TPS Posted September 12, 2008 Share Posted September 12, 2008 The first article talks about the increased borrowings by banks from the fed's discount window, something that used to be frowned upon. The second says the Freddie/Fannie bail outs were aimed at foreign holders of the debt, specifically the official sources, not the private. Gee, the administration acquiesced to foreign governments for fear they'd dump the dollar? Where have I heard that before.... Bank borrowings Foreign bond holders Link to comment Share on other sites More sharing options...
LongLiveRalph Posted September 12, 2008 Share Posted September 12, 2008 The genius of Alan Greenspan Link to comment Share on other sites More sharing options...
olivier in france Posted September 12, 2008 Share Posted September 12, 2008 Headline of the "Wall Street Journal" may 10th 2012 : "President Obama Fired, the Chinese Central Bank ends buy of the US federal government and names Yao Ming President. " Link to comment Share on other sites More sharing options...
TPS Posted September 12, 2008 Author Share Posted September 12, 2008 The genius of Alan Greenspan Why is he to blame? Link to comment Share on other sites More sharing options...
Billy Basement Posted September 12, 2008 Share Posted September 12, 2008 The first article talks about the increased borrowings by banks from the fed's discount window, something that used to be frowned upon. The second says the Freddie/Fannie bail outs were aimed at foreign holders of the debt, specifically the official sources, not the private. Gee, the administration acquiesced to foreign governments for fear they'd dump the dollar? Where have I heard that before.... Bank borrowings Foreign bond holders Technically, it is more of an implosion than a meltdown. The metdown-o-meter has barely moved, whereas the implode-o-meter has gone berserk. Link to comment Share on other sites More sharing options...
LongLiveRalph Posted September 12, 2008 Share Posted September 12, 2008 Why is he to blame? There is not one indvidual that is to "blame." (Not that blame gets you anywhere, anyways.) Its just that his watch as chairman is generally regarded as the one of the greatest financial stretches in our nation's history. He is widely credited with helping to facilitate that success. And yet, that seemingly glorious period was financed by foreign ownership of our government debt, dramatically increasing since 1980, and even more dramatically since 2000. Volcker from the Wash Post: It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth. And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency. The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change. Greenspan was lauded for his performance as chairman, because all was well "in the now." His foresight appears to have been less than stellar, and it's left Bernake and Paulson scurrying around assuring foreign central banks that the creditworthiness of their bond holdings is secure....At the expense of the American taxpayer....And at the risk of the collapse of the current financial structure. So I guess what I meant...Greenspan not to blame, just that his genius was based on a credit card. Link to comment Share on other sites More sharing options...
DC Tom Posted September 12, 2008 Share Posted September 12, 2008 The second says the Freddie/Fannie bail outs were aimed at foreign holders of the debt, specifically the official sources, not the private. Given that a significant chunk of mortgage bonds are ultimately held by foreign investors, how could a bailout NOT involve them? That's almost like complaining that farm subsidies target corn growers...trying to find the sinister in the blisteringly obvious. Link to comment Share on other sites More sharing options...
molson_golden2002 Posted September 12, 2008 Share Posted September 12, 2008 Given that a significant chunk of mortgage bonds are ultimately held by foreign investors, how could a bailout NOT involve them? That's almost like complaining that farm subsidies target corn growers...trying to find the sinister in the blisteringly obvious. I think it's something besides the mortgage debt they are worried about. I am guessing that these "companies" also service federal debt??? Perhaps act like a brokerage for it or something. Maybe someone could expain that And yet, that wasn’t the mortgage market itself that forced the hand of U.S. Treasury Secretary Henry M. “Hank” Paulson: It was the $5.2 trillion in so-called Fannie and Freddie “agency debt” - of which more than $1.3 trillion, or about 25%, was held by foreign investors. Total U.S. agency debt of all types was said to be slightly more than $1.5 trillion. Link to comment Share on other sites More sharing options...
TPS Posted September 12, 2008 Author Share Posted September 12, 2008 Given that a significant chunk of mortgage bonds are ultimately held by foreign investors, how could a bailout NOT involve them? That's almost like complaining that farm subsidies target corn growers...trying to find the sinister in the blisteringly obvious. You apparently didn't read the article. The point was that the bailout was targeted toward them in order to prevent them from bailing on US assets in general triggering a collapse of the dollar. There's a difference between "involve them" and "aimed at them." You're slipping... Link to comment Share on other sites More sharing options...
DC Tom Posted September 12, 2008 Share Posted September 12, 2008 I think it's something besides the mortgage debt they are worried about. I am guessing that these "companies" also service federal debt??? Perhaps act like a brokerage for it or something. Maybe someone could expain that Nope, Fannie and Freddie are strictly mortgage debt (this you can trust me on; I work for Ginnie right now). The real, ultimate reason that Fannie and Freddie get bailed out is that they are quasi-government entities: securities (mortgage bonds) issued by them are specifically government-insured. Which means that if Fannie and Freddie can't guarantee payment to the bondholders, the government's obligated to step in and support them. The short version is: somebody buys a bunch of mortgages and puts them in a trust. They create a bond issue backed by that trust. They sell the bond issue. Bond holders get the interest and principal payments from those pooled loans. Fannie and Freddie guarantee the payment. The government guarantees Fannie and Freddie. But the ultimate payment to the bond holder isn't flexible...there's no ability for anyone in the chain of guarantees to say "We didn't get our full payment this month, so you're not either" to the bond holder. That's why at each step in the line there's a reserve requirement...if a homeowner defaults, the bank can step in and make up the difference from reserves. If the bank can't make the payment, Fannie and Freddie step up. If they can't, the government steps in. So the direct beneficiaries of this bail-out are the holders of Fannie and Freddie bond issues. Indirectly...the entire mortgage industry nowadays is designed around quick turn-around to generate cash for new mortgages. You write a mortgage, you either sell it to a bond issuer or issue bonds on them yourself to generate cash to lend anew. Ultimately, the bond holders are loaning the money through a bunch of intermediaries to the home owner...so the home owner indirectly (and theoretically) benefits from that flow of money being maintained. Also, the federal government benefits indirectly from maintaining stability in the credit markets (if mortgage bonds start going in to default, interest rates on bonds will start to rise across the board, which is kind of a big deal when you're running half-trillion dollar budget deficits). But the primary benificiaries are and will always be the bond holders, since the system guarantees their payments by design and intent. It's interesting to note, though, that the limits on initial principal that Fannie and Freddie were allowed to back were raised in February by some 25%. For everyone complaining that Fannie and Freddie acted irresponsibly in acquiring bad loans...anyone want to explain to me again how Congress' giving them greater access to the mortgage market was a good thing? Link to comment Share on other sites More sharing options...
DC Tom Posted September 12, 2008 Share Posted September 12, 2008 You apparently didn't read the article. The point was that the bailout was targeted toward them in order to prevent them from bailing on US assets in general triggering a collapse of the dollar. There's a difference between "involve them" and "aimed at them." You're slipping... No, I just think it's a stupid point. We're talking about the guarantors of mortgage bonds being bailed out. OF COURSE this action is aimed at the bond holders. Link to comment Share on other sites More sharing options...
Taro T Posted September 12, 2008 Share Posted September 12, 2008 Nope, Fannie and Freddie are strictly mortgage debt (this you can trust me on; I work for Ginnie right now). The real, ultimate reason that Fannie and Freddie get bailed out is that they are quasi-government entities: securities (mortgage bonds) issued by them are specifically government-insured. Which means that if Fannie and Freddie can't guarantee payment to the bondholders, the government's obligated to step in and support them. The short version is: somebody buys a bunch of mortgages and puts them in a trust. They create a bond issue backed by that trust. They sell the bond issue. Bond holders get the interest and principal payments from those pooled loans. Fannie and Freddie guarantee the payment. The government guarantees Fannie and Freddie. But the ultimate payment to the bond holder isn't flexible...there's no ability for anyone in the chain of guarantees to say "We didn't get our full payment this month, so you're not either" to the bond holder. That's why at each step in the line there's a reserve requirement...if a homeowner defaults, the bank can step in and make up the difference from reserves. If the bank can't make the payment, Fannie and Freddie step up. If they can't, the government steps in. So the direct beneficiaries of this bail-out are the holders of Fannie and Freddie bond issues. Indirectly...the entire mortgage industry nowadays is designed around quick turn-around to generate cash for new mortgages. You write a mortgage, you either sell it to a bond issuer or issue bonds on them yourself to generate cash to lend anew. Ultimately, the bond holders are loaning the money through a bunch of intermediaries to the home owner...so the home owner indirectly (and theoretically) benefits from that flow of money being maintained. Also, the federal government benefits indirectly from maintaining stability in the credit markets (if mortgage bonds start going in to default, interest rates on bonds will start to rise across the board, which is kind of a big deal when you're running half-trillion dollar budget deficits). But the primary benificiaries are and will always be the bond holders, since the system guarantees their payments by design and intent. It's interesting to note, though, that the limits on initial principal that Fannie and Freddie were allowed to back were raised in February by some 25%. For everyone complaining that Fannie and Freddie acted irresponsibly in acquiring bad loans...anyone want to explain to me again how Congress' giving them greater access to the mortgage market was a good thing? I'm fairly certain Barney Frank would gladly explain that for you. Link to comment Share on other sites More sharing options...
jjamie12 Posted September 12, 2008 Share Posted September 12, 2008 No, I just think it's a stupid point. We're talking about the guarantors of mortgage bonds being bailed out. OF COURSE this action is aimed at the bond holders. I think his point is that it wasn't the mortgage bond holders that were driving the decisions, but the Fannie/Freddie debt-holders. Link to comment Share on other sites More sharing options...
GG Posted September 12, 2008 Share Posted September 12, 2008 I think his point is that it wasn't the mortgage bond holders that were driving the decisions, but the Fannie/Freddie debt-holders. The mortgage holders have no say in this. The Fan/Fed debt-holders do. Link to comment Share on other sites More sharing options...
jjamie12 Posted September 12, 2008 Share Posted September 12, 2008 The mortgage holders have no say in this. The Fan/Fed debt-holders do. I think that is what I was saying, no? Link to comment Share on other sites More sharing options...
GG Posted September 12, 2008 Share Posted September 12, 2008 I think that is what I was saying, no? Nope. Tom is talking about the guarantors of the mortgages, ie Fan/Fred, and their bondholders are the ones being bailed out. Link to comment Share on other sites More sharing options...
jjamie12 Posted September 12, 2008 Share Posted September 12, 2008 Nope. Tom is talking about the guarantors of the mortgages, ie Fan/Fred, and their bondholders are the ones being bailed out. I know... The article, as I understand it was mostly concerned with Fannie/Freddie 'Agency Debt', which, seems to be referring to their corporate debt, not their mortgage guarantees. Tom seems to be referring to the mortgage bondholders as being 'bailed out', which, while technically true (as I think more about this, I'm not TOTALLY sure that this is correct. I think it is unclear at this time whether or not the MBS are 'guaranteed', as they are still trading at a spread to treasuries... of course, Fan/Fred debt is also trading at a spread to treasuries, even though the gov't has 'guaranteed' those, so I'm not totally sure), isn't the point of the article as I understand it. Edit: And the reason I think Tom is referring to the mortgage debt, specifically, is because a few times he's referenced it, like here: Nope, Fannie and Freddie are strictly mortgage debt (this you can trust me on; I work for Ginnie right now). Which is actually incorrect. Fan/Fred issue corporate debt, as well. He also referenced it here (ultimately this quote is actually a little ambiguous, but given his statement above, I interpreted this as referencing mortgage debt, not 'Agency debt'): No, I just think it's a stupid point. We're talking about the guarantors of mortgage bonds being bailed out. OF COURSE this action is aimed at the bond holders. Again, it isn't totally clear which bondholders he's writing about, as I said before, I interpreted this to be the holders of the mortgage debt. I re-read the original linked article, and it appears that the thrust of the article is about bailing out Corporate bondholders of Fannie/Freddie, not the mortgage bond holders. And this makes sense to me, because Fannie/Freddie (in theory) collect what are known as (I'm pretty sure you know this) 'g-fees' in order to guarantee the principal on these bonds. The article seems to be mainly (again) talking about corporate debt and Fannie/Freddie bondholders, NOT Fannie/Freddie mortgage-backed-securities holders. Link to comment Share on other sites More sharing options...
GG Posted September 13, 2008 Share Posted September 13, 2008 I know... The article, as I understand it was mostly concerned with Fannie/Freddie 'Agency Debt', which, seems to be referring to their corporate debt, not their mortgage guarantees. Tom seems to be referring to the mortgage bondholders as being 'bailed out', which, while technically true, isn't the point of the article as I understand it. Sorry, Tom was correct. By saying "mortgage guarantors" he meant (I hope) Fannie/Freddie as they're the ones on the hook for the repayment of the bonds they sell to investors. Fannie/Freddie debt is fungible whether it's their corporate debt or whether it's a senior guarantee of a series of mortgages that they packages and sold. As a bond holder you're indifferent, as long as you're in the same creditor class. The big issue that some people (WSJ) raised is that Treasury is guaranteeing Fan/Fred subordinated debt in addition to the senior debt, without asking the sub debt holders for a haircut. [Edit] Even after your edit to clarify, as long as Fan/Fred corporate debt and their guarantees of mortgage-backed securities are in the same creditor class, it's the same thing. In the vast majority of cases, a guarantee is the same as the actual debt obligation, unless the bankruptcy court invalidates the guarantee. In this case, I can't see how a bankruptcy court would invalidate the mortgage guarantees. Link to comment Share on other sites More sharing options...
jjamie12 Posted September 13, 2008 Share Posted September 13, 2008 Fannie/Freddie debt is fungible whether it's their corporate debt or whether it's a senior guarantee of a series of mortgages that they packages and sold. As a bond holder you're indifferent, as long as you're in the same creditor class. GG, I don't think this is right. A corporate bond has no prepayment risk associated with it, and so trades different levels. I don't think it's at all clear how a bankruptcy judge would rule in this case... Would an MBS have recourse to the balance sheet outside of the individual mortgages that back it? Technically the g-gee that keeps getting earned every month would go towards buying out bad loans out of the MBS, and I'm not sure how that works in a bankruptcy situation that needs a definite end point? In other words, I don't think its clear that they would be treated pari pasu with the actual 'corporate' debt holders. The big issue that some people (WSJ) raised is that Treasury is guaranteeing Fan/Fred subordinated debt in addition to the senior debt, without asking the sub debt holders for a haircut. Right. I totally agree with this. Link to comment Share on other sites More sharing options...
GG Posted September 13, 2008 Share Posted September 13, 2008 GG, I don't think this is right. A corporate bond has no prepayment risk associated with it, and so trades different levels. I don't think it's at all clear how a bankruptcy judge would rule in this case... Would an MBS have recourse to the balance sheet outside of the individual mortgages that back it? Technically the g-gee that keeps getting earned every month would go towards buying out bad loans out of the MBS, and I'm not sure how that works in a bankruptcy situation that needs a definite end point? In other words, I don't think its clear that they would be treated pari pasu with the actual 'corporate' debt holders. It depends on whether the MBS issuers also file. Even if they don't, whoever assumes Fan/Fred will have to pick up all the obligations, and the guarantees will rank pari with the corp debt. The MBS holders would have recourse to Fan/Fred because the guarantee stipulates that in the event of a default on the MBS, the holder can go to Fan/Fred for payment. Link to comment Share on other sites More sharing options...
Recommended Posts