US Nationalizes Mortgage Lenders

  • #26
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"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".
I believe that he was trying to convey the idea that it was indeed a misperception.
 
  • #27
Astronuc
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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.
The language leaves the door open, i.e. the government isn't committed to stepping in (i.e. which does not carry the full faith and credit of the Federal Government), but the other lines implies that it might (but it may be a recipient of a loan guarantee commitment made by the Government), or suggests/infers, or it is hoped the reader will be swayed to believe the government will step in, but only if . . . .

The government is not in, but it's not out either.
 
  • #28
BobG
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Five trillion dollars is pretty hard to wrap your mind around. Only the US and Japan have national debts greater than 5 trillion dollars (in fact, only 7 countries have national debts greater than 1 trillion).

Realistically, Freddie Mac and Fannie Mae own 5 trillion dollars of debt. I guess if every loan they own defaulted (in other words, half the home owners in the US walked out of their homes and their mortgages), their own personal debt might be pretty close to that, but that $5 trillion is almost a number just thrown out there for shock value.
 
  • #29
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.
You're right.. By chartering I mean founded based on government legislation. The government was definatily behind the founding/chartering of the companies, their creation was an act of government.. It doesn't change the fact that as of Sunday they were private corporations however.

As for point two, I agree as well.. I don't think that an "implicit" guarantee of government intervention means anything, but I was responding to the claims made on this thread that the government is known to be called upon in the event these companies get into trouble. So if such a claim were true, then I'm just saying that the government could still fulfill that obligation (if such obligation were to exist) by propping them up via a bailout, without any need for full scale nationalization.
 
  • #30
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The language leaves the door open, i.e. the government isn't committed to stepping in (i.e. which does not carry the full faith and credit of the Federal Government), but the other lines implies that it might (but it may be a recipient of a loan guarantee commitment made by the Government), or suggests/infers, or it is hoped the reader will be swayed to believe the government will step in, but only if . . . .

The government is not in, but it's not out either.
The two sections that you highlighted are quite different in their meaning. The first one "full faith and credit", refers to the fact that when the GSE borrows money, the government does not guarantee that the GSE will pay back its creditor(s). The second one "loan guarantee committment" refers to the fact that when the GSE loans money, the government may, at its own discretion, guarantee that the GSE will be paid. If they do, and the borrower defaults, the gov't pays the loan.
 
  • #31
Astronuc
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I think (but it may be a recipient of a loan guarantee commitment made by the Government) is a bit ambiguous. Does it mean the government will cover the lenders who loan money to the GSE, or does it meas that it will cover the GSE on money it lends, or both?

The statement by itself seems to have multiple meanings.

Famous last words from Congress - "that wasn't the intent" :rolleyes:
 
  • #32
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Originally Posted by 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.

Just so we're clear, was that intended to be a serious statement? Do you have a source for it?
There is no way China could order us to do anything, although they may have requested it. China as well as Japan have billions invested in Fannie and Freddie.


Large holders of the two companies debt, including overseas central banks, had shown increasing nervousness recently, dumping more than $27 billion in agency securities in just the last two months. China and Japan, the biggest buyers of the two companies' bonds, welcomed the bailout.
http://uk.reuters.com/article/newsOne/idUKN0527106320080908?pageNumber=3&virtualBrandChannel=0 [Broken]
 
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  • #33
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I think (but it may be a recipient of a loan guarantee commitment made by the Government) is a bit ambiguous. Does it mean the government will cover the lenders who loan money to the GSE, or does it meas that it will cover the GSE on money it lends, or both?

The statement by itself seems to have multiple meanings.

Famous last words from Congress - "that wasn't the intent" :rolleyes:
US Code said:
(ii) does not have the power to commit the Government

financially (but it may be a recipient of a loan guarantee

commitment made by the Government);
It means that the GSE cannot commit the government to a loan guarantee, but that the government may make that commitment on its own.

I think it is clear that it only refers to borrowers who default on money owed to the GSE, not on the GSE defaulting on money borrowed from its creditors since the previous clause said they would not do so.

However this distinction would be meaningless if the government, at its own discretion, decided to guarantee with full faith and credit that the GSE would pay its creditors even though the previous clause explicitly said that they would not make such a guarantee.

I don't dispute that politicians are weasels and that the insult is to the weasels. But I think the wording of this particular definition is clear.
 
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  • #34
quadraphonics
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.
What do you mean "excludes founding?" Both Fannie Mae and Freddie Mac began as explicit arms of the government; not GSE's, not private corporations, but actual divisions of the Treasury Department. The granting of Congressional Charter is what changed their status from plain Federal government components into GSE's, which is to say, privately-owned, publicly-chartered corporations. The basic idea is to use private capital to perform a public mission, thus keeping it off the government's balance sheet. The Congressional Charter has a number of implications that make GSE's different from your standard private corporation. In addition to establishing the rules the GSE operates under, it can also *exempt* the GSE from Federal regulations that apply to private corporations (such as, say, reserve requirements for lenders). In this case, there are also rules about the sizes of loans that the GSEs will guarantee. Perhaps more importantly, however, government sponsorship gives the Federal government authority over a GSE that it does not have in the case of a purely private corporation. Just to pick an example out of thin air, the Treasury Secretary can summarily dismiss all of the executives of a GSE, and place it into a government conservatorship, without any consultation with the shareholders, or avenues for appeal. More generally, the rules are up for revision by Congress at any time, and so things like access to low-interest, short-term loans from the Federal Reserve can be introduced on short notice, should political conditions favor them.

As far as the China element goes, it is true that they've bought up tons of shares of Fannie Mae and Freddie Mac as part of the trade/finance relationship that characterizes the China/US bilateral relationship. It is thus in their interest that the GSEs not fail, as this would take a big chunk out of their central bank, with devestating consequences. It is also in the United States' interest that the GSEs not fail, as this would also have devestating consequences for our financial system. This would gravely undermine both economies, and the relationship between them, which nobody wants. It is much better for everyone if Fannie Mae and Freddie Mac are preserved, which will spare both our banking systems a big crunch, and allow China to continue to provide demand for low-return instruments and so sustain America's ability to borrow money cheaply, arrest the yuan/dollar exchange-rate equalization, and so preserve the bilateral trade relationship. So, to suggest that China "ordered" America to do this is preposterous: it's in the vital interests of *both* parties that it be done, and China is nowhere near influential (or ham-fisted) enough to issue such an "order," nor is America stupid enough to shoot itself in the head just to spite China.
 
  • #35
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  • #37
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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.
The other link said:
the Treasury may not have had any alternative if it wanted to prevent an immediate meltdown in the U.S. mortgage market and in the U.S. financial system in general.
There is a difference between the statement in the link and your characterization of it.
 
  • #38
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There is a difference between the statement in the link and your characterization of it.
I already mentioned elsewhere that what I said was meant to be sarcastic exaggeration.
 
  • #39
russ_watters
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Realistically, Freddie Mac and Fannie Mae own 5 trillion dollars of debt. I guess if every loan they own defaulted (in other words, half the home owners in the US walked out of their homes and their mortgages), their own personal debt might be pretty close to that, but that $5 trillion is almost a number just thrown out there for shock value.
Yes, shock value. It, of course, also assumes that all the homes that the mortgages purchased are utterly worthless.

What the actual exposure is here is tough to gage, but I suspect it is quite small. The real problem isn't the defaults, it's liquidity. Because of the explosion in housing prices over the last 10 years, I suspect (though I am not sure) that the value of the property in those mortgages is larger than the value of the loans themselves. The problem is that it takes perhaps as much as a year from the time a borrower stops paying until the lender can sell the house and get the money back (perhaps even with a profit!). The lag causes a cash-flow crisis. And that causes them to cut back on how many new mortgages they are willing to back. Which deepens the crisis and extends the national economic slowdown.

I suspect that the biggest share of the losses here will not be the general public, but will be the shareholders - who lose everything (something on the order of $50 billion, their market cap at the beginning of the year). And that's the way it should be.
 
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  • #40
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The problem is that it takes perhaps as much as a year from the time a borrower stops paying until the lender can sell the house and get the money back (perhaps even with a profit!).
I was under the impression that any profit from such a sale must be returned to the previous owner, n'est pas?
 

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