America’s mortgage giants | Suffering a seizure | Economist.com

FOR many Americans, Sunday is for church, family lunches or catching a ball game. For the country’s financial authorities, it has become the day of the dramatic announcement: the takeover of Bear Stearns; the Treasury’s promise in July to stand behind Fannie Mae and Freddie Mac; and, most momentous of all, on Sunday September 7th, what had recently come to be seen the inevitable culmination of that pledge: the government’s seizure of the two giant mortgage agencies.

Hank Paulson, the Treasury secretary, had hoped that the July announcement would calm nerves sufficiently that he would not have to take out his “bazooka”. The opposite happened. The firms’ shares collapsed amid fears that investors would be wiped out in a government rescue. This severely curtailed their ability to issue much-needed capital, also infecting their mortgage-backed securities and the $1.6 trillion of debt they had issued to buy mortgages for themselves. It was only a matter of time before the government was forced to launch its largest-ever financial rescue.

Though some had wanted to see the agencies fully nationalised, obstacles stood in the way—not least that this would have required an act of Congress. So the Treasury had to get creative. The plan has four planks. First, Fannie and Freddie will be taken into “conservatorship”, a watered-down form of receivership, by their revamped regulator, the Federal Housing Finance Agency, until they are once again “sound and solvent”. Second, they will have access to a loan facility, secured against their assets, until the end of 2009. Intriguingly, this will also be available to the 12 Federal Home Loan Banks. James Lockhart, the FHFA’s head, stressed that these bank-owned co-operatives, also designed to grease housing markets, are mostly in good shape. But they have a lot of short-term debt and the quality of their borrowers’ collateral is falling. Allowing them to tap the credit line may be a shrewd precautionary measure.

The third plank highlights Mr Paulson’s wish to protect the taxpayer and avoid “moral hazard”. The Treasury will buy preferred shares as needed, whenever the agencies’ net worth dips below zero, and this paper will be repaid ahead of their existing preferred and common stock (whose dividends are being eliminated). Lowly shareholders could yet lose everything.

Indeed, the deal could have been a lot worse for the taxpayer. In exchange for vowing to keep the firms above water, the government will receive $1 billion “fee” in preferred stock at no cost, along with warrants giving it the right to 80% of the firms’ common stock at a nominal price. The two chief executives will leave. Fannie and Freddie, whose unparalleled political connections helped them to keep regulation toothless and expand on threadbare capital cushions, will no longer be allowed to lobby lawmakers.

The final piece of the plan may unnerve some taxpayers. To keep mortgage markets chugging along, the Treasury will become a buyer of last resort for bonds packaged by the agencies, purchasing them in the open market if demand slackens. Could it end up burdened with piles of toxic paper? Mr Paulson was upbeat, pointing out that since the Treasury would hold the securities to maturity it might one day reap net gains.

But the eventual cost to the public purse is unknown and potentially huge. The Treasury says it could buy as much as $100 billion of preferred stock in each of the two firms, though it deems that highly unlikely. Ultimately, the size of the bill will depend on their ability to recover, and that is far from clear. Under American accounting standards they have adequate capital, despite the rapid deterioration of their portfolios. But on a fair-value basis, marking their assets to the current market price, Freddie is insolvent and Fannie not far off. Moreover, with house prices still sliding and foreclosures rising sharply, worse may be ahead.

It’s going to be really interesting to see how the markets react to this news today … and it might end up being a good deal for the taxpayers in the long run; but with some short-to-medium term pain for banks and investors.

Unlike A-Train, while I agree that the taxpayers are going to get saddled with some of the cost of this mess, I don’t think it’s going to be as bad as he is predicting.

Thus far, the government’s commitment is $200 billion … and there is no guarantee that they’ll have to shell out that much. To put that amount into perspective; as of September 2007, the war in Iraq was costing $720 million per day … $200 billion is about 278 days of the war, a tad more than 9 months. The war could end up costing tax payers between 2-3 trillion dollars; 10-15 times that of the mortgage crisis.

The entire mortgage market is currently estimated to be $11 trillion dollars; this means that the bail-out is for less than 2% of the entire market. With the way that the market has been swinging lately; I make and lose more than that in a day sometimes.

My gut feeling is that most investors are panicking needlessly, assuming that all the loans in these various companies’ portfolios are bad. I think, however, that most homeowners will do everything they can to pay their loans; in the short-term, foreclosures will continue to rise, but with plans being developed to help homeowners’ re-finance their loans, given a few more months things should settle down.

When it comes right down to it, banks would rather take a small loss on loans by re-financing at market-prices; rather than foreclosing, and auctioning off a house at prices that are well-below the going market-rate. And most homeowners would rather stay in their properties if at all possible, doing everything they can to make the payments, rather than losing their homes.

Banks are getting more conservative, and are requiring better documentation before approving loans. Home buyers are buying smarter; trying to get something they can afford, rather than getting the biggest and most expensive house they might possibly be able to get. And the fact remains that it’s really only at the upper-end that housing prices are falling. At the lower-end and middle of the market, prices are stable … either rising very slowly, or stagnant, but not really falling.

Investors just need to step-back a bit, get rid of the worst junk in their portfolios, and ride it out, because it will get better … and getting off a roller-coaster in the middle of the ride is dangerously stupid.

Bear Stearns to Get Backing From J.P. Morgan, N.Y. Fed - WSJ.com
Firm’s Shares Sink Amid Liquidity Fears
By KEVIN KINGSBURY, ANDREW DOWELL and SERENA NG
March 14, 2008 1:22 p.m.

NEW YORK — In a dramatic move Friday, JPMorgan Chase Co. and the Federal Reserve Bank of New York stepped in with emergency funds to keep beleaguered investment bank Bear Stearns Cos. afloat.

The move, during a week of worry about whether Bear could continue to meet its obligations, took the credit crisis to a new, more serious stage and was a reminder of how quickly an erosion of confidence can undermine even leading financial institutions.

The involvement of the Fed — coordinating with the Treasury Department and the Securities and Exchange Commission — made clear authorities were concerned about the risks to the broader financial system. Bear is the smallest of Wall Street’s big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages.

My reaction?

It’s just a start, and I hope to flesh it out further as the day goes on.

To the tune of “The Bare Necessities” from Disney’s The Jungle Book:

Look for the Bear Stearns equity,
The simple Bear liquidity,
I’m talking ’bout debt instruments and cash.
I mean the bare necessities,
Like J.P. Morgan’s sympathy,
‘Cause the Fed ain’t always gonna save your ass.

Whenever they go long, whenever they short,
The hedgies are wond’ring if they should abort.
Investors are running on the bank,
To make some money before Bear tanks.
When you see all the traders retreat,
It’s time to examine the balance sheet,
Then maybe sell some more.

The Bear’s liquidity and strife will affect you,
They’ll affect you.

Look for the Bear Stearns equity,
The simple Bear liquidity,
I’m talking ’bout debt instruments and cash.
I mean the bare necessities,
That’s why Bear Stearns can’t rest at ease
‘Cause the Fed ain’t always gonna save your ass.

Copyright © 2008, Steven L. Sheffield. All Rights Reserved.

Margin Calls Throttle Thornburg
By DONNA KARDOS
March 7, 2008 2:08 p.m.

In the latest sign of how badly firms have been hurt by the credit crunch Thornburg Mortgage Inc. Friday said there is “substantial doubt” about its ability to continue as a going concern, citing deterioration of prices of mortgage-backed collateral and a liquidity position under unprecedented pressure.

Thornburg issued the warning amid an announcement that the lender will restate financial statements for the past two years to recognize write-downs on assets that may result in a $427.8 million charge for 2007.

And:

Carlyle’s Comeuppance Debt Fund CCC Placed Bet On AAA Mortgage Bonds And a Load of Leverage

Picking CCC as your ticker symbol when you are listing a fund that invests in debt tempts fate. That is what private-equity shop Carlyle Group did when it floated Carlyle Capital Corp. in Amsterdam. The fund invests in AAA-rated bonds backed by Fannie Mae and Freddie Mac, the U.S. mortgage giants. Having borrowed 32 times the amount of equity in the fund by the end of 2007, there wasn’t much cushion against the margin calls that are now coming in.

Many hedge funds borrow heavily, but banks now are increasingly cautious about lending. If a fund’s creditors decide they want to offer less debt or hold more collateral against trades, it can lead to forced asset sales. If the fund’s trades happen to be losing money, too, the result can be a vicious spiral.

Carlyle Capital is struggling to meet calls from financing counterparties for more collateral to back up that debt. Its $21.7 billion portfolio was supported by just $670 million of net assets at the end of last year. Carlyle Group has lent the fund some money — a credit facility recently upped to $150 million — to help ease its cash crunch. The fund held back on paying a dividend last quarter. It says it also has sold $1 billion of assets since August.

Mounting Liquidation Fears Squeeze U.S. Stock Market
March 6, 2008 5:40 p.m.

Worry about the health of the credit markets made a noisy comeback Thursday, leveling financial stocks and sending many investors scampering for the safety of government debt.

Revelations that two large investors had missed recent margin calls raised fears that more investors could be forced to liquidate assets to meet their obligations to lenders, possibly setting off a nasty spiral in which assets are unloaded into a declining market, placing even more downward pressure on values and leading more lenders to call in loans.

“The uncertainty in the market is rising,” especially in light of the margin calls, said Jim Russell, senior portfolio strategist at U.S. Bank. “Once those things get triggered you can have forced selling by leveraged players. That just adds fuel to the fire.”

The Dow Jones Industrial Average plunged by 214.60 points, or 1.8%, to end at 12040.39, hammered by sharp declines in all three of its banking components. Bank of America dropped 2.7%, Citigroup fell by 4.4%, and J.P. Morgan Chase shed 3.5%. The Dow industrials have slipped in five of the last six sessions and are now down 9.2% for the year to date.

The Standard & Poor’s 500 fell 2.2%, or 29.36 points, to end trade at 1304.34, the lowest close for the broad market measure since Sept. 22, 2006. It is down 11% this year and is 17% below the record close that it marked in October. The index’s financial sector was its worst performer Thursday, falling 4.2%.

It’s one thing when an individual investor misses a margin call, and has part of their portfolio sold out to cover. But when a hedge fund that is leveraged to 32 times its capital under management misses margin calls, life is going to get painful for a lot of people.

Carlyle Capital Receives Additional Default Notices
By PETER LATTMAN
March 7, 2008 7:05 a.m.

Carlyle Capital Corp. Friday said lenders were liquidating some of its mortgage securities, painting an even bleaker picture of its already perilous situation.

In a short news release issued early Friday, the fund, which is managed by a unit of Washington, D.C., private-equity firm Carlyle Group, said it received “substantial additional margin calls and additional default notices from its lenders” and that “these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital.”

On Thursday Carlyle Capital roiled the financial markets when it said it failed to meet margin calls on its $21.7 billion portfolio. The fund said it had received a notice of default from one of its lenders that helps finance its portfolio of highly rated mortgage securities. Shares in the fund, which is listed in Amsterdam, slid about 60% Thursday.

And then I read this:

Housing, Bank Troubles Deepen
Foreclosures Reach A New Record; Home Equity Falls
By SUDEEP REDDY and SARA MURRAY
March 7, 2008; Page A1

Two crucial barometers of the nation’s housing market have worsened markedly in recent months, ratcheting up pressure on policy makers in Washington for action to stem the growing housing crisis and its widening impact on the nation’s financial system.

Among the latest trouble signals, the number of American homes entering foreclosure rose to the highest level on record in the fourth quarter of 2007. Meanwhile, homeowners’ share of the equity in their homes fell to a post-World War II low.

The unwelcome contrast provides stark evidence of how falling home prices are weighing on consumers. And it could add urgency to efforts by Federal Reserve officials to avert a larger wave of foreclosures by prodding lenders to reducing the principal — or total amount owed — on troubled mortgages.

Now, granted, a lot of people took on a lot of really stupid mortgages over the past few years, and some of them deserve what they get … but what doesn’t make sense to me is how many people are letting themselves get into this situation. Face it … banks don’t want to foreclose on their loans. They would much rather work with the borrowers to set new payment terms … but most borrowers won’t go to their lendors and say “I’m in trouble and need help” until it’s far too late.

Housing should be among the top-three items that get paid for when you get paid. Make sure you have a place to live, make sure you have food to eat, and make sure you have some way to get to/from work. Anything else can wait. If you don’t pay your credit cards, your credit score may suffer (albeit not nearly as much as it will if you default on a mortgage), but you’ll still have a place to live.

Sell your big stupid SUV and downgrade to a sensible little 4-banger (or even, shock & horror, ride a bicycle!). Get rid of cable/satellite … sell the plasma-screen if need be. Take on a tenant in your McMansion, to help cover the mortgage payment. Stop buying steaks and fast food, and make do with veggies and pasta and less meat; you really only need 3-4 oz of protein a day, and there are lots of sources from whence you can get it.

But don’t put yourself in a situation where you might lose your place to live when you still have other options. That is sheer idiocy.

I’m tired of watching my portfolio value continuing to drop … even after receiving my company matches for the past two years in my 401(k), it’s value is less than it was at the beginning of 2007 (prior to actually receiving the match for 2006), and it’s certainly less than it was at the beginning of 2008. I think I’m actually getting close to having a negative average-annual ROI (return-on-investment) overall from when I started at Morgan Stanley in 1999, but it hurts too much to look right now.

My only consolation is knowing that I’m buying in at lower prices now, and that when the market finally does recover, I will own more shares … but the short-term pain is still extremely painful. It’s the financial equivalent of a kidney stone … you know you’ll survive it, but in the midst of the pain, you’re not quite sure how.

From this morning’s New York Times (online):

Nader Announces Third-Party Run for President - New York Times
By THE ASSOCIATED PRESS
Filed at 10:27 a.m. ET

WASHINGTON (AP) — Ralph Nader said Sunday he will run for president as a third-party candidate, criticizing the top White House contenders as too close to big business and pledging to repeat a bid that will ‘’shift the power from the few to the many.”

Nader, 73, said most people are disenchanted with the Democratic and Republican parties due to a prolonged Iraq war and a shaky economy. The consumer advocate also blamed tax and other corporate-friendly policies under the Bush administration that he said have left many lower- and middle-class people in debt.

”You take that framework of people feeling locked out, shut out, marginalized and disrespected,” he said. ”You go from Iraq, to Palestine to Israel, from Enron to Wall Street, from Katrina to the bumbling of the Bush administration, to the complicity of the Democrats in not stopping him on the war, stopping him on the tax cuts.”

”In that context, I have decided to run for president,” Nader told NBC’s ”Meet the Press.”

After being the spoiler costing Al Gore the Presidency in 2000, and incurring the wrath of most Democrats in 2004 when he chose to run again (and dropping from 2.7% of the votes cast in 2000 to a mere 0.3% in 2004), he’s running again … to what end? He has no chance of winning, and is beginning to just sound like a crank rather than a true advocate for the American people.

Give it up, Ralph. It’s a different world that what it was when you declared the Chevrolet Corvair “unsafe at any speed” back in 1965. And while your ideas are not irrelevant, the way you choose to express them are more of a hindrance to change than a help.

For the past several years, I’ve been carrying a collection on an old credit card debt that got racked up back in the 1990s … when I was unemployed for awhile at the end of 1998 and early 1999, this debt ballooned up, and ultimately went into collections.  Since 2001, I’ve been paying it back … today, some 6 years and $9,000.00+ later, I cleared the debt completely. 

I’ve received the release letter from the collection agency, showing paid in full on 9/20/2007.

Still working on clearing out my current credit card debt … but I expect to have at least half of that cleared by the end of the year, and closing out some of those accounts.

And then I’m looking forward to watching the FICO score climb.  It’s all part of rebuilding my life.