# News US Nationalizes Mortgage Lenders

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1. Sep 9, 2008

### Mental Gridlock

The US has taken over Freddie Mac and Fannie Mae, the two biggest privately owned mortgage lenders in their country.

They fired and replaced the CEO's and board of directors.

They will now conduct the day to day operations of the companies.

They are taking money away from the investors by eliminating their dividends.

Here is the source for all of the above factual claims:

http://money.cnn.com/2008/09/07/news/companies/fannie_freddie/index.htm?eref=edition

Besides these consequences, the takeover may have big costs for the US taxpayers as well. Treasury secretary Henry Paulson stated he was unsure how much it would be costing, but certainly did not deny the expenditures. The treasury department said they would possibly spend as much as 100 billion dollars over time. The following is the source for these claims:

I am posting this thread to inform people of what is going on as well as the consequences that it will have on its investors and the taxpayers, as well as to inquire on what the good side might be or to simply discuss if it's a good decision, or other concerns for why it might be bad. I would like to know what other people think about its effectiveness as well. Do you believe that this will help the economy and the housing market, or could it make things worse? I invite anyone from anywhere in the world to comment or dispute.

The following is my opinion about the matter:

I don't like it because it is a step towards communism. I feel the government's role is not to interfere in the affairs of private corporations so much, let alone take them over. And nationalizing any company in any industry may be a slippery slope. Today it's okay for them to take over private institutions, this might mean that they could do the same in the future for other companies as well, perhaps even outside the finance industry. This of course is speculation on my part. But I'm no fan of a move towards communism.

2. Sep 9, 2008

### Alfi

They fired and replaced the CEO's and board of directors.

Ya right.
I bet they walk away free and clear with millions.

3. Sep 9, 2008

Ya got that one right. $15 million for the CEO's. That is the reward for failure. 4. Sep 9, 2008 ### Mental Gridlock "ya right." ????? Are you denying that they were ousted? http://www.marketwatch.com/news/sto...x?guid={832C8CA2-92B9-4AE4-9D8F-6105C62DBA1B} They were forced out. Removed. aka fired. Like was mentioned, they failed and so were removed. They fired the CEO's and there certainly doesn't seem to be any choice they had in the matter. They were fired. Ousted. Discharged. Dismissed. Relieved of their command. Let go. Shown the door. Got the axe. Got the pink slip. Terminated. Call it what you want; that's what happened. This isn't changed by the fact that they got a severance. Their severance payment was part of the contracts (source is my link above).. The goverment couldn't do much about that. But the fact they got paid doesn't change the fact that they were ousted. 5. Sep 9, 2008 ### cristo Staff Emeritus Isn't this a little ironic: how can people be "free" if their government is getting more and more power, and now owns the monopoly on mortgage lending. Doesn't this go against the whole American ideal? 6. Sep 9, 2008 ### wildman Yep. But I think you all missed why Bush and the Congress are doing this. They did it because the Chinese ordered us to do it. We have lost our independence due to the large amount of money we owe others. 7. Sep 9, 2008 ### Alfi 15 Million severance. ( 300 years worth of my average pay ) They earned that! Who pays for that? Taxpayers or the investors? 8. Sep 9, 2008 ### edward The bail out was a necessary evil. Ironically it was also done to protect foreign investors. http://www.latimes.com/business/la-fi-asianstocks9-2008sep09,0,361126.story [Broken] 10% of China's GDP is invested in the mortgage giants. http://www.npr.org/templates/story/story.php?storyId=94369826 Everyone sing: Its a small world after all....it's a small world after all Last edited by a moderator: May 3, 2017 9. Sep 9, 2008 ### mgb_phys So should china have just bought them? A bankruptcy sale on a financial company with no assets, they should have paid around 10c on the$, since they were set to lose 10% they could have got the whole thing failry cheaply.

10. Sep 9, 2008

### edward

Do you really think that the American people would go for that?? We wouldn't even let them buy Maytag. China would much prefer that the American tax payers pick up the tab.

For that matter other foreign companies might oppose that kind of deal.

http://www.forbes.com/finance/2008/09/09/fannie-freddie-roubini-pf-ii-in_rl_0909croesus_inl.html [Broken]

Last edited by a moderator: May 3, 2017
11. Sep 9, 2008

### mgb_phys

It's a free country, they are a listed public company ;-)
It's not like the USA is some S. American banana republic that would just unilaterally nationalise foreign owned companies.

12. Sep 9, 2008

### f95toli

AFAIK both companies were founded by the federal government (early 30s?) and although they were later privatized (mid 60s?) they have never been "private corporations" in any normal sense of the world, it has ALWAYS been implicit that the US government was behind them and that they would never be allowed to collapse.
Hence, the government simply had no choice in this case; not saving them would have amounted to breaking an implicit promise to the market.

13. Sep 9, 2008

Specifically, Fannie Mae and Freddie Mac are not private corporations, but Government Sponsored Enterprises (see http://en.wikipedia.org/wiki/Government_sponsored_enterprise ). And while there is no explicit guarantee of any of their instruments, it has always been assumed (with good reason) by pretty much every one that the Federal Government would not allow them to go bankrupt.

It's funny how shocked some people get by things like this; I guess all the years of portrayal of the United States as the epitome of unrestrained capitalism (both inside the US and without) have made people forget that the US is, in fact, a mixed economy, just like most other countries.

14. Sep 9, 2008

### Staff: Mentor

Just so we're clear, was that intended to be a serious statement? Do you have a source for it?

15. Sep 9, 2008

### wildman

Last edited: Sep 9, 2008
16. Sep 10, 2008

### Astronuc

Staff Emeritus
Um - the 2 FM's are not privately owned. They are publicly traded companies, and are actually GSE's. They may however be delisted from the NY Stock Exchange, but one can still by their common and preferred stock.

Economics dictated the takeover. The 2FM's were having trouble raising capital - so the government stepped in with it's full faith and credit.

The world financial markets are jittery, and it could very well be that the aggregate debt now exceeds the ability to pay. Certainly the US economy appears to be over-leveraged.

17. Sep 10, 2008

### Jimmy Snyder

Here is a quote from the link you provided:

Language is weird. Publicly traded means privately owned (though not vice versa obviously). See the wiki quote above concerning GSE's.

Last edited: Sep 10, 2008
18. Sep 10, 2008

### Jimmy Snyder

Here is an excerpt from the US Code. It is from a definition of the term "government-sponsored enterprise", but it is just a snippet, not the entire definition.
http://uscode.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t01t04+10699+0++()" [Broken]
That means that when you say Fannie Mae and Freddie Mac are not privately owned, you are breaking the law.

Last edited by a moderator: May 3, 2017
19. Sep 10, 2008

### kronon

The Regulators sit on their hands for 7 years just watching as a 5 trillion dollar hole opens in economy, bringing it to the brink.

They ignore the warning signs that others have been pointing out to them.

And now they are the saviours?

Terrorist before the explosion and doctor after it.

In my view they are a major disappointment who have very seriously failed their obligations.

20. Sep 10, 2008

### Astronuc

Staff Emeritus
Ah - my mistake. Thanks for the correction.

So publicly-owned implies owned by the government.

Presumably privately-held and privately-owned don't mean the same thing.

I have to wonder if the laws are written to obfuscate the details and snooker the general population with respect to investing.

Edit: With respect to "is privately owned, as evidenced by capital stock owned by private entities or individuals;" - what is a private entity - anything not the government? So in essence, a publicly-traded company is still a 'private entity'.

Last edited: Sep 10, 2008
21. Sep 10, 2008

### Mental Gridlock

Thank you for the clarification, jimmysnyder.

I did do fact checking when I chose my words to determine that privately owned was a legitimate label. The investors were private people, and the people who staffed the companies weren't government employees, as opposed to say the USPS which is a government corporation.

The total extent of government involvement in the corporations (prior to the unprecedented takeover of course) was:

1) founded/chartered by the government, a long time ago. It's irrelevant since they became purely private since then, and in the market world of today they certainly were not government corporations.

2) I am hearing mentions of an "implicit" agreement that the government would not allow their collapse, as they were GSE's. Then I hear people state that because of this agreement, it makes sense that they were taken over and we shouldn't be surprised or complaining.. The problem with this is that a full takeover isn't required to prevent their collapse. I would sooner expect a "bailout" rather than a communist policy of nationalization.

The airline industries weren't GSE's but the government bailed them out via funds and tax breaks. They never just assumed control of the companies and fired all their executives and directors and took over their operations. The airline industry appears to have rebounded and is still in business, although could still have issues due to the rising fuel costs. Nevertheless the bailout worked.

This is what I could expect for Freddie and Fannie as well, not this unprecedented assimilation of their companies into the federal government.

22. Sep 10, 2008

### Jimmy Snyder

I don't follow. I'm pretty sure they do mean the same thing.

The difference between publicly owned and privately owned should be clear. If the gov't owns it, it's publicly owned, otherwise, it's privately owned. There is no difference between holding and owning in this context.

Publicly traded refers to a privately owned company whose stock is traded on one or more stock markets. Not all privately owned things trade publicly. For instance, a family owned company may be owned by several people, but restrictions are placed on the shares so that they cannot be sold outside that small group. These shares are not sold on stock exchanges. You may have heard the term "initial public offering (IPO)", in which the stock of a closely held company is released for sale to the larger public on stock exchanges.

The bit about entities I believe refers to the fact that some GSEs are owned by a small group of companies (the private entities) who are also the customers of the GSE. These are privately owned, but not publicly traded since only the customers are allowed to buy in.

23. Sep 10, 2008

### Jimmy Snyder

On point one, the only involvement of the gov't is in chartering. I don't really know what that means, but it excludes founding. GSE's are private from their inception. Edit: probably a charter is a document listing the rules with which a company must comply.

On point two, I quote the wiki page again. The wiki page quotes Dan L. Crippen.

Last edited: Sep 10, 2008
24. Sep 10, 2008

### Astronuc

Staff Emeritus
The GSE's Fannie Mae and Freddie Mac are/were publicly-traded companies although privately-owned.

"debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee. . . ." is somewhat inaccurate - he should have said " . . . . because of the misperception of a government guarantee" The US Code explicitly states that the GSE's are not backed by the "full faith and credit" of the US government.

The term 'weasel-words' comes to mind, but I don't want to defame weasels. Weasels have more integrity than politicians.

Basically the government doesn't commit to bailing them out unless they screw up majorly (which they did), in which case the Secy of Treasury is likely to step in and bail them out, 'because they are too big to let fail' - and most individuals are too small to help out.

Something smells rotten - and it's not the Limberger.

25. Sep 10, 2008

### Jimmy Snyder

I'm not sure what you mean by this. When I think of 'weasel words' I think of saying one thing and meaning another. I note that you emphasised some of the words. Are these the weasel words? Do you think they have a hidden meaning? Please clarify.