Fredd​ie Mac Fanni​e Mae Big Mess Ahead​ For USA

[Mrs. Sharon B. Hodge]

September 6, 2008 - Henry M Paulson Jr, the Treasury secretary, and Ben S Bernanke, the Federal Reserve chairman, were involved in the takeover of Freddie Mac and Fannie Mae

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U.
S Rescue Seen at Hand for 2 Mortgage Giants
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By STEPHEN LABATON and ANDREW ROSS SORKIN
Published: September 5, 2008

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said

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

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

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy.
With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers.
Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.
It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans

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

For months, administration officials have grappled with the steady erosion of the books of the two mortgage finance giants. A fierce behind-the-scenes debate among policy makers has been waged over whether to seize the companies or let them work out their problems.
Even after the companies are put under government control, debates will continue over whether they should be independent and how they should operate over the long term

The declines in the housing and financial markets apparently forced the administration’s hand.
With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets.
But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr.
Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies

In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected

The debt securities the companies issue to finance their operations are widely owned by mutual funds, pension funds, foreign governments and big companies

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

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

Spokesmen at the two companies did not return telephone calls seeking comment

The meetings reflected the reality that senior administration officials did not believe they could wait for some kind of financial tipping point, as happened with Bear Stearns, which was saved from insolvency in March by government intervention after its stock plummeted and lenders withheld their capital

Instead, Mr.
Paulson has struggled to navigate through potentially conflicting goals — stabilizing the financial markets, making mortgages more widely available in a tightening credit environment, and protecting taxpayers from possibly enormous losses

Publicly, administration officials have tried to bolster the companies because the nation’s mortgage system relies on their continued ability to purchase mortgages from commercial lenders and pull the housing markets out of their slump

But privately, senior officials have been critical of top executives at the companies, particularly Freddie Mac. They have raised concerns about major risks to taxpayers of a bailout of companies whose executives have received huge compensation packages. Mr.
Syron, for instance, collected more than $38 million in compensation since he joined the company in 2003

Although Mr. Syron promised regulators earlier this year that he would raise $5.5 billion from investors, he has failed to make good on that promise — even as Fannie Mae raised more than $7 billion. Mr.
Syron was slated to step down from the chief executive position last year, but that was delayed when his appointed successor, Eugene McQuade, chose to leave the company

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

Mr. Paulson had hoped that merely having the authority to bail out the two companies, which Congress provided in its recent housing bill, would be enough to calm the markets, but if anything anxiety has been increasing. The clearest measure of that anxiety has been the gradually widening spread between interest rates on Fannie- or Freddie-backed mortgage securities and rates for Treasury securities, making home mortgages more expensive.
The stock prices of the companies have also plunged

After stock markets closed on Friday, the shares of Fannie and Freddie plummeted. Fannie was trading around $5.50, down from $70 a year ago.
Freddie was trading at about $4, down from about $65 a year ago

With Fannie and Freddie guaranteeing $5 trillion in mortgage-backed securities, and a big share of those held by central banks and investors around the world, Mr.
Paulson appears to have decided that the stakes are too high to take chances

The Treasury Department is required by the new law to obtain agreement from the boards of Fannie and Freddie for a capital infusion. The exception is if the companies’ regulator, Mr.
Lockhart, determines that the companies are insolvent or deeply undercapitalized it could take the companies over anyway

Charles Calomiris, a professor of economics at Columbia Business School, said delaying a rescue would only increase the risks and costs

“The last thing you want to do is give a distressed borrower more time, because when people are in distress they tend to take a lot of risks,” he said.
“You don’t want zombie institutions floating around with time on their hands”

US Government To Take Over 2 Top Mortgage Giants, Shareholders To Be Wiped Out


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China holds more than $1,5 TRILLION dollars of US debt and they have been on a HUGE military shopping spree over the past few years and cant wait to dump the rest of their deflating US currency holdings and tank US economy overnight, I bet nobody cares, keep swiping your credit cards and see what will happen next

There is a very good reason why I have been warning for 2 years of a massive Chinese invasion of USA, you think all their prison slave labor would not pay off as you continue to borrow from their banks and buy their products every day? If US does not pay up they will TAKE YOUR LAND - Its part of the New World Order invasion plan anyway - Now US is invading its neighbor Pakistan and disrupting China's major oil pipelines, things will only speed up from here


Billionaire Jim Rogers July 09, 2008 - Dump the US Dollar and LEARN TO SPEAK CHINESE


July 12, 2008 - Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds $376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts



China threatens 'nuclear option' of dollar sales – Telegraph UK 10/...

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China Dumps US Dollar Denominated Debt: Bank of China flees Fannie-Freddie
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Financial Times
By Saskia Scholtes in New York and James Politi in Washington
August 28 2008

http://www. ft. com/cms/s/0/74c5cf58-7535-11dd-ab30-0000779fd18c. html

Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June

The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.over the mortgage financiers’ capital positions and the timing and structure of a potential government rescue has made some investors reassess their exposures.
Asian investors in particular have become net sellers of agency debt, said analysts

Federal Reserve custody data shows that for the year to July, foreign official and private investors bought an average of $20bn of agency debt a month, including debt issued by other government agencies such as Ginnie Mae and the Federal Home Loan Banks. Purchases of US Treasuries averaged $9.
25bn

From July 16 to August 20, foreign investors sold $14.7bn of agency debt, trimming their overall holdings to $972bn. They purchased $71.
1bn of Treasuries in the same period

The US Treasury was granted powers last month to extend its credit lines to Fannie and Freddie and invest in their debt and equity.
The rescue plan came after a collapse in the companies’ shares heightened concerns about their ability to raise equity capital to cushion losses and whether they could maintain their access to the debt markets

By making a historically implicit government guarantee for the mortgage financiers’ debt increasingly explicit, the Treasury sought to reassure foreign and domestic investors by providing a safety net.
Fannie and Freddie have a combined $1,500bn of debt outstanding

This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil.
Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments

After a sharp drop in the market value of their stock last week, Fannie and Freddie have made a strong recovery after successful short-term debt sales. Fannie was 13.
5 per cent higher on Thursday and Freddie was up 12 per cent

Bank of China’s disclosure on its holdings of Fannie and Freddie securities came as the bank reported a 15 per cent increase in second-quarter profit

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Main Bank of China Is in Need of Capital
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New York Times
By KEITH BRADSHER

September 5, 2008

HONG KONG — China’s central bank is in a bind

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.
2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation.
Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States.
The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan.
As the yuan slips in value, China’s exports gain an edge over the goods of other countries

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S.
Prasad, the former division chief for China at the International Monetary Fund

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates.
When interest rates rise, the prices of bonds fall

Read The Rest HERE

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Chinese Government is Top Foreign Holder of Fannie Mae, Freddie Mac Bonds
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$376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals According to FreedomWorks Analysts

Market Watch
July 11, 2008

http://www. marketwatch. com/news/story/chinese-government-top-fore...

WASHINGTON, Jul 11, 2008 (BUSINESS WIRE) -- As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks would like to point out that a bailout is a transfer of possibly hundreds of billions of U.S.
tax dollars to sophisticated investors and governments overseas

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S.
Securities"

FreedomWorks President Matt Kibbe commented, "The prospectus for every GSE bond clearly states that it is not backed by the United States government.
That's why investors holding agency bonds already receive a significant risk premium over Treasuries"

"A bailout at this stage would be the worst possible outcome for American taxpayers and mortgage holders, who have been paying a risk premium to these foreign investors.
It would change the rules of the game retroactively and would directly subsidize the risks taken by sophisticated foreign investors"

"A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history.
It is bad economics and you can be sure it is terrible politics"