NationStates Jolt Archive

http://www.ft.com/cms/s/0/d4794e4e-50fe-11dd-b751-000077b07658.html
Guarantees for America’s guarantors

US taxpayers are about to find out what their long-standing and (strictly speaking) non-existent guarantee of Fannie Mae and Freddie Mac will cost them. One way to think of it is this: take the US national debt of roughly $9,000bn and add $5,000bn. Not bad for an obligation still officially denied.

In the end, that astounding prospect might be the outcome. Partial or outright nationalisation of the housing lenders – colossal pseudo-private entities that own and underwrite US housing loans – would add some or all of their $5,000bn (€3,144bn, £2,513bn) in liabilities to the government’s balance sheet. While it is true that the agencies (unlike the government) own housing-related assets that roughly match those liabilities, the still-collapsing housing market makes this a lot less reassuring than one could wish.

[...]

$5 trillion in obligations that potentially have to be taken over from Freddie Mac and Fannie Mae. Compare that to a total of all the Bush deficits of $3 trillion or so.

What do you reckon? Doom or not that big a deal?

That's a lot of nuts!

*Is not an economist*


EDIT: Ok, fun aside, I'd love to hear what effect this has on an already teetering market. The widespread ramifications of that amount of money being spent must surely be enormous. Unless someone who actually knows what they're talking about comes in here and tells me otherwise...

Economics scare Nod....However...

Its not good. I'm given to understand that perception is a great influence on 'the market', and as the perception was bad before, it'll surely go to shite now....

Rock and a hard place, either the US props up those two companies, potentially causing a massive addition to the US deficit and other problems, or it lets those two tank, and given how much they underwrite, potentially knocking the US into a depression.

Probably better to prop them up, hope like hell that nothing more hits, and work to pay off the tax debt taken on by this rather than deal with another train wreck of a depression.

The widespread ramifications of that amount of money being spent must surely be enormous.
One's gotta be careful. The ramifications will be enormous, but not because the money is actually being spent immediately. Depending on whether we end up with nothing but a guarantee (which means the government only pays when the two can't) or an actual nationalisation of sorts (which means the government pays all the cashflow obligations of the two) there'll be different amounts and timing. But the bigger impact might be the message it sends about the state of the financial system, the government's credit rating and perhaps the US Dollar falling further (though maybe by not as much, because Freddie and Fannie might not have as many foreign debtholders, I don't know).

Well, if Mae and Mac fall over and the govt has to bail them out, the perception will be the market is buggered, which means the market shortly will be buggered. And if Obama is in power at the time, added with Obama's avowed "spend, spend, spend" and "Tax, tax, tax" statements, then I'll be able to buy a mustang for pennies.


the NZ dollar historically has ranged around .65 to .70 USD, we're over 75, and have been over .80.

I wouldn't be surprised if Obama has a second term, if we're trading at even or with the NZD ahead of the USD at the end of said second term.

Well, if Mae and Mac fall over and the govt has to bail them out, the perception will be the market is buggered, which means the market shortly will be buggered. And if Obama is in power at the time, added with Obama's avowed "spend, spend, spend" and "Tax, tax, tax" statements, then I'll be able to buy a mustang for pennies.


the NZ dollar historically has ranged around .65 to .70 USD, we're over 75, and have been over .80.

I wouldn't be surprised if Obama has a second term, if we're trading at even or with the NZD ahead of the USD at the end of said second term.

If Obama takes over then we, you are screwed.

Hold on, hold on a sec... now I may not know much about finance (but damn this credit crunch is teaching me fast:P) but if the government takes over the Fannie Mae and Freddie Mac, and all their liabilities are covered by tax, that makes the two institutions rock solid (just like over here, Northern Rock is the safest institution to put your money in, right now), which means, that in a market where everything else seems frail, they will hold a strong appeal and will redress soon. As they do, the rest of the market should follow suit. Or no?

Reagan raised the debt from $0.900 trillion to $2.6 trillion. That's $212.5 billion/year.
Bush Sr. raised the debt from $2.6 trillion to $4 trillion. That's $350 billion/year.
Bush Jr. raised the debt from $5.6 trillion to $9 trillion, and it's still climbing. That's $485 trillion/year over his first seven years.

And yet you dare claim that democrats would be a disaster!? For shame!

Hold on, hold on a sec... now I may not know much about finance (but damn this credit crunch is teaching me fast:P) but if the government takes over the Fannie Mae and Freddie Mac, and all their liabilities are covered by tax, that makes the two institutions rock solid (just like over here, Northern Rock is the safest institution to put your money in, right now), which means, that in a market where everything else seems frail, they will hold a strong appeal and will redress soon. As they do, the rest of the market should follow suit. Or no?
Well, that'll be what a bunch of officials are hoping anyways. Realistically, it won't happen immediately. Before anything else it signals just how bad the crisis has gotten, and just how badly the housing market is hurting. So all those mortgage-backed securities will be marked down further rather than recover.

But it's moved beyond that by now as well. Share markets all over the world aren't getting back in gear and the only place people can make money are commodities, and that's not diversified enough. And then there is still a lot of dodgy risk management and off-balance sheets skeletons in closets around, so the institutions still don't trust each other, and the failure of these two won't help at all.

Bush Jr. raised the debt from $5.6 trillion to $9 trillion, and it's still climbing. That's $485 trillion/year over his first seven years.

And yet you dare claim that democrats would be a disaster!? For shame!
It is intersting to note that because of the devalued dollar the debt was 5.95 trillion euros in 2001 but in 2008 it's actually only 5.6 trillion euros.

In short: You would need less euros today to pay the US national debt today than in 2001.

It is intersting to note that because of the devalued dollar the debt was 5.95 trillion euros in 2001 but in 2008 it's actually only 5.6 trillion euros.

In short: You would need less euros today to pay the US national debt today than in 2001.
Aye, on the other hand, the value of the Euro has essentially doubled against the dollar in the last 7 years.

@ The OP -

That's not a write-off of $5 trillion dollars, because they've got assets of a similar value.

It is intersting to note that because of the devalued dollar the debt was 5.95 trillion euros in 2001 but in 2008 it's actually only 5.6 trillion euros.

In short: You would need less euros today to pay the US national debt today than in 2001.

so if we switch to the euro Bush has lowered the debt ?????

That's not a write-off of $5 trillion dollars, because they've got assets of a similar value.
Yeah, assuming that the asset portfolio matches the liabilities, it wouldn't be too bad. Of course, if it did, the two wouldn't need help.

Nonetheless, you're right, it seems unlikely that the whole $5 trillion would end up being debt. If it did, all hell would break loose. But even so, you're adding a lot of money to the wrong side of the government's balance sheet, and that has consequences.

so if we switch to the euro Bush has lowered the debt ?????
Pity that the Fed can't print euros. The US government can only pay using either dollars it can print, or foreign reserves. And those are obviously gonna run out before you can pay back the debt.

Reagan raised the debt from $0.900 trillion to $2.6 trillion. That's $212.5 billion/year.
Bush Sr. raised the debt from $2.6 trillion to $4 trillion. That's $350 billion/year.
Bush Jr. raised the debt from $5.6 trillion to $9 trillion, and it's still climbing. That's $485 trillion/year over his first seven years.

And yet you dare claim that democrats would be a disaster!? For shame!
And for reference, folks? That means that Clinton, in his eight years, averaged $200 billion a year. That's almost as much as Reagan...

... although interest played a much larger role. At this point, interest is what - $500 billion a year?

Heavy devaluation of the dollar is likely regardless of what happens. It's been sliding in all regards, and the financial meltdown is enormous.

And for reference, folks? That means that Clinton, in his eight years, averaged $200 billion a year. That's almost as much as Reagan...

... although interest played a much larger role. At this point, interest is what - $500 billion a year?

Heavy devaluation of the dollar is likely regardless of what happens. It's been sliding in all regards, and the financial meltdown is enormous.
Actually, let me follow up on that. Average annual percentage increase in debt:

Carter: 5.7%
Reagan: 14.2%
Bush I: 11.4%
Clinton: 4.3%
Bush II (first six years): 8.2%

Bush II has actually increased the debt at a slower percentage rate than Reagan and Bush I did. Interest, rather than spending balance, has been the more important factor. It's just that getting to a budget surplus to start catching up on the debt took so much political wrangling that it's missed even more dearly...

so if we switch to the euro Bush has lowered the debt ?????
Well, it would mean that it would cost less to pay the national debt in Euros today.

In other words, for Europe and probably rest of the world, the absolute value of the debt has decreased: You could "buy" less with 9 trillion dollars now than with the 6 trillion dollars back then.

Well, it would mean that it would cost less to pay the national debt in Euros today.

In other words, for Europe and probably rest of the world, the absolute value of the debt has decreased: You could "buy" less with 9 trillion dollars now than with the 6 trillion dollars back then.

well lets apply for membership in the EU on cultural grounds and be done with it.

And to think that the euro was considered an interesting experiment that was doomed to fail, according to some naysayers.

And to think that the euro was considered an interesting experiment that was doomed to fail, according to some naysayers.

the first few years it did look really messy. the difference between the euro and the dollar is management at the central banks. The strength of the Euro is it is more removed from politics. The problem with the dollar is interest rates are being kept low to try get Mccain elected (low interest sort of stimulates the economy). Where as no one country has that much sway over the Euro.

though part of the reason the Euro has inflated so much in value is investors have fled from the dollar to the euro. once the dollar stabilizes you should see a drop in the euro value as they return to the dollar to invest in the Us economy again.

I think the problem here is even if the government just guarantees freddie and fannie debt, (plus capital infusion to make up their funding short fall), it removes the spread over treasuries for their debt and drives the cost of government borrowing up. (The two sort of meet in the middle, more or less). This is bad at the moment for obvious reasons. Because I am thinking that the government will have to be doing lots more of bailing out in the future, and will need to borrow for it. The FDIC being all short of funds.

I don't think that it will collapse the US government though or any of the doomsday talk you hear (at least not instantly anyway) because even though the five trillion portfolio is probably not worth five trillion even if held to maturity, lots of stuff in there is pre 2004 seasoned stuff, so there probably is a fair amount of value in there. Of course a sizable chunk is still auto-approved rubbish which is a zero.

I'm sure glad that the government stabilized the credit markets in march so we don't have to deal with this. Asshats.

Actually the sad thing is that if some failures had been allowed back in september this probably wouldn't have been such an issue. (Fannie/freddie being unable to raise short term debt to fund).

Thing of it is though, ultimately this is going to result into a return to traditional overconservative lending standards for purchase money mortgages. 20-25% down excluding fees, and rates at a substantial spread over the ten year note.

:confused: I haven't taken an economics course and my knowledge isn't really up to scratch. Could someone please explain this to me?

I think the problem here is even if the government just guarantees freddie and fannie debt, (plus capital infusion to make up their funding short fall), it removes the spread over treasuries for their debt and drives the cost of government borrowing up. (The two sort of meet in the middle, more or less). This is bad at the moment for obvious reasons. Because I am thinking that the government will have to be doing lots more of bailing out in the future, and will need to borrow for it. The FDIC being all short of funds.

I don't think that it will collapse the US government though or any of the doomsday talk you hear (at least not instantly anyway) because even though the five trillion portfolio is probably not worth five trillion even if held to maturity, lots of stuff in there is pre 2004 seasoned stuff, so there probably is a fair amount of value in there. Of course a sizable chunk is still auto-approved rubbish which is a zero.

I'm sure glad that the government stabilized the credit markets in march so we don't have to deal with this. Asshats.

Actually the sad thing is that if some failures had been allowed back in september this probably wouldn't have been such an issue. (Fannie/freddie being unable to raise short term debt to fund).

Thing of it is though, ultimately this is going to result into a return to traditional overconservative lending standards for purchase money mortgages. 20-25% down excluding fees, and rates at a substantial spread over the ten year note.

Good thing that most of our debt is held by foreigners. If the US starts to have serious economic problems, we'll take the rest of the world down the drain with us in a few days.

Thing of it is though, ultimately this is going to result into a return to traditional overconservative lending standards for purchase money mortgages. 20-25% down excluding fees, and rates at a substantial spread over the ten year note.

My veterans affairs loans will really start to shine again. nothing down and 2% interest.

But the bigger impact might be the message it sends about the state of the financial system, the government's credit rating and perhaps the US Dollar falling further (though maybe by not as much, because Freddie and Fannie might not have as many foreign debtholders, I don't know).

I wish it wasn't going to be a big deal, because it shouldn't be in a rational market. Fannie Mae and Freddie Mac have long profited from an implicit government guarantee, which was one of the reasons they were able to borrow money so cheaply. Any evaluation of the state of the US financial system or the US government's credit rating should have included that -- maybe with less weight than the explicit guarantee of T-bills, but nevertheless included. So an implicit guarantee actually being exercised should result in a small ripple at most.

Sadly, we don't live in a rational-market universe, we live in reality. The fault is partly the US government's, which tends to forge a compromise over regulation whereby the pseudo-socialists can try to intervene in the market ("but only for good reasons!") and the small-government hardliners can pretend that the government isn't intervening. ("FNMA and FHLMC are, like, totally private companies, dude!") The results of such self-deluding behavior are predictable.

The fault is also partly the market's. I know it's silly to assign blame to abstract concepts -- what I mean is that there are smart, highly paid economists advising governments and large financial companies who should have used their expensive degrees in economics to look at how little the GSEs were capitalized, how little they were paying to borrow money, and how much they were spending to convince the US government to call their string-bikini-sized reserves "adequate capitalization," and said "hmm, looks like there's a risk premium that's not being factored in somewhere..." That the smart economists didn't do this in great enough numbers doesn't mean they're not smart, it means that they endorsed the "greater fool theory" of investing when it came to GSEs -- the greater fool in this case being some imaginary group of taxpayers who could magically shoulder the burden of bailing out the GSEs without pulling money away from other spending. The market, influenced by the self-deluding government and the errant market leaders, ends up having the collective wisdom of a nest of rabbits.

Given my personal bias (I'm currently in the market for my first house, and I need someone to lend me money*,) I think that the US government is doing the right thing in stepping in to see if half-assed measures can prop up the GSEs. I hope it will also have the guts to insist that its oversight be taken seriously, and that "adequate capitalization" should mean more than 2 cents and a hamster. Barring that unlikely show of fortitude, I hope that the markets will start to reflect that a government stamp of "adequate capitalization" on any financial institution means about as much as a "Hold" recommendation on a stock -- neither is a vote of confidence. This will hurt, but continuing mass self-delusion will only end up hurting more.

(*If anybody wants to continue listening to my bitter-old-bear ramblings they'll most likely find me in the 2-room unheated shack out by the railroad, as that's the only loan I'll likely qualify for in the current environment...)

Good thing that most of our debt is held by foreigners. If the US starts to have serious economic problems, we'll take the rest of the world down the drain with us in a few days.

Because that went wonderfully.

Pity that the Fed can't print euros. The US government can only pay using either dollars it can print, or foreign reserves. And those are obviously gonna run out before you can pay back the debt.

We can pass a law saying we can pretty easily. I mean US law is international law if Iraq has shown us anything.

As much as I hate to say it, the gov't does need to come in and intervene on this one.

If both Fannie Mae and Freddie Mac went under, that would be an end to about 50% of the mortgage market in America. Right now, we are probably in a recession, but if those two went under, it would be next to impossible to get a loan, and that would put us into a depression.

We can pass a law saying we can pretty easily. I mean US law is international law if Iraq has shown us anything.

Damn it! Stop stealing all our good stuff!

Damn it! Stop stealing all our good stuff!

don't think of it as stealing just think of it as applying Us Financial management to your currency.

don't think of it as stealing just think of it as applying Us Financial management to your currency.

We can call it the Patriotizing of the Euro.

We can call it the Patriotizing of the Euro.

I like the sound of that.
and after we pay off the national debt (and the euro is likely worthless). we can switch back to the dollar.

Actually the shrub has his legacy.

He will add another digit to the US National Debt.

Actually the shrub has his legacy.

He will add another digit to the US National Debt.

Actually, you could say that everything was fine up until we elected a Democratic House and Democratic Senate.

It's not like the President can pass any laws - that's the job of the House and Senate...

Actually, you could say that everything was fine up until we elected a Democratic House and Democratic Senate.

It's not like the President can pass any laws - that's the job of the House and Senate...

Hmmm?

I missed the day where Congress declared war on Iraq......

Hmmm?

I missed the day where Congress declared war on Iraq......

You also missed the days where the Democratic Congress kept voting money for the war... long after they had promised to stop it...

Actually, you could say that everything was fine up until we elected a Democratic House and Democratic Senate.

It's not like the President can pass any laws - that's the job of the House and Senate...

Just like America was totally safe from devastating terrorist attacks until you idoits elected a Republican president.

You also missed the days where the Democratic Congress kept voting money for the war... long after they had promised to stop it...

So who exactly controlled the house and the senate till 2006.....

Just like America was totally safe from devastating terrorist attacks until you idoits elected a Republican president.

Unfortunately, there were attacks prior to that. Dating back to 1993.

And the plans for 9/11 started during the Clinton Administration, by Osama's own admission.

So who exactly controlled the house and the senate till 2006.....

Doesn't matter - it all went to shit after the election.

Technically, a President has precious little control over the economy.

Doesn't matter - it all went to shit after the election.

Technically, a President has precious little control over the economy.

Uhuh. Everything was so peachy before they lost control....

Just like America was totally safe from devastating terrorist attacks until you idoits elected a Republican president.

Yes, because the the USS Cole happened during a republicans tenure as president. You know before 9/11 Bush was actually reducing AID to Israel.
His pre 9/11 tenure he was a very non interventionist president. He was sort of forced into the position by Bin laden. which is likely why he does it so poorly.

Uhuh. Everything was so peachy before they lost control....

Economically, yes.

Unfortunately, there were attacks prior to that. Dating back to 1993.

And the plans for 9/11 started during the Clinton Administration, by Osama's own admission.

They managed to knock off 4,000 of you under the watchful eye of a Democrat?

If you want to blame problems under a half democrat government solely on the democrats them surely you have to admit that whatever happens under a totally republican government is entirely thier fault.

Anything else would make you a hypocrite wouldn't it?

They managed to knock off 4,000 of you under the watchful eye of a Democrat?

If you want to blame problems under a half democrat government solely on the democrats them surely you have to admit that whatever happens under a totally republican government is entirely thier fault.

Anything else would make you a hypocrite wouldn't it?

You don't recall the previous attempt on the World Trade Center, do you? 1993?

You don't recall Pelosi's promises to end the war and bring the troops home and never vote for war funding?

Economically, yes.

Uhuh....

You don't recall the previous attempt on the World Trade Center, do you? 1993?

You don't recall Pelosi's promises to end the war and bring the troops home and never vote for war funding?

So where is the shrubs evidence for war in Iraq?

You don't recall the previous attempt on the World Trade Center, do you? 1993?

Attempt and success are a very different thing.

You don't recall Pelosi's promises to end the war and bring the troops home and never vote for war funding?

Blah, blah blah.

All I'm hearing is I'm a massive hypocrite.

Either bad things that happen are the fault of whoever is currently in charge or there is more to it than that. If there is more to it than that then the current economic problems aren't all down to the current democratic houses.

So where is the shrubs evidence for war in Iraq?

Why didn't the Democrats do what they said they would do, and stop funding the war?

If you and they thought it was SO wrong and SO illegal and SO illogical and SO bad - why didn't they stop it?

Why did they vote more and more and more and more and more billions into the war?

Why?

All I'm hearing is I'm a massive hypocrite.

Either bad things that happen are the fault of whoever is currently in charge or there is more to it than that. If there is more to it than that then the current economic problems aren't all down to the current democratic houses.

It's not just the President.

If you're going to say "whoever is currently in charge" you have to include the House and Senate.

They pass all expenditure approval (on the war for example) and pass all of the laws.

Once the Democrats were elected, Bush was essentially powerless - but they didn't play that - they kept doing what Bush wanted.

So they're spineless and weak.

It's not just the President.

If you're going to say "whoever is currently in charge" you have to include the House and Senate.

They pass all expenditure approval (on the war for example) and pass all of the laws.

Once the Democrats were elected, Bush was essentially powerless - but they didn't play that - they kept doing what Bush wanted.

So they're spineless and weak.

I know, I said that. You should really read what I say.

Oh, I get what you're doing, you've realised that your statement was stupid so now you're setting up strawmen rather than make an actual argument to defend it.

I know, I said that. You should really read what I say.

Oh, I get what you're doing, you've realised that your statement was stupid so now you're setting up strawmen rather than make an actual argument to defend it.

Hardly. I just don't see that many Democrats or their supporters willing to say that their own party has fucked them.

Hardly. I just don't see that many Democrats or their supporters willing to say that their own party has fucked them.

That's because it's painfully obvious our Party fucked us. That's all Political Parties do.

Hardly. I just don't see that many Democrats or their supporters willing to say that their own party has fucked them.

So any defence of your statement that we should blame a half democrat government for the current economic problems when you refuse to blame an entirely republican goverment for past problems?

Why didn't the Democrats do what they said they would do, and stop funding the war?

If you and they thought it was SO wrong and SO illegal and SO illogical and SO bad - why didn't they stop it?

Why did they vote more and more and more and more and more billions into the war?

Why?

So you admit the shrub lied.....

Why didn't the Democrats do what they said they would do, and stop funding the war?

If you and they thought it was SO wrong and SO illegal and SO illogical and SO bad - why didn't they stop it?

Why did they vote more and more and more and more and more billions into the war?

Why?
Because they can't overturn a presidential veto.

Actually, a Presidential veto can be overturned. However, it requires 2/3 majority vote in each house. Last time I checked, the democrats only had 1/2 majority in the House of Representatives and were tied with Republicans in the Senate; luckily, the two independent senators caucused with the Democrats. Either way, the likelihood of Congress overturning a veto for setting a quick timetable or preventing funding is 0, because those things won't even make it through Congress in the first place.

Even if Democrats don't want to be in Iraq, soldiers are already there, and we are obligated to support them. We cannot pull out quickly, because then we would be responsible for the civil war that would ensue; the civil war that we are preventing from happening right now. To place blame on the Democratic Congress for the deficit caused by the war is absolutely ignorant and shameful. The President sent the soldiers there, and Congress has to support the soldiers until there's a feasible way of pulling out without rampant violence and more war.

Actually, a Presidential veto can be overturned. However, it requires 2/3 majority vote in each house. Last time I checked, the democrats only had 1/2 majority in the House of Representatives and were tied with Republicans in the Senate; l

You know that's what he meant, right?

You don't recall the previous attempt on the World Trade Center, do you? 1993?


Planned under Bush, if you want to ascribe 9/11 to Clinton.

The whole problem with Fanny and Freddie (besides their names) is that they had an unofficial stamp of approval from the government. As I understand it they didn't have to pay some taxes, in return they did a lot of the risky lending, because they knew they had backup, as will be shown (has been?). In other words they had really shitty business practices because of a government guarantee they couldn't go under. For the same reason I'm against bailing individuals out, I'm against bailing out companies- It makes them stupid, they think theres no risk because the government has their back. However that just means we all pay for it, which is bullshit I shouldn't have to pay anything because some assholes wanted to dick around like nothing could possibly go wrong.

:soap: (also, wtf is up with the smilies...)