USA taxpayer starts backing any expenditure program it can get out of hand real fast and said expenditure program almost never is scaled back. You silly boy-you think someone is looking out for the taxpayer.


I agree that debts can be repudiated - but that will make it harder for you to borrow in the future, which means that it will be harder to spend beyond your income in the future.

The "surplus" of the past may be kept by repudiation or inflation or default, but it will no longer be available going forward. Which means that spending and incomes must be aligned, going forward.

The more I read about this stuff the madder I get. My personal debts are small, on the order of six months pay for me and they'd be a fraction of that had I not gotten sick this time last year. My ability to service the estimated $525,000 the federal government has assigned to each and every household? Well, not so good ...

I really wonder what happens after 11/4/2008. A defeat for McCain/Palin is, in the eyes of the disloyal Christian Right, a defeat for the god of their understanding. They're primed for violence (Google:Joel's Army). I see predictions that Ford and G.M. go under in the interim between the election and Obama's inauguration. That'll go over like the proverbial lead balloon. Interesting times in which we live, just like the Chinese curse. Some days I want to just hide under the covers and not come out at all.

Obama is the best chance for the country IMO but I think the hot babe with a shotgun trip might have won it for the Alzheimers patient-hard to say.

A defeat for McCain/Palin is, in the eyes of the disloyal Christian Right, a defeat for the god of their understanding. They're primed for violence (Google:Joel's Army).

I don't think they're planning to lose the 2008 campaign and their fight seems to be paying off:

US politics is a very strange beast to outsiders, but then again, it has been for a while. Americans revere Ronald Reagan yet during his presidency, most non-Americans found it utterly bewildering how a second rate movie actor who was prone to memory lapses and mixing up his lines could be styled "the Great Communicator".

Yet to this day, even Americans who were opposed to Reagan politics and economics, assign him full merit marks to the title "Great Communicator."

Which only proves that if you repeat a line (phrase, mantra) over and over again, no matter how far-fetched, people will start to believe it.

Palin would be seen as a loony-tune candidate practically anywhere else in the western world, but in the good old USA, she is a benefit (blessing) not a liability (curse) to the GOP. Simply mind boggling.

What will happen when TSHTF and TPTB are still in place. Stay tuned. This is when it could really get interesting.

After watching Sicko you can see the the US has a healthcare crisis far greater than any financial one.

Why is socialised medicine an evil communist plot to take over the American way of life but socialised mortgages are part of the 'free' market?????

Why could nobody find this billion dollars or so to bring US healthcare for the poor to better than third world standard?

Funny old thing life isn't it?

The problem with socialized medicine is that it is more difficult to steal vast sums of money. Some of these grifters at Freddie and Fannie were making tens of millions a year (not uncommon in the financial industry). Figure out a way for the club members to steal as much in socialized medicine and you will have it tomorrow.

I would mention a few bullet points on this topic that I haven't seen emphasized and try to put in a little detail on them. Yes, I am without specialized knowledge and likely won't choose to research this in depth, I have gotten to a place where it is like, "Yes, I get it, looks familiar" I could spend lots of time on this but it is more along the lines of "choose your battles" and "what does it matter in the face of eternity" ;)

1. The middle class is being screwed. big surpise.
2. Private property rights have just been significantly weakened. This is probably my takehome point so I'll expand on this at some length.

Previously, constitutionally, the government's role is to protect the rights of landholders. Now, for the majority of mortgage holders, you are either implicity or explicity in debt to your government. The Animal Farm irony of this is that both Fannie and Freddie were created to expand home ownership, they succeeded too well and now they are the instruments by which the Federal government, if you are in debt, declares itself Lord of your manor. Previously the contract was between private citizens and the government existed only to protect the contract, now, implicity or explicity, for most, if you have a mortgage your debt is not to a private citizen your debt is to the government. Hell of a job Georgie.

Whenever, property rights are respected, property is considered valuable. As an example, consider Eastern Europe, now that private property exists again, despite decades of severe oppression and economic hardship, what is the price of an apartment in Prague?

So what will this stunt do? I'm a laymen and not a seer on this matter. But let me ask this are you now more or less comfortable investing knowing your debt is tied up with the Federal government?

For me I saw a nice house on a third acre in nice town for 495k, it was in foreclosure. I thought it had been sold then saw it had been dropped to 450, I suspect it would have went for 650-700k three years ago. Maybe I'll make an offer, but my new question is ... WHO THE HELL IS MY CONTRACT WITH AND WHO IS VOUCHSAFING THAT CONTRACT! Oh, the poiticians will now protect the henhouse.

Sorry, the oratory is overblown. Still I have to think it is 50/50 whether this move will reassure people or whether people will say at some level, jeez, we already pay property taxes now property debt is also overseen by the government, and property prices continue down.

3. The investors and preferred investors (small banks?) are screwed while the large banks and international holders are protected at the price of taxpayers.

4. If the government cannot control property at some point they will make it again more expensive once they have reduced the percentage of people who own homes. Their first choice though is to obtain as much control as possible over private property.

I am likely being too conpiratorial here but it does appear certain that a) we all just became poorer b) the large banks are off the hook c) the federal government now has its hooks in property ownership.


Good question. If you get a "Conforming Fannie Mae loan" it will be one of two groups. Fannie Mae may keep the loan on their books so basically you owe the government. Otherwise your loan will be packaged and sold as part of a Mortgage Backed Security (MBS) to an investor, probably a foreign person, group or entity like the Bank of Japan or a pension fund here in the U.S. Now even if your loan is sold to an investor the taxpayer is now on the hook if you don't pay and the bank takes a loss on your loan after they foreclose.

If you go to your local credit union for a mortgage they are most likely a "Portfolio Lender." That means they hold the loan until maturity so you'll always owe them and your borrowing the savings of other members of the credit union. A Portfolio Lender does not sell their loans to others.

Your 100% right the fact that the Government now owns a large number of the homes in the US did not escape me.

Who are you going to vote for when the government owns your mortgage ???
This is one of the absolutely scariest things I've seen yet.

Needless to say if I stay in the US I will pay cash and I'll wait to pay it until housing crashes.
If it does not then I'm better off renting and staying out of the game.
If I choose this route then I'll probably buy land with a small cabin and rent.
But I'm for sure going to watch what happens over the next few years.
A lot of people have just been stripped of their voting rights for all intents and purposes.
The question is what will the US Government do with its new found power ?

Look no further than to your northern neighbor, Canadian Government has backed mortgages for >30 years. They have still had changes in governments. They also have universal health cover for most medical conditions except cosmetic surgery.
The US has been in a banking crisis, this is now over because the government is prepared to stop any major financial institutions from failing. Banks won't be forced to put foreclosed homes on market, interest rates for mortgages will return to levels of a few years ago, house prices will stabilize (people have to buy or rent somewhere). The US dollar will probably drop and oil prices will probably increase again, but this is going to happen anyway.
The US can now focus on the real crisis, PEAK OIL, and perhaps do something to reduce oil consumption.

FED monetizing debt - "definition of monetizing debt : Paying off government debt by printing more money. Leads to inflation"

Now it has begun. Remember, so far only some 25% of all bad debt has been delt with in this financial melt down. Nobody in their right mind this time will help out in order to finance these banks and institutes. Only one option awailable and that is to monetize debt. The result simply spells hyperinflation. Proven reserves in the ground is where it´s at. Hard assets from now on is the ONLY place available if you want to protect your wealth. Soon investors will start pooring in to the sector and this will be nothing but the perfect storm as far as commodities are concerned.

"ASHINGTON (Reuters) - The U.S. government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac , in what could be the biggest federal bailout in U.S. history in a bid to support the U.S. housing market and ward off more global financial market turbulence."§ionID=5

Bear sterns got them self in a mess as nobody wanted to give them loans, Thus their problem was a solvency issue. Lenders argued that they had no idea what Bear Sterns really was worth or what the value of all these "packaged loans " represented. Earlier on people like Moody’s, Standard & Poor had given these type of financial products triple A rating (a criminal act in fact). By now it´s evident even to a 6 years old they represent 0 value. Thus lending to Bear sterns represented at huge risk s it was no value at that institution of any value backing the loans you or loaning against. Bottom line Bear sterns got no loans and thus was caused by an issue with their solvency and then the result was a liquidity crisis for Bear Sterns. The banks however had the money could have lended it to the company but they realized that if they would then probably would stand to risk it ALL.

Some thing now with F&F nobody BUT the government now are willing to pay for their debt as everybody understand they really have no value to back any loans up with their balance sheets basically has blown up.

Now if a lender loans money as a debt loaned to a commodety play what they then will have as a security is in fact the reserves. They represent real tangialble, and undisputable value. That is what you then loan against. Yes a company could then after having gotten it´s loan find itself in a mess cased by e.g. technical problems etc and ultimately stand the risk then of bankruptcy. If they would get broke and if they would find themselves in a position where they would not be able to pay any of their obligations to the bank e.g. like interests etc well then what represents value (their reserves) simply will be transferred to the lender. That is why lending to people with hard assets in the ground; proven reserves etc represent no real risk to the lender. Having said that nobody in their right mind however today wants to give any loans to anybody where there might be the slightest risk some of their supposed asset base is in fact some kind of financial packaged product,.

There is money available and what we see now is not an issue as such with liquidity (people not having money to issue any loans) but rather an issue with solvency (people not wanting to loan any money without what now represents real value.

“If there is no tomorrow, financially, why can’t we borrow and spent all the money today?” Paulson’s little devil whispered to Poulson’s ear.

We owe it to ourself.

The whole mortgage mess reminds me of Matthew Arnold's great lines,

And we are here as on a darkling plain
Swept with confused alarms of struggle and flight
where ignorant armies clash by night

The truth is, nobody knows what is going on. Sure we all have opinions, but it is like a game of water polo, where the real kicking and fighting takes place below the water, out of sight of the audience.

Interestingly, the "housing collapse" is really a pretty localized event, with the top 5 or 10 states representing a huge portion of total Households in the US, and also a huge number of the foreclosures:

This I think is what Airdale was trying to say earlier in this string of posts, but he worded it badly and thus made it sound like a "city vs country" war.

Much of the country has seen no great decline in house prices. I live in central KY and shopping for an affordable house here is still almost hopeless, as the prices just refuse to go down much. The builders are still building like mad however, so there is still hope they could flood the market and we could still see some declines.

The builders must assume that the home buyers will get the money somewhere. The incentive packages given by uncle sam to prop up the markets are taken very seriously here, almost like a sort of a "VA loan" for civilians, and I know many first time homebuyers who are seriously shopping, and some who have already closed deals. Up the string, one poster linked to a "rent to price" source,

The fact is that home prices have come down a great deal IF, and this is the big IF, you are in one of the large states that have suffered badly. In other regions, the rent to price spread was never much higher than it has been historically and thus it has not changed considerably. Likewise the rent to income spread.

I hate to have to say this once again, as I have said it before on TOD US, but there seems to be a real desire on the part of the business media to get as much hysteria out of this event as possible. It is well known that Freddie Mac and Fannie Mae have been poorly managed for decades. They probably should have been taken over by the Feds years ago simply to clear out the corruption, graft and abuse. If one went by what one hears in the media, you would assume that Fannie and Freddie were buried in a wave of foreclosures that left them broke. This is certainly not the case:

Freddie and Fannie hold 5.4 trillion dollars in mortgages but lost only 14 billion dollars in the last 4 quarters. If see that as a reason for a takeover, then General Motors and Ford should have been taken over long ago. I know that saying "only" in front of 14 billion dollars sounds obscene, but saying 5.4 trillion is equally difficult.

So we must assume one of the following:

(a) Fannie and Freddie were completely unable to remarket any of the 5.4 trillion dollars worth of mortgages it holds (???), (does that seem likely?)

(b) Seeing that the management of Fannie and Freddie were now unpopular with shareholders and bankers, the government saw it's chance to swoop in and take control while it had the chance and remove much of the corrupt management of Fannie Mae and Freddie Mac.

Long story short: The U.S. housing crisis has been one of the most oversold financial "events" since the S&L collapse, another relatively localized event which was supposed to have buried the U.S. for good a quarter of a century ago.

If you want to put things in perspective, think of it this way: The money the US will export to buy oil over the next decade will be about twice the amount of all the mortgages that Fannie and Freddie hold combined. That money will leave the US to be spread throughout the world, some possibly returning to buy some of those Freddie/Fannie mortgages. Most of the houses that Fannie and Freddie have money tied up in will still be right here in the old US (excepting any that burn down or are torn down). Which is the real crisis?


US and UK housing prices are vastly overvalued from historical income ratios, and that has to come down before housing is affordable.
All the financial engineering in the world can't change that, save as inflation does the job instead of overt falls.
That is why this 'rescue' package is just bailing out a boat with a hole in the bottom.

You are correct in that:
The builders keep building.
The banks keep lending, to good and bad risks.
The Central Banks keep taking on more debt to keep the system afloat.
The consumer keeps borrowing to pay the interest.
The financial people keep stealing.
The politicians to be successful can't say how bad it is.

None of this is going to alter until it breaks.

ThatsitImOut, I would say a) is extremely likely. The GSEs hold 5.4 trillion in mortgages, have effectively no equity, and therefore have to roll over 5.4 trillion in debt every quarter. The Chinese and other sovereign country funds have become net sellers of GSE debt. Who's buying? Despite the explicit guarantee of the USG, people would rather hold T-bills than GSE debt as shown by the widenning spread between them.
So the treasury is going to sell T-bills on the open market for which there is demand, and buy super senior preferred stock from Fan and Fred with the proceeds.

Mr Mudd is expected to receive $9.3 million in pay and retirement benefits under the terms of his contract, while Mr Syron could walk away with $14.1 million.

This takeover is definitely a watershed event in that it's (following the Bear Sterns bailout) the biggest, last financial bailout the US government can do (since it can't bail itself out after this).

This means that, since these two events represent the crisis widening and deepening (but not ending), the next event in the unfolding larger crisis will be when the US can't bail itself out (probably after hyperinflation takes hold).

The way to control that crisis will be new regulations on the amount of money you can withdraw from your bank account, the amount you can change into foreign currency, the amount of gold you can buy, etc, maybe also rationing of gas and flour (I'm not sure about the details).

People will riot, of course, and the spreading unrest will bring the military into the picture. The US military that is. More rationing, more controls, seizing of assets or food, confiscating whatever, etc. Of course the people at the top will make sure that the FOOD is always flowing their way!!

I am pretty sure that this is already modeled on their computers and the plans are drawn up.

Eventually, if you get enough years of military control over a population you end up with a feudal type of system.

Because of the Maximum Power Principle (and remembering that "politics is the economics of power") the structure and form of government HAS to change when the energy form changes (FF to land) and the transition can be (history shows it) painful. It happened here in Japan (land to FF) with Meiji govt.

Don't expect democracy anymore, study history, and be ready for big changes because some of the people in Washington are far out ahead of most.

You are exactly correct. This allows for the privatisation of profits and making the risks and losses the public burden.
War is the exact same. The leaders make private their
profits and make public the risk and losses.
This burden will be more than the people can suffer.
This is anti democracy, its capitalism on steroids. The ranks of the poor will swell in America to proportions not seen in society since the dark ages.
Serfs and peasants, teaming multitudes of poverty stricken masses, to weak to fight exaustion or the ruling class.
Tempus fugit when your having fun

On CNN the estimated bill according to the Government was £200bn tops.
They commented that if it had not gone through, interest rates on mortgages would likely have risen by 1%, whereas now they might fall by 0.3%

Potentially almost unlimited, and government estimates of $200 bn , as Government estimates are invariably far too low, sounds like a perfectly awful deal to me for a saving of 1.3%, even for those who have mortgages.

Can anyone put an actual figure on what the costs versus the savings is, assuming that the government estimates are correct?
$200 bn costs plays what?
I suppose it is almost impossible to give exact figures, as the time frame and everything else is unclear, but how much is 1.3% extra on mortgage costs per year?

I might have had a stab at it for the UK, but am unfamiliar with the US market.

The US mortgage market is about twice the FM&FM, say 10 Trillion(10,000 Billion) , a saving of 1.3% interest is worth 130 Billion per year. Not a bad return if it costs US government 200Billion and stops a complete economic melt-down of the world financial system.

If the US government really gets short of funds could raise gasoline taxes from 18cents to $1.80 a gallon, still lower than most European countries, run a balanced budget, and reduce that $700 Billion oil import bill!
Ooops, that would never happen, most in US would rather see a total financial collapse, gasoline rationing universal conscription, dusk to dawn curfews, as long as gasoline prices are kept low( preferably lower than $3 a gallon).

Thanks. I don;t think that if someone offered me a deal to reduce my mortgage whilst being taxed nearly twice as much as my savings per year over perhaps two years, and that I was thereby taking on additional liability for half again my present mortgage if things went wrong, that I would jump at the offer.

To my mind this mess is the result of an over concentration of income/wealth at the top in the United States. When capitalism does its thing and rewards the most efficient and those who own the most capital, eventually through mergers and failure of those who are less endowed or less skilled the capital ascends to the top of the heap.

In such a situation capitalism looks and behaves more and more like socialism only with socialism for those at the top. Eventually the advanced capitalist state comes to resemble a communist state where capital is controlled by a few at the top. These few make decisions in there own interest and not in the interest of minor players lower down. As time passes the system fails due to the maldistribution of income and wealth as it did in the Soviet Union.

In the American case, the concentrated capital is forced to lend to none credit worthy borrowers in order to increase itself and thus sows the seeds of its own destruction.

It is somewhat similar to predators and prey on an island IMO. If the predators become to powerful by eating to many of the prey, they have to suffer a decline so that the prey can recover their numbers and provide enough food for the predators.

The destruction of capital at the top is necessary to re-balance the system. This could have been done with increased top income taxes, reduced lower income taxes and or increased social spending for those
at the bottom of the system. But the policy of government since the Reagan years has been reduced taxes on wealth income and promotion of concentration of wealth through mergers and such.

Along with this there has been a fervid promotion of globalization which ships the primary source of those with lower income (jobs) to foreign low wage countries thus increasing profits and concentrating wealth for those capitalists at the top even more. The result of all this has been stagnant or even declining real income and wealth for those nearer the bottom and even the middle and upper middle of the capitalist system.

The remedy of reduction/collapse of the predators in the system is now underway and gaining strength. Hopefully some of the prey can now recover a little so that not all the predators die off. That would be natures way.

Actually, i think you meant "communist dictatorship state", not just "communist state", though you're correct, only the first type is really possible. However, without the word "dictatorship" your metaphor is lost. With it, I'd agree totally.

Paul Krugman's "The Return of Depression Economics" had a paragraph on 1998 events titled "Saving the world for Soros". Perhaps when these events are chronicled the title will probably be "Saving the world for Gross" (CEO of PIMCO).

But there is a much more important side of this issue, which is seen only from the perspective of the physical limits to growth. And I am quite dissappointed this aspect is not being tackled in this discussion. So I will address it starting from this quote of Paulson's statements:

"I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth"

If you are aware of physical limits to growth, and that Easter Island's society could have avoided catastrophic collapse if they had stopped building moais in time, it is clear that the housing correction is not the biggest risk, but the biggest HOPE for the US. Because when house prices fall below construction cost, residential construction grinds to a halt. Which, from a Hubbert’s Peak-aware perspective, is exactly what the doctor orders. Because construction of more suburban and exurban McMansions is just digging further in the already deep hole most of the US population is in, as inevitably higher fuel prices will turn those homes into traps for their occupants.

So, while the Preferred Stock Purchase Agreements part of the plan is completely justified and was necessary for the very reason stated by Paulson: ensure the GSEs can fulfill their EXISTING debt, thus saving the world for the People's Bank of China (a critical enough issue to warrant doing it for Gross at the same time) ...

"First, Treasury and FHFA have established Preferred Stock Purchase Agreements ... Under these agreements, Treasury will ensure that each company maintains a positive net worth. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. ...

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS."

... it is the GSE MBS purchase part of the plan which is most unwise in the light of the physical limits to growth. Sure enough, that part, as Paulson says, would be necessary...

"to further support the availability of mortgage financing for millions of Americans, (...because...) During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers."

What Paulson (and practically the whole political/economic/financial establishment) cannot see is that a decrease in the availability of mortgage financing is a GOOD thing for Americans, just as a decrease in the availability of drug financing is a good thing for a junkie.

Again, lack of mortgage credit -> house prices fall further -> eventually they fall below construction cost -> residential construction grinds to a halt, which, from the way and places houses are being built today, is a GOOD outcome.

And if the US Treasury does not know what to do with the pile of cash it is sitting on (?), here are a few areas where it could be used instead:
- Wind farm construction
- Upgrading the electric grid to handle the above item
- Electrifying the US freight railroads and replacing the double and triple tracks taken up in recent decades
- Building electrified urban rail

The last two items were proposed by Alan Drake here.

Is it possible that this move was done to remove the risk of outside forces (China, Russia, SA) selling off at once and crashing the US economy?

National Security?

Dow is up 2.29% so far today. Talk about rational exuberance!

The government of the biggest economy of the world is admitting that the largest debtholders in the country were about to become insolvent and need to be saved at taxpayers expense, and the market falls into delirium! Cheesh...

Just one question: when the time comes, who is going to bail out the US government itself?

Exactly---the US Govt won't be able to bail itself out (by printing more money) if no one wants those dollars anymore.

This is the last effort (an unprecedented seizure of FMFM) to continue BAU. When it fails to keep the money flowing properly so that those at the top can enjoy the fruits of ....labors that is when the army will step in to make sure that these food/energy flows will continue to fill the bellies of the people at the top.

Of course no country will be immune from this turmoil in some form. But the US may feature it in a most dramatic way, following its general eschewing of public health and safety measures which people in other countries take for granted. (There is no public healthcare or good public transportation in the US, and the US sends people off to get killed in wars so that its companies may profit, etc.)

The gaping maw of the rich opens to swallow what it can get and the dollars it will get will be more and more worthless.

So the gaping maw will still need to be filled and it will seize other things next, not just FM/FM,
and while the people running FMFM were well compensated after being dismissed, the next seizures and confiscations will probably not be so kindly transacted. That is why the US military will be involved next.

What makes it all so interesting is the election coming up.

My grandperent saved they whent out of this world inn pluss. What are we doing now. My elders lives on debt and just leav it for theyr children.

The Gross boss of Pimpco was on CNN just now - he said that the takeover of F & F was unlikely to stabilise houseprices, but might have prevented worse deterioration.
IOW, there is no way this will work in it's purported purpose.
I think he can afford a better hair transplant.

Just to repeat what I said up string, house prices in much of the country are pretty stable anyway.

The goal here is to shore up prices and prevent more mass foreclosures in the big electoral states, because these are the ones that matter, both financially and politically. If you take the big coastal states and Ohio out of the picture, the rest of the country is suffering a mild dip in home prices at most. Uncle Sam gets 5.4 trillion dollars in mortgages...take about a third off of them to account for home price depreciation and that still gives them 3.7 trillion in value (estimate), to cover Fannie and Freddie's 16 billion in losses...not a bad deal if you ask me. For those claiming that the U.S. debt/credit rating will drop because of this, I don't see why it would, Many governments around the world control most or all of the mortgages inside their borders anyway, this is new news only in the U.S. It's always amazing to me that when the U.S. does something that the Euro countries and Canada have long been doing and getting praised for it means we have somehow come unraveled.


Roger: Canada has not been "long doing this" at all. There is an insurance program for down payments under 25% (CMHC) but Canada has nothing as monstrous as Fannie and Freddie (in relation to the size of the mortgage market). On this one, the USA has defintely broken new ground in cronyism. I assume your "not a bad deal" was sarcasm-nobody in the marketplace wanted this garbage so now the taxpayer (or "Uncle Sam" as you like to call him) is stuck with this stinking crap.

Smile when you say that partner


Looking at the "issuers" breakdown you see who issued these securities insured by CMHC (large financial institutions). Freddie and Fannie are doing more than insuring the mortgage lending of other financial institutions.

Well I'm not the TIIO debunking squad but one more time. It's true that ignoring California and Arizona and Michigan and Ohio and Florida and Nevada, the price of houses in the rest of the country is stable.

The 5.4 trillion dollar question is whether Fannie and Freddie's losses are only 16 billion. Which is to say how solid is their balance sheet. Uncle Sam is on the hook for the entire 5.4 trillion. If a third of it disappears (your number) we the taxpayers are getting socked with the 1.7 trillion dollar writeoff.

The current plan is for the entities to continue and hopefully expand lending. Theoretically, once 2010 rolls around a contraction would start. One would expect this contraction date would be continually postponed based on past performance of USA guv programs. My point is that one would expect the 5.4 trillion to expand greatly along with the probable 1.7 trillion writeoff.

They do not own the mortgage assets, they have been bundled up and sold on.
They own the risk - the guarantee.
That is what the securitisation is about.
If the prices remain stable or go up, then they have made their fees.
If it goes down , they are stuck for almost all of the loss.
So on your figures they have a loss of around $1.7Trn.

All the relatively stable house prices in much of the country mean is that the losses have not really kicked in yet, as earnings to house price ratios are still unsustainable.

The only rescue possible for this is inflation.
This will put up long term interest rates still more, and give the banks yet better spreads against short term rates.

The result is that the $1.5-2 Trn of bad bank loans if passed on to the taxpayer.

I can't help but think that the US Govt had orchestrated this bailout years ago (by deliberately making loans easier for those that couldn't afford them,as well as creative type loans aka ARM and interest only. Knowing all along that those loans would default, thus causing the govt to step in and take over the mortgages.
I can't see how this is good for anyone that already has a house. Even if it's already paid off.

Hi Folks,

Ultimately money, especially the monopoly fiat kind - does not matter. What does is possession, power and potential. Possession is nine-tenths the law and gives you power to enforce that law. This then gives you the potential do pretty much do as you please. This is why most land in the UK is still owned by aristocratic interests, and has been for nearly the last thousand years. As I mentioned in an above post, there is nothing to stop 'the powers that be' from starting the game all over again with new bits of worthless paper/bytes on a computer somewhere. Being in possession of dwindling resources increases power rather than reducing it. The elite will possess more stuff than ever - for example, in a mortgage agreement, the 'lender' actually owns the property, and the mortgagee has to pay what is in effect rent on the property. Originally this 'lease' agreement could pass as a 'debt' obligation to the tenants offspring - hence the term from old French meaning 'death' - mort etc. So one possible outcome could be a revised mortgage agreement in perpetuity, thus you would never own 'your' property - i.e. have full possession and be forever chained to pay what ever you earned to the mortgage lender i.e. indentured labour in their factory. Over that sort of time scale, any current fall in property value and even substantial numbers of property write-offs (Macmansions etc) could be offset by the compound appreciation of the remaining assets. Many might accept this gladly rather than be forced onto the street, even an unheated home provides shelter from the storm.

When the masses again join the queues to the soup kitchens, the depression of the 1930's will suddenly seem like yesterday, and the heady boom of the last 50 years merely the dream it actually was.
I just hope its not tomato - I don't eat tomatoes they aggravate my arthritis - so there you have it: tomorrows choice; ache or starve. It may even be vegan - literally... as in containing vegans! And people wonder if they'll still be driving...